Feature-based pricing allows companies to price their services and products based on varying levels of functionality.
Feature-based pricing is one of the leading SaaS pricing models, allowing companies to price their services and products based on varying levels of functionality. It’s most commonly paired with a tiered pricing strategy, where access to more features increases the price.
Although considered an innovative strategy by many, feature-based pricing is not a revolutionary concept and has a lot in common with more traditional pricing. If you think about most services and products you pay for, you will find that a higher price usually means more features. Consider any item you can purchase, and you will begin to see that features almost always play a role in the cost.
Here are just a few examples of everyday feature-based pricing:
Even though this pricing model is easy to understand, it’s not necessarily straightforward to implement. You will need to consider how to use this strategy to the best effect. This blog offers a guide to the pros and cons and a breakdown of different approaches to pricing per feature.
Want to explore a specific aspect of feature-based pricing? Skip ahead by clicking on the topic.
Below is a brief overview of different approaches to implementing feature-based pricing. Click on the strategy of your choice to jump ahead.
Even basic feature pricing tends to use tiers to segment each subscription level. Companies will usually divide their features into three price points, each allowing users slightly more access. What happens in the most stripped-back version is that the bottom tier will often be the stickiest, offering most features and perceived value to potential subscribers.
The Globe and Mail is an example where it is cost-effective for the newspaper to prioritize selling digital access. Although you can pay more to receive print copies, the higher tiers offer no other extra features, with the most expensive subscription simply supplying print versions on a greater number of days. This approach makes print delivery a luxury and incentivizes subscribers to choose a digital subscription. An effective strategy, given the high cost of printing and the supply chain issues involved when delivering physical papers.
Feature-based tiers can take many forms, and most businesses will use some combination of tiered pricing strategies to sell products/services. The lowest or cheapest tiers are usually entry-level lead magnets, inviting potential subscribers to trial features for free or at a minimal cost. Higher tiers will often load each price point with impressive features and employ psychological pricing tricks like anchoring and price skimming.
Canva is a graphic design tool that has mastered the art of feature-based tiers. The lowest subscription level offers access to a wide range of attractive features, allowing subscribers to trial the product with a low barrier to entry. This is also a freemium strategy, allowing users to sign up with an email and explore the design tools. For this to work, you must be very confident in the attractiveness of your higher tiers and have a high percentage of upgrades once subscribers trial the lower levels. If you look at the landing page below, it’s also clear that the “preferred option” is pro. Free users are continually reminded of pro features when designing, making the idea of upgrading a constant choice as they navigate their options.
Value-based pricing coupled with per feature pricing can be an extremely effective strategy. It allows you to charge based on the perceived value of your features rather than the exact cost of developing them. Its success depends on meticulous market research and a solid understanding of your features’ worth to your target audiences. Established brands often use it as they can bank on awareness of their reputation to charge premium rates.
One of the keys to getting value-based pricing right is understanding differentiated worth, i.e. knowing which unique features set your product apart from the competition. This information will allow you to determine the perceived value of that difference and create pricing that takes advantage of your strengths.
Dyson is an established brand that sells vacuums using value-based per-feature pricing. Their pricing pages present different price points on a sliding scale—vacuums have lower functionality at lower prices. The key features are immediately apparent, and the copy even compares each vacuum’s suction to one of Dyson’s legacy products. This tactic only works because the core audience understands the reference, and it helps them to distinguish between prices.
Standard across all industries, bundling is an age-old technique for selling a group of products or services. The main appeal for companies is the ability to make products or services more attractive by selling them in sets. It is critical to understand what elements of your product/service will incentivize sales and use these features to help differentiate between various bundles.
Phone companies are strong examples of bundling features, often using a new phone or device bundled with a data package to sell their service. It is mutually beneficial because the customer gets the phone they want at a reduced rate, and the phone company sells a lot more than just the phone.
Bell’s Samsung Galaxy pricing is an example of this. Customers pay nothing for the phone upfront, and instead, they sign up for a 2-year phone plan and buy the phone at a reduced rate charged in installments in their monthly phone bill. New devices with the flashiest features are the big selling point, but the real aim is to bundle these phones with more lucrative features such as data, minutes, and international calls.
Managing revenue recognition and deferred revenue for featured billing depends on how and when customers pay for your product/services. If they pay a monthly fee, it’s possible to recognize that revenue each month when earned. However, it’s not quite as simple for those paying an annual subscription. Rather than recognizing revenue immediately, you will need to set up a deferral schedule and only recognize revenue when earned over the year. The easiest way to do this is to divide it into monthly installments.
Revenue allocation is one of the core ways companies can understand the profitability of their features. Each component earns a certain amount of revenue, and accurately allocating revenue to features is critical. For instance, if you’re selling websites to companies at various price points, with your most advanced option costing 25,000 CAD and your least expensive costing 5,000 CAD. You must break down the features of each level and perform a comprehensive margin analysis to see where your revenue is coming from and to understand what features are high-earners worth further development. You may also notice features that are a drain on resources.
The complexity of managing subscription billing models is introduced by the wide range of options available to customers (do they want annual, monthly or quarterly billing?). Most companies will require a robust billing solution in place to handle this as they scale. A solution should streamline complex billing and also automate revenue recognition and deferrals to allow you to remain compliant with accounting standards like ASC 606 and IFRS 15.
It perhaps comes as no surprise that companies will not implement feature-based billing without careful consideration. Below is a short guide to help you understand the critical components to a successful implementation.
Companies are often so distracted by the critical features of their software or product that they forget about their people. Both are important. Take time in the early stages of your pricing strategy implementation to define every single feature your company has to offer and understand the perceived value of each one. It can be a surprising exercise and reveal differentiators that will help set your various price points apart.
It’s hard to implement effective feature-based pricing without embracing a hybrid model. As discussed earlier in this article, it combines well with several approaches. Consider the models that make the most sense for your features, and develop a strategy that will make the most sense for your audience.
Automating revenue recognition and understanding the complexity of allocating revenue to features will be critical for high performance. Investing in a robust billing solution will allow you to do this at scale and provide you with the tools to get accurate insights when performing margin analysis on your features.
