Subscription Pricing Terms: A Plain-English Glossary

Subscription pricing has its own vocabulary, and much of it is used loosely. People say tier when they mean package, value metric when they mean billing unit, and churn when they mean three different things. This glossary defines the terms that come up in real pricing decisions, grouped by what they are for.

Pricing structures

• Flat rate: one product, one price, everything included. Simple, no expansion path.
• Per-seat (per user) pricing: price multiplied by number of users. Predictable, but breaks when software does the work instead of people.
• Tiered pricing: two to four named packages at different prices with different limits or features.
• Usage-based (consumption) pricing: the customer pays for what the system does. API calls, workflow runs, documents processed.
• Hybrid pricing: a platform fee plus a usage or outcome component. Combines predictability with expansion.
• Outcome-based pricing: price tied to a measured result, such as a resolved ticket or a percentage of savings.
• Freemium: a permanently free tier used as an acquisition channel, distinct from a free trial with an end date.
• Good-better-best: the three-package convention, where the middle option is designed to be chosen.
• Add-on: a separately priced module on top of a base plan. The cleanest way to monetise a feature with real delivery cost.
• Bundling and unbundling: combining features into one price, or separating them out to price independently.
• Price ladder: the full set of prices across plans and add-ons, read as one structure rather than individual numbers.

For how these compare in practice, see the SaaS pricing models guide.

The units you charge on

• Value metric: the unit your price scales on. It should grow with customer value, be predictable to the buyer, and track your cost of delivery. The single most consequential pricing decision.
• Billing unit: what appears on the invoice. Often the same as the value metric, but not always.
• Fence: the rule that keeps segments in their intended plan. Usage limits, feature gates, support levels, deployment options.
• Entitlement: what a customer is contractually allowed to consume or access.
• Overage: the rate charged for consumption beyond entitlement.
• Commit (committed spend): a volume the customer agrees to pay for upfront, usually at a discount, with overage above it.
• Drawdown: a prepaid credit balance consumed as the customer uses the product.
• Metering: the system that measures consumption. Weak metering makes usage pricing unsellable, because buyers cannot verify their own bill.

Contract and billing terms

• Billing period: how often you invoice, typically monthly or annually.
• Term: the length of the commitment, which is not the same as the billing period. An annual term can be billed monthly.
• Annual prepay: twelve months paid upfront. The fastest way to improve cash position without changing price. See burn rate and runway.
• Proration: partial-period charging when a customer changes plan mid-cycle.
• Grandfathering: keeping existing customers on their old price after a change.
• Price protection: a contractual cap on future increases, often demanded in enterprise deals.
• Auto-renewal and opt-out window: the renewal default and the notice period for cancelling.
• Ramp deal: a contract where price rises on a schedule across the term.
• Floor (platform fee): the minimum recurring amount regardless of usage.
• Dunning: the retry and notification process for failed payments. Often recovers a meaningful share of apparent churn.
• Involuntary churn: cancellations caused by payment failure rather than a decision.

Revenue metrics

• MRR / ARR: monthly or annual recurring revenue. Recurring only, so one-off services and usage spikes do not belong here.
• ARPA / ARPU: average revenue per account or per user.
• Expansion revenue: additional revenue from existing customers through upgrades, seats, usage or add-ons.
• Contraction: revenue lost to downgrades without cancellation.
• Gross revenue churn: revenue lost to cancellations and downgrades as a share of starting revenue.
• Net revenue retention (NRR): starting revenue plus expansion minus contraction and churn, divided by starting revenue. Above 100 percent means the base grows on its own.
• Logo churn: customer count churn, as opposed to revenue churn.
• Quick ratio: new plus expansion revenue divided by churned plus contracted revenue. A measure of growth efficiency.
• Gross margin: revenue minus cost of delivery. Critical in AI products, where inference cost scales with usage.
• CAC: fully loaded cost of acquiring one customer, including payroll.
• CAC payback: months of gross-margin revenue needed to recover CAC.
• LTV: gross-margin revenue expected from a customer over their lifetime. Highly sensitive to the churn figure used.

For how to calculate and read these together, see churn rate analysis and customer acquisition and pricing.

Research and testing methods

• Willingness to pay (WTP): the maximum a buyer would pay before walking away.
• Van Westendorp price sensitivity meter: four questions that map an acceptable price range and indifference point. Good for finding the range. Full method here.
• Gabor-Granger: sequential purchase-intent questions at specific prices, producing a demand curve and a revenue-maximising point. Full method here.
• Price elasticity: how much demand changes when price changes.
• Reference price: the price a buyer already has in mind, usually anchored on a competitor or an incumbent process.
• Segmentation: grouping buyers by what they value and what they will pay, which is what tiers should be built on.

The terms that decide the outcome

If you only take three from this list: value metric, because it determines whether revenue grows with customer success; net revenue retention, because it tells you whether the structure is working; and gross margin, because in AI products it decides whether growth funds the business or drains it.