The best SaaS companies have a net revenue retention (NRR) above 120%. This means that even if they signed zero new customers this year, they'd still grow 20% — just from existing customers expanding their usage and upgrading their plans.
This doesn't happen by accident. It's the result of pricing that's designed to grow with the customer.
The Three Pricing Models and Their Expansion Dynamics
Per-seat pricing (Slack, Notion, Figma) grows as the team grows. Every new hire who joins the product is expansion revenue. The compounding dynamic is powerful in growing companies — the product's value grows with headcount, and so does the revenue. The risk: as teams shrink or cost-cutting happens, contraction is also per-seat.
Usage-based pricing (Stripe, Twilio, Snowflake) grows as usage grows. Revenue is directly tied to the value customers get from the product — if Stripe processes more payments, they pay more. This aligns incentives perfectly: customers who succeed pay more, customers who struggle pay less (until they cancel). The risk: revenue is less predictable.
Tier-based pricing (HubSpot, Intercom) creates expansion through feature gates. Users on lower tiers hit a ceiling — a feature they need is only available on the next tier up. Upgrade is the path of least resistance. The risk: feature gates feel punitive if the gated features are core to the product's value.
Designing for Expansion: The Limiting Factor
Every pricing model that drives expansion has the same underlying principle: as customers grow, they hit a limit that makes the next level clearly worthwhile.
For per-seat: the limit is the number of people who need access. For usage-based: the limit is the amount of value they're generating with the product. For tier-based: the limit is the features available on their current plan.
The design question is: what is the natural expansion driver in your product?
Not every product has obvious per-seat dynamics. Not every product has obvious usage metrics. But most products have some dimension along which usage naturally grows as customers get more value — that's the dimension to price against.
The Freemium Expansion Model
Freemium is a specific version of tier-based pricing designed to minimize the top-of-funnel friction and maximize the expansion rate from free to paid.
The economics only work if:
- —The free tier delivers real value (so users actually stay and adopt the product)
- —The free tier has a natural ceiling (so growth-oriented users feel the need to upgrade)
- —The upgrade path is clear and immediate when the ceiling is hit
The most common freemium failure: the free tier is too generous. Users get enough value from free that the upgrade never feels urgent. Linear historically had this problem — the free tier was so functional that teams had no urgency to upgrade.
The fix is usually reducing the free tier's ceiling, not adding features to the paid tier. Make the ceiling visible earlier in the user journey.
Net Revenue Retention: The Number to Optimize
NRR is the clearest measure of whether your pricing drives expansion:
NRR = (Starting MRR + Expansion - Contraction - Churn) / Starting MRR
A 100% NRR means expansions exactly offset churn and contraction. A 120% NRR means you're growing 20% from your existing base, which means every new customer acquisition compounds on a growing base.
Companies with NRR above 120% (Snowflake historically had 150%+) can grow extremely fast from a relatively small customer base. Companies with NRR below 100% are in trouble — they're on a treadmill where new customer acquisition just offsets the base that's shrinking.
Annual Contracts vs. Monthly Pricing
Annual contracts improve revenue predictability and reduce churn (customers who've paid for a year don't cancel impulsively in month three). But they add friction to the initial conversion.
The standard model: offer monthly pricing for self-serve/PLG customers who need low commitment to start, and annual pricing (at a 15–20% discount) for customers who've validated value and want to lock in the price.
Annual contracts compound well with expansion: customers on annual contracts who expand mid-year often pay prorated expansion immediately, which improves short-term cash flow and demonstrates the product's growth dynamic to potential investors.
FAQ
When should you switch from seat-based to usage-based pricing?
When your product's value is more correlated to how much customers use it than how many people access it. A platform that processes transactions, sends messages, or generates outputs has natural usage-based pricing. A platform that gives teams a collaborative workspace is better suited to seats.
How do you handle price increases without churning customers?
Grandfather existing customers for 12 months, give clear advance notice (60–90 days), and frame the increase in terms of value added. Customers who are getting strong value tolerate price increases. Customers on the margin churn — which is useful segmentation data.
What's the right discount for annual vs. monthly?
15–20% annual discount is industry standard. Less than 10% doesn't motivate the switch. More than 25% leaves too much revenue on the table and trains customers to expect deep discounts.
Written by
Ross
Founder & Strategy Lead, Greta Agency
Ross has spent 10+ years building growth engines for companies from seed to Series C. He founded Greta Agency to prove that great software can ship in days, not months.