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SaaS Usage-Based Pricing: The Future of Software Monetization
June 26, 2024
Who wouldn't enjoy getting their money's worth?
Especially in SaaS where the products or results are often intangible, giving your customers the sense that they are getting value for the money enhances customer satisfaction.
The perks of such customer service are long-term- loyalty, engagement, lifetime value, retention, and brand identity.
Introducing a pricing system that gives clarity and transparency on the billing based on usage can significantly enhance customer trust and satisfaction.
So what is this emerging monetization system in the software industry that helps you enjoy all these perks?
In this article we will walk you through SaaS usage-based pricing, reasons why it's the future of SaaS, and why companies are increasingly moving towards opting for it as their pricing structure.
So scroll down for more.
What is a usage-based pricing model?
As the name suggests, usage-based pricing models charge customers for their usage of the product or service.
For example, your electricity bill is generated based on your energy consumption. The more you use, the higher your bill. The less you use, the lower you are charged.
It is a commonly used pricing model in the cloud computing, telecommunication, and software-as-a-service industries.
It is a flexible and scalable model which provides a win-win situation for both the provider and the customer.
7 Reasons Usage-Based Pricing is the Future of SaaS
Software as a service has some ingrained features that make it suitable for usage-based pricing.
These ingrained characteristics are what make it the future of SaaS.
So what are these inherent qualities? Let's look through 7 different reasons:
Charging customers based on how much they benefit.
Usage-based SaaS pricing gives customers the feeling that they are receiving value for their money’s worth.
As the customers pay only for their usage, it helps create a strong relationship between the provider and the client.
Making it easier for beginners to join.
Consumption-based pricing in SaaS offers lower initial costs. This is a major attraction for smaller companies or start-ups.
It helps them start using the software without the financial burden or hefty charges.
Adapting easily to your changing demands.
SaaS usage-based pricing is flexible and scalable. This means companies can increase or reduce their usage depending on their financial capacity.
Such a pricing system supports companies during their variable workloads or seasonal changes.
Encourages you to be mindful of your usage.
In consumption-based pricing, users are mindful of their usage. They will efficiently use the software by ensuring optimal usage and reduced wastage.
Predicting how much revenue growth will occur.
SaaS providers will have a better track of their cash flow and revenue growth with usage-based pricing. The logic is simple: as customers increase so does the revenue.
Using data to gain insights.
Usage-based SaaS pricing relies on data to monitor and track customer usage. It helps understand how customers interact with the solution, which are the popular features, and how things can be improved.
Gathering these insights helps in improving the solution for enhanced customer satisfaction.
Setting yourself apart from the competition.
A common pricing model followed in SaaS is the subscription-based pricing model. However, the cost-effectiveness, flexibility, and scalability of offering usage-based pricing will help stand apart in the crowd.
Who doesn't like a fair deal? It makes us feel good. It also makes us trustworthy of the company.
Providing a transparent and usage-based billing system brings you a lot of perks that help optimize your overall business growth.
Reasons Why Companies Are Switching to Usage-based Pricing
Businesses always choose the better option.
Data shows that usage-based pricing is a fast-emerging method. According to OpenView, 61% of SaaS companies experimented with some form of UBP.
If the numbers show a positive increase, that means there is good enough reason for people to switch to a consumption-based pricing system.
From a customer perspective, usage-based pricing offers benefits that make it desirable:
- Usage-based pricing provides increased flexibility. Depending on the changing market demands they can decide their usage without overcommitment.
- It is cost-effective. When you pay for only what you use it ensures optimal usage and zero waste of money and resources.
- There is no huge initial payment or long-term commitment. Companies can decide on their usage level, period of usage, and termination of service.
- There is transparency and predictability in pricing. This helps companies plan their budgeting for SaaS expenditure resourcefully.
It is the freedom to decide how and when to use the service/product that makes usage-based pricing an attractive payment system among clients.
Making the best use of it gives a win-win situation for both the provider and the client.
SaaS Usage-Based Pricing Examples
Now companies across the world have successfully implemented and executed SaaS usage-based pricing.
Some of these top company names include:
These success names show that usage-based pricing has a huge fan base that can bring desired results and growth.
How to implement a usage-based pricing model for SaaS companies?
Be clear on your strategic and operational steps.
Deciding that you are going with a usage-based pricing system doesn't streamline your transactions.
There needs to be a setting up of a process that helps you ensure that every participant involved in the transaction is clear about it.
So here is a roadmap on how you can go about implementing a usage-based pricing process:
Define Usage Metrics
Be clear about the metrics you will use to calculate the pricing.
For example, a Wifi bill is generated based on the data usage, a phone bill is generated based on the duration of the call, etc.
Develop a Pricing Structure
Decide what pricing structure best suits your transaction.
For example, charging a base rate till a certain level of usage or paying only based on the actual usage, etc.
Set Up Monitoring and Billing Systems
Incorporate an effective tool that will monitor and track usage metrics in real-time.
For example, your electricity bill includes the energy consumption that helps you understand the correctness of the invoice generated.
Communicate Clearly with Customers
Make your customers aware of the pricing and calculation process.
For example, they must be clear about the usage metrics, pricing structure, and calculator process and be able to anticipate the final bill for the period.
Develop a Customer Support Strategy
Develop a customer support system that timely addresses their queries and doubts.
Pilot the Model
Give a test run to your process to check if it's evaluating the right metrics, doing the right calculations, and giving the correct output.
Measure Success and Improve
Collect feedback from recipients, evaluate its success, understand the areas of improvement, and work on improving your pricing model.
Designing a usage-based pricing system for your SaaS business requires careful planning, execution, and implementation.
It is an ongoing process that requires constant updation to ensure its relevance and effectiveness.
Types of usage-based pricing models
You can charge your customer usage based on various ways.
The choice of which type of usage-based pricing model suits your business depends on the kind of service you provide, industry standards, customer needs, etc.
So here is a list of pricing types for you to make your best call:
Pay-as-You-Go
A straightforward pricing structure where customers are charged on their usage without any base fee.
For example: A cloud storage service charges customers per gigabyte of data stored per month.
Tiered Pricing
Tiered pricing is like levels in video games. As your score or usage increases, you enter the next tier where you will have a different price bracket, additional benefits, etc.
For example: An email marketing platform charges $20/month for up to 10,000 emails, $50/month for up to 50,000 emails, and $100/month for up to 100,000 emails.
Volume Pricing
In volume pricing the per-unit cost reduces and usage increases. It provides a better offer for customers for buying/using large quantities.
Example: A data analytics service charges $0.10 per transaction for the first 10,000 transactions, $0.08 per transaction for the next 40,000 transactions, and $0.05 per transaction beyond that.
Freemium to Usage-Based
A freemium model offers customers some features free of charge while the premium features come with additional charges.
Example: Grammarly offers basic editing free of charge. But for nuanced language corrections, you need to subscribe to a premium version.
Hybrid Pricing
Hybrid pricing is a combination of base fees and usage charges. This means customers pay for a base subscription and have to pay additional charges when usage goes beyond a level.
Example: A SaaS CRM platform charges a base fee of $50/month for up to 1000 contacts, with an additional $0.10 per contact above that limit.
Per-Feature Pricing
A solution has multiple features each catering to a distinct value proposition. This helps customers to choose and pay for required features that are of use to them.
Example: A cloud software suite charges for individual modules such as accounting, CRM, and inventory management based on the usage of each feature.
Usage is subjective. So businesses must choose a payment method that suits their industry standards while making the customers feel they are getting the best deal.
When should you go for a usage-based pricing model?
Businesses must think from a self-interest point of view as well as a customer point of view.
The former helps you to make judicious decisions that bring in profit, growth, and success. The latter helps you build a loyal customer base that stays together in ups and downs.
So when should you go for a usage-based pricing model?
- When your customers have a varying usage pattern
- When you want to attract potential customers with a low-cost entry
- When your product is measured and billed based on usage.
- When you want to encourage customers to use the product efficiently.
- When you have a scalable product that increases revenue with customer usage.
- When the market is competitive and providing flexibility is the USP.
- When you want customers to feel they are receiving value for the price they pay.
If any of these reasons ring a bell with you then YES, it's time to opt for a usage-based pricing strategy.
What else should I consider about usage-based pricing?
Usage-based pricing is not just about measuring customer consumption and billing a price.
You need to think a bit more comprehensively to ensure its effectiveness.
- Make sure your cost structure aligns with the usage-based pricing model.
- Incorporate tools to make your measuring and billing process accurate.
- Maintain a clear communication stream with your customers.
- Provide necessary awareness and support to your customer base.
- Always have a revenue predictability to assess your growth.
- Be watchful of your competitors to help you stand apart from the crowd.
- Gather feedback on customer satisfaction and the effectiveness of the billing process.
Being mindful of these aspects can improve the effectiveness of your consumption-based pricing.
Does usage-based pricing make sense for your company?
Want to know if usage-based pricing is actually your cup of tea? Here is a little checklist of questions to ask yourself.
✅What is the nature of my service/product?
✅What is the usage pattern of my customers?
✅How do my competitors structure their pricing structures?
✅Can my existing tools and operations track and bill customer usage?
✅Does usage-based pricing positively impact my cash flow?
✅Does this pricing model help my customers see the value in my service?
If you are positively able to answer these questions.
If you feel that the overall impact is desirable.
If you feel that the pricing model can seamlessly integrate with your operations.
If you feel your customer will be happy at the end of the day.
Then yes, usage-based pricing does make sense for your company.
Who is usage-based pricing best for?
- Scalable services
- One-off or bulk services
- Seasonal or campaign-specific services
The answer is simple: Scalable services.
Usage-based pricing is best for scalable services where usage can vary significantly and can be accurately measured and billed. The model allows customers to pay only for what they use, making it ideal for services that can scale up or down based on customer needs.
Final Thoughts
The SaaS usage-based pricing model is a straightforward billing system. You pay for what you use.
From a customer perspective, it is a very convenient way of measuring consumption. There are clear metrics as to how the amount got added up and if the final amount is right or not.
This level of clarity and transparency is always appreciated and brings the customers closer to you.
While from a service provider perspective, usage-based pricing helps you evolve easily with the market changes. This scalability and flexibility welcome a large group of small and entry-level business groups with your low initial costs.
But the biggest perk is that you can easily predict your cash flow and revenue growth. You gain by increasing customers and their usage.
So the more the customers, the higher the profit.
Back this flexibility, scalability, and predictability with data insights and you have the perfect package to drive growth and success.
In short, the simplicity and win-win aspect of usage-based pricing is its greatest attraction in the SaaS industry.
To read more about these topics, visit https://www.kennect.io/. To know more about our solution Book A Demo NOW!
Sheetal S Kumar
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