SaaS Usage-Based Pricing – A Closer Look at the Concept

In the ever-changing landscape of SaaS, where success hinges on sales, client retention, and demonstrating value, a major obstacle is pricing. The right pricing model can be your company’s game-changer to achieve significant profits. With variables like user seats, services, company size and functionality in play, SaaS organizations struggle to demonstrate the value of their goods. Usage-based pricing is a flexible pricing strategy that might perfectly fit your SaaS venture. 

Usage-based pricing, a commercial SaaS strategy, lets customers pay only for the services they actively use. Payments are linked to the number of subscribers reached or API requests made. This approach bills users based on product usage at the end of each billing cycle, similar to traditional phone plans where excessive usage leads to higher costs.

Usage-based pricing can manifest in diverse forms, from pay-as-you-go to volume-based charges or a hybrid combination. Firms can also offer subscription tiers, incorporating software use, services, and functionality, offering flexibility in aligning costs with actual customer usage.

The Rise of Usage-Based Pricing in SaaS- A Paradigm Shift in Software Pricing

SaaS providers are abandoning traditional subscription pricing in favor of usage-based models, aligning with consumer trends and the economic value of goods. This shift results from various market forces fueled by consumer preferences, technological advancements, and intense competition.

In the “2021 State of Usage-Based Pricing Report” from OpenView Venture Partners, seven of nine SaaS IPOs, including Slack, Elastic, and Snowflake, renowned for their remarkable retention rates, embraced usage-based pricing. Moreover, the acceptance of this model surged from 27% to 56% between 2018 and 2022, marking a twofold increase in just four years. This trajectory clearly indicates why usage-based pricing stands as the future of software pricing.

Elements of usage-based pricing

Implementing a usage-based pricing model is impossible unless you precisely categorize your product usage into utilized units. The effectiveness of your usage-based strategy depends on having the appropriate data. Another important fact is that the following three elements facilitate keeping track of the precise usage quantity in a usage-based pricing model.

Metering billing

Businesses charge a fixed sum for every unit used when using meter billing. For instance, kilowatts are the unit of measurement used by electricity companies. In contrast, cloud storage and cloud computing providers like Microsoft Azure charge for their services based on the number of hundred, thousand, or million units used.

Mediation

Businesses utilize mediation engines when data needs to be filtered and normalized for billing and rating purposes, as in the context of VoIP (Voice Over IP). The raw data is organized and filtered, and the output is invoiced according to the:

• Call duration 
• Amount of data transferred in MB
• Number of MMS or SMS 
• Cost of video usage

Billing

In addition to the mediation engine, billing can monitor and evaluate usage data throughout the entire billing cycle. The information is then utilized to develop pricing strategies, such as price, discounts, billing plans, and promotions.

Existing platforms on the market have trouble handling metered billing compared to companies that charge for their products based on the user’s consumption. Togai allows companies to classify any action related to their development as a revenue-generating event within its platform. Thanks to its event-driven structure, organizations can create the pricing model they need without the need for extensive engineering efforts.

The Benefits of Usage-based Pricing for Businesses

Technology and innovation have and keep influencing business pricing models. Current economic theory is now being driven by usage-based pricing. Besides showering immense benefits in the SaaS industry, customers can get more value from products or services with usage-based pricing. The reasons why companies are converting to usage-based pricing were explained in detail by Togai, a renowned billing platform for usage-based pricing. Let us take a look: 

Increased cost awareness

Customers have grown more financially aware, prompting them to conduct thorough research and discover budget-friendly options without sacrificing service quality. In order to grasp the benefits of implementation and monitor tangible business value, companies are now seeking greater cost transparency and simplified billing processes.

Enhanced agility

The fundamental tier of a business service generally meets the needs of SMBs and startups. Yet, as a company grows, access to a broader array of products and services is necessary. With usage-based pricing, businesses can readily adapt and bill customers for additional usage.

Increased competition & creativity

Emerging SaaS providers offer better services and simplify integrations in the competitive market, thereby showering customers with more options and negotiation power. Increased competition empowers customers to select from various SaaS providers by conducting thorough product capability assessments and choosing the best value-driven pricing options before purchasing.

Evolved development techniques 

Changes in development processes and technical architecture are shifting the traditional top-down sales cycle towards a greater emphasis on bottom-up technology adoption. Furthermore, the rise in popularity of try-and-buy self-service purchasing and pay-as-you-go models has been driven by the growing adoption of low-code/no-code tools among non-technical users.

Reduced dedication

Customers are more willing to test an on-demand product if it is offered in increments of lesser magnitude and doesn’t require a sizable upfront expenditure. This advantage opens doors to new customer profiles and addresses the customer’s desire to avoid commitments and ownership responsibilities.

Increased client retention

As clients only pay for what they use, usage-based pricing can increase satisfaction with customers and retention rates. Users need not discontinue service during the off-peak season since they can easily adjust their usage to match their evolving business requirements. This model doesn’t compel customers to pay for services or products they rarely utilize.

Improved feedback collection

Companies can use a usage-based model to gather feedback regarding how customers utilize their products. It helps in identifying traits that are attractive to your clients and those that need improvement. This aids in determining which parts of the SaaS software offering are in great demand by looking at the revenue statistics.

The bottom line

In the journey to embrace usage-based pricing, remember to tailor it to your unique service, product, and industry. However, your SaaS provider’s capacity to properly measure consumption and enable simple payments is the key to success. When off-the-shelf solutions fall short, many companies rise to the challenge by building robust billing and metering systems internally, all in pursuit of delivering the ultimate customer experience. To maintain cost transparency, connectivity from consumption to reporting is essential. Implementing end-to-end value tracking requires strong data management skills. Innovating new approaches to assess the significance of IT and restructuring the online presence of businesses across industries are both made possible by the shift.