Usage-Based Pricing: What it Is and How to Implement it

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Understanding Usage-Based Pricing

Examples of Companies Successfully Using Usage-Based Pricing

The Benefits and Challenges of Usage-Based Pricing

Key Metrics to Track in Usage-Based Pricing Model

Best Practices for SaaS Companies Adopting Usage-Based Pricing

The Future of Usage-Based Pricing in SaaS

Driving Business Success with Usage-Based Pricing Using Younium

FAQ

Conclusion

The software-as-a-service (SaaS) industry is changing fast and one of the biggest shifts is the move from flat-rate pricing to usage-based pricing model.

More businesses are adopting this approach because it offers flexibility and fairness. Since customers only pay for what they use, it makes it easier for startups and small businesses to access high-quality software. 

At the same time, it helps SaaS companies attract more users, reduce customer churn, and scale revenue more effectively.

In this post, we will explore why usage-based pricing is gaining popularity, how it benefits companies and customers, and what challenges businesses face when implementing it. 

Understanding this shift is crucial for staying competitive in the modern market if you are in the SaaS industry.

Understanding Usage-Based Pricing  

Usage-based pricing, also known as "Pay-as-you-Go," is a dynamic pricing model that has gained popularity as businesses move away from traditional license/maintenance software propositions and towards subscription-based models. This pricing approach charges customers based on their actual usage of a SaaS product or service, providing a win-win situation for both customers and service providers. 

By aligning costs with value, usage-based pricing allows customers to pay for what they consume, offering greater flexibility and cost control. This model is particularly beneficial for customers who have varying usage needs or unpredictable demand patterns. Instead of paying a fixed fee for a set amount of resources or features, they pay based on their specific usage levels, ensuring that they are only charged for the value they receive. 

There are different variations of usage-based pricing, including mixes of committed and non-committed usage. For instance, a customer may have a contract that includes a base allocation of 10GB of data within the subscription fee. However, if they exceed this allocated amount, they may be subject to overage charges for each additional GB consumed. These overage charges can sometimes be structured in tiers, where the cost per unit increases as usage surpasses certain thresholds. 

Let's explore some specific B2B examples that illustrate the implementation of usage-based pricing: 

• Cloud Computing Services: Customers pay for the computing resources (virtual machines, storage, bandwidth) they consume, aligning costs with usage. 
• Telecommunications Services: Businesses are charged based on metrics like voice call minutes, data usage, or text messages sent. 
• Data Analytics Platforms: Customers pay based on the volume of data processed or analysed, ensuring cost-efficient access to valuable insights. 
• Email Marketing Services: Pricing is based on the number of emails sent or the size of the contact list, aligning costs with email marketing needs. 

Examples of Companies Successfully Using Usage-Based Pricing

Many leading companies have adopted this approach to provide value while scaling with customer needs. Below are examples of businesses that have successfully implemented usage-based pricing.

1. AWS (Amazon Web Services)

AWS charges customers based on their product usage. This allows customers to increase their usage as needed, avoiding large upfront costs. 

Customers pay only for the resources they consume, making it a cost-efficient solution. AWS also offers a free tier to attract new users who can upgrade as they grow. 

Image via Amazon Web Services

2. Twilio

Twilio provides cloud-based communication tools, charging per API request. Businesses pay based on the number of messages, calls, or authentication requests sent. 

This pay-as-you-go model helps companies manage communication costs while scaling operations. Twilio also provides volume discounts, encouraging long-term use.

Image via Twilio

3. Stripe

Stripe, a payment processing giant, charges a percentage of each transaction as its fee. Merchants only pay when they process payments, avoiding fixed costs. 

This pricing model makes Stripe attractive to startups and small businesses. The company also offers custom pricing for high-volume users. 

Image via Stripe

The Benefits and Challenges of Usage-Based Pricing

Usage-based pricing is an increasingly popular model that aligns costs with actual consumption, offering flexibility for both businesses and customers. 

While it provides opportunities for scalable revenue and cost efficiency, it also introduces complexities in forecasting and subscription management. Let’s examine the benefits and challenges of usage-based pricing. 

The Benefits for Customers

• Cost Optimization: Usage-based pricing allows customers to pay only for the features and services they actively use. It helps them avoid unnecessary expenses and eliminates the cost of underutilized services. 

Instead of being locked into a fixed-rate subscription, businesses can adjust their spending based on actual usage. This helps optimise budgets, improve financial planning, and allocate resources more effectively. 

• Scalability and Flexibility: A key advantage of usage-based pricing is its scalability. Customers can increase or decrease their usage based on their evolving needs without switching to a new plan or incurring penalties. 

This flexibility is particularly beneficial for startups and small businesses that may experience fluctuating demand. It also allows enterprises to scale efficiently without committing to fixed-cost plans that may not match their needs over time.

• Transparency and Fairness: Usage-based pricing provides transparency by directly linking costs to actual usage. Customers know exactly what they are paying for, which builds trust and ensures fairness.

Unlike traditional pricing models that bundle multiple features into a single plan, this approach ensures that customers are only charged for the services they consume. This level of clarity helps businesses make informed decisions about their business software costs.

• Lower Entry Costs: For businesses hesitant to commit to high upfront costs, usage-based pricing provides an accessible entry point. Instead of paying a large fixed fee, customers can start using a product at a lower cost and scale up as needed.

This is valuable for startups and smaller companies that need enterprise-level software but cannot afford large subscription fees. It also enables businesses to experiment with a service before fully committing.

• Encourages Efficient Usage: Since costs are tied to usage, businesses are more likely to use their resources efficiently. This model discourages wasteful consumption and encourages teams to optimise product usage. 

By monitoring their usage patterns, SaaS teams can identify unnecessary expenditures and adjust their workflows accordingly. 

The Benefits for SaaS Providers

• Revenue Growth: Usage-based pricing opens new revenue streams for SaaS providers. Instead of relying on fixed subscription fees, providers can charge customers based on product usage. As customers scale up their usage, recurring revenue naturally grows. This model allows SaaS companies to capture more value from high-usage customers while remaining accessible to smaller users.
• Improved Customer Retention: Usage-based pricing fosters stronger customer relationships through tailored pricing plans. Offer customised solutions that meet specific customer needs, enhancing satisfaction and improving customer retention.  
• Market Competitiveness: Offering usage-based pricing can set a business apart from competitors. Many customers seek flexible pricing options, and by providing a scalable model, SaaS companies can attract a wider customer base. This flexibility also appeals to large enterprises that prefer to pay based on usage rather than committing to rigid contracts.
• Encourages Product Adoption and Upselling: Usage-based pricing incentivises customers to explore more features without the fear of overpaying for unnecessary tools. As they become more comfortable with the product, they may use it more, leading to higher spending. Additionally, SaaS companies can introduce tiered usage models or add-on features to encourage upselling while maintaining transparency.

Potential Challenges of the Usage-Based Pricing Model

While usage-based pricing brings numerous benefits, there are certain challenges to consider: 

• Complexity in Pricing Structures: Implementing and managing usage-based pricing can be complex, requiring careful consideration of pricing tiers, metering, and subscription management systems. If you don’t find the right subscription management system, you may be looking at three different solutions connected to make the process work. 

However, Younium is a subscription management platform founded specifically for this need of advanced subscription handling. You can handle a mix of one-off fees, recurring fees, and usage fees which can also differ per customer you sign. 

• Customer Retention Challenges: With a usage-based pricing model, customers can reduce or stop using a service at any time. This means lower commitment compared to subscription plans. 

Because of this, businesses must focus on delivering continuous value to keep customers engaged. The team of experts at Younium can assist you with implementing personalised offers, loyalty programs, and usage-based discounts to help improve retention.

• Revenue Predictability Difficulty: Businesses using a usage-based pricing model often struggle to predict and recognise revenue. Since customer usage fluctuates, monthly income can vary. This makes budgeting and financial planning harder for companies.

Investors and stakeholders may also find it difficult to assess long-term profitability. As a SaaS business owner, you may need to implement forecasting tools to estimate subscription revenue or set minimum pricing thresholds to stabilise income.

• Customer Uncertainty and Bill Shock: Customers might struggle to predict their costs with a usage-based model. If usage spikes unexpectedly, customers may face higher consumption pricing costs than expected which can lead to frustration and a negative customer experience. 

Some users might hesitate to engage more with the service due to cost concerns. To address this, you should offer clear usage tracking and spending alerts to help customers manage subscriptions.  

Key Metrics to Track in Usage-Based Pricing Model

Tracking key metrics ensures accurate billing and helps in making informed pricing decisions. It also helps companies improve customer experience and predict revenue growth. 

Below are the most important SaaS metrics to track in a usage-based pricing model.

Average Revenue per Account 

The average revenue per account (ARPA) shows how much revenue a business earns from each customer. It helps determine if the pricing model effectively converts usage into income. Businesses can compare this data across customer segments to find the most valuable users. 

If the ARPA is too low, it may signal a need for pricing adjustments. Tracking trends over time helps in forecasting revenue growth. A rising ARPA often means higher customer engagement and satisfaction.

Customer Retention Rate

Retention rate measures the percentage of customers who continue using a service over time. A high retention rate indicates satisfied customers who find value in the pricing model. 

Low retention could indicate that pricing is too complex or expensive. Tracking this metric helps businesses with churn analysis and identifying patterns that lead to customer drop-offs.

Estimated Monthly Recurring Revenue (EMRR)

EMRR, or Estimated Monthly Recurring Revenue, is a subscription metric that provides an estimate of the monthly revenue a customer is likely to generate based on their initial booking within the usage-based pricing model. It is an indication of the customer's anticipated usage but is not a contractual commitment. EMRR helps businesses project and forecast revenue streams, offering a version of the truth that informs revenue predictions. 

Usage Revenue 

Usage revenue represents the actual revenue generated from measured usage within a given month. This metric reflects the tangible value customers derive from the product or service based on their usage levels. By tracking usage revenue, businesses can gauge the direct correlation between customer utilization and revenue generation, allowing for streamlining financial processes and accurate revenue reporting. 

Historic Usage Revenue Trend

The historic usage revenue trend analyzes patterns and trends in usage revenue over time. By examining this trend, businesses can identify average increases or decreases in revenue on a monthly basis. This analysis provides insights into customer behavior, seasonality effects, and market dynamics. It helps businesses make informed decisions regarding pricing strategies, resource allocation, and future growth plans. 

Best Practices for SaaS Companies Adopting Usage-Based Pricing

Adopting a usage-based pricing model can help SaaS companies align revenue with customer value. However, without the right strategies, it can lead to revenue instability. 

The following best practices can help optimise a usage-based pricing strategy.

1. Provide Real-Time Usage Analytics

Customers need clarity on how they use a service to manage costs effectively. Providing a dashboard with real-time SaaS analytics can help them track their usage and anticipate their expenses. 

It can also build trust by ensuring there are no hidden charges or unexpected fees. Additionally, you can provide automated alerts to notify customers when they are nearing usage limits to prevent surprises.

Moreover, granular breakdowns of consumption patterns can help customers optimise product usage and find cost-saving opportunities. Ultimately, giving users visibility over their product usage can enhance customer satisfaction and reduce churn.

2. Set Clear Pricing Transparency

Pricing transparency is essential to avoid customer frustration and loss of trust. So it’s important to clearly outline pricing rules, ensuring customers understand how costs are calculated.

You need to provide detailed breakdowns of unit pricing, volume discounts, and any additional fees. Plus, offering estimated cost projections can help users plan their budgets accordingly.

Avoid hidden fees that might lead to billing disputes or cancellations and regularly update customers on pricing changes, explaining the reasons behind adjustments. 

3. Offer Freemium or Trial Models

Allowing users to experience a product before committing can drive higher adoption rates. A freemium model lets customers explore basic features, while trial periods offer full functionality for a limited time. It can help build confidence in your SaaS product and demonstrate its value.

You can also collect usage data during the trial to understand customer behaviour and personalise offers.

If you run an advanced B2B company and can’t offer trials or freemium plans, demos would work just fine These help businesses set realistic expectations about the product, and its features and costs.

4. Balance Flexibility with Revenue Predictability

Usage-based pricing offers flexibility, but it can also lead to unpredictable subscription revenue.

Introducing consumption-based pricing strategies like minimum spend commitments can help manage cash flow issues for SaaS businesses while still allowing usage-based scaling.

Also, blended pricing models, which combine fixed fees with variable charges, can help you maintain a balance between predictability and customer choice. 

You can also offer volume-based discounts to incentivise higher usage without deterring smaller customers. Predictable billing cycles with capped charges can prevent excessive fluctuations in SaaS revenue. 

For instance, offering annual contracts with usage-based add-ons can provide further stability. As a SaaS company, you should also analyse historical usage trends to forecast future earnings.

5. Regularly Reassess Pricing Strategy

You pricing strategy should evolve to match market conditions and customer needs. Gather feedback from customers to help identify pain points and opportunities for improvement in your consumption pricing model. 

Alternatively, you could analyse competitive pricing structures to ensure your business remains attractive in the market. You can regularly A/B test your pricing models to see what works best for different customer segments. 

Additionally, monitoring churn rates and billing disputes can indicate areas where pricing needs adjustment. With this, you can make data-driven adjustments to help grow revenue and prevent customer dissatisfaction. 

Implement Proactive Customer Support

Proactive support can help prevent billing issues and enhance the user experience. You can provide dedicated account managers to assist high-value customers with pricing queries.

Chatbots and automated assistants can also assist customers in understanding their usage and billing in real time. Additionally, educational resources, such as FAQ and tutorials, are useful for empowering customers to manage their accounts efficiently. 

You can regularly check in with customers to provide an opportunity to address concerns before they escalate and proactively notify customers about potential cost-saving opportunities. 

The Future of Usage-Based Pricing in SaaS

The software-as-a-service (SaaS) industry is shifting towards more flexible SaaS pricing models. Usage-based pricing is gaining popularity because it allows customers to pay for only what they use. 

As technology advances, innovations will shape the future of this pricing model. Let’s take a look at some of the SaaS trends affecting usage-based subscription pricing models.

Real-Time Usage Insights for Cost Control

One of the biggest challenges with usage-based pricing is the unpredictability of costs. Currently, many SaaS providers rely on periodic billing cycles, which means customers only see their usage data at the end of a billing period. 

And with this, many customers experience "bill shock" when they receive unexpectedly high invoices. 

As technology advances, real-time tracking dashboards will become a standard feature in usage-based pricing models to help customers monitor their spending. 

These dashboards will display up-to-the-minute updates on consumption levels so customers can adjust their usage before exceeding budget limits. 

For example, a marketing agency using a cloud-based analytics tool will be able to see its data processing costs rise as it runs more campaigns. If expenses approach a set budget limit, automated alerts will notify users, giving them the opportunity to adjust their usage immediately. 

This level of visibility will prevent unexpected costs and improve financial planning. Customers will also appreciate the transparency in SaaS billing and feel more in control of their software expenses. When customers can see exactly how pricing is calculated, they are less likely to dispute invoices.          

The Role of Blockchain and Smart Contracts in Transparent Usage-Based Billing

Blockchain technology and smart contracts will drive transparency in usage-based billing. Blockchain’s decentralised ledger will create an immutable record of every usage transaction. This will prevent discrepancies and disputes over billing amounts. 

Smart contracts will automate invoicing, ensuring instant and accurate payment processing. These contracts will execute predefined rules, reducing the risk of overcharging or underbilling.

Customers will have full visibility into their usage data, building trust with businesses. Blockchain will also enable cross-border SaaS transactions with minimal fraud risk. 

Features like decentralised identity verification will ensure that only authorised users access specific services. Businesses will no longer need intermediaries for billing verification, lowering costs. 

As regulatory compliance becomes more critical, blockchain will provide auditable records for financial transparency. These advancements will make blockchain a key enabler of fair and efficient usage-based pricing.

Startups and Enterprises Balancing Fixed and Variable Pricing Models

Many software companies prefer a hybrid model that combines predictable costs with scalable usage-based elements. 

Enterprises with stable workloads may opt for fixed pricing to maintain budget certainty. Startups, on the other hand, may benefit from variable pricing that scales as they grow. 

SaaS businesses will introduce flexible contract options to accommodate both models. Subscription-based services will increasingly include metered components for add-on features.

This balance will improve customer satisfaction by offering choice and flexibility. As competition intensifies, SaaS businesses will innovate to create pricing strategies that work for different business sizes.

Industry-Wide Standardisation of Usage-Based Pricing Metrics

The SaaS industry is moving towards standardising usage-based pricing metrics. Currently, different providers define the usage metric in varied ways.

Standardisation will create a common framework for measuring software usage. This will improve transparency, making it easier for businesses to compare pricing across vendors. 

Industry associations and regulatory bodies will likely introduce guidelines for fair billing practices. Standardised metrics will also simplify contract negotiations between SaaS providers and customers. 

Companies using multiple SaaS solutions will benefit from uniform reporting and invoicing structures. As the market matures, industry-wide standardisation will enhance trust and drive broader adoption of usage-based pricing

Driving Business Success with Usage-Based Pricing Using Younium

At Younium, we have supported numerous customers in seamlessly adopting and embracing usage-based pricing as an integral part of their business models. 

This innovative approach allows customers to align costs with their actual utilization of our platform, optimizing spending, improving cost control, and gaining greater flexibility in resource allocation. 

Whether through a true usage model or a committed vs non-committed model, our customers have found value in paying for what they use and tailoring their expenses to their specific usage patterns. Our dedicated support and robust subscription model tools ensure a smooth transition, enabling accurate usage tracking, transparent reporting, and flexible billing. 

The advantages of usage-based pricing, such as optimized expenditure and enhanced cost predictability, make it a valuable choice for businesses across industries, and we are committed to delivering exceptional value to our customers as they navigate this pricing model with Younium. 

FAQ

For a usage-based pricing model, SaaS businesses charge customers based on how much they use a product or service. Instead of paying a fixed fee, customers pay for actual usage, which can be in terms of storage, transactions, or user activity. 

Compared to other pricing models, this model makes pricing more flexible. It also benefits both businesses and customers. 

Customers only pay for what they need while businesses attract a wider range of users, from small startups to large enterprises. It also helps companies grow revenue as customers scale their usage over time.

PLG stands for Product-Led Growth. In this strategy, the product itself drives customer acquisition and expansion. Usage-based pricing fits well with PLG because it lowers the entry barrier. Customers can start for free or at a low cost and scale up naturally as they use more products. This way, customers see value before committing to higher spending and the pricing adapts as their business grows.

Seat-based pricing charges per user, no matter how much they use the product. It works well for businesses with fixed teams. 

Usage-based pricing, on the other hand, charges based on actual usage. It benefits companies with fluctuating needs, like startups or seasonal businesses. 

With seat-based models, costs stay the same, even if usage is low. With usage-based models, costs rise and fall with demand.

Yes, while usage-based pricing has many benefits, it also comes with challenges:

• Revenue predictability: It’s harder to forecast revenue compared to fixed pricing models.
• Customer uncertainty: Some customers worry about unexpected costs if their usage spikes.
• Billing complexity: Tracking and billing usage accurately requires strong systems and analytics.
• Onboarding friction: Customers might need clear pricing explanations to understand how costs change with usage.

Businesses need to balance transparency, flexible plans, and clear usage limits to make it work smoothly.

It depends on the business and its customers. Some SaaS companies have fully switched to usage-based pricing, while others use a hybrid model.

Usage-based models work best for tools with measurable consumption, like data storage, AI processing, or API calls. But for software where access matters more than volume, seat-based pricing can still make sense.

Conclusion

The adoption of usage-based pricing in the SaaS landscape is undergoing a remarkable transformation, propelled by the introduction of advanced subscription billing platforms such as Younium. These platforms play a crucial role in revolutionizing the way customers consume software services, offering a range of benefits for both customers and providers. 

Younium's subscription management platform has supported numerous customers to effectively implement and manage usage-based pricing models, enabling cost optimization, scalability, flexibility, and transparency. By leveraging Younium's robust capabilities, providers can align pricing with actual usage, ensuring that customers only pay for the services they utilize. This approach not only optimizes costs for customers but also unlocks revenue growth opportunities for providers. 

Curious to see how Younium can support your business? Request a demo today and explore the possibilities.