Usage-based pricing has emerged as one of the most desirable pricing model for the software-as-a-service (SaaS) industry. It’s known by many terms, including consumption, pay-as-you-go, time/unit-based pricing, pay per transaction, metered billing, resource-based, and utility. Regardless of the term used, the concept is the same and the benefits delivered are exceptional. SaaS companies track product and service usage, and customers only pay for what is consumed. As the rising star of SaaS pricing, usage-based pricing examples are in every industry. That’s because it enables SaaS companies to do many things, including:
- Grow the business faster
- Quickly respond to changing business and customer needs
- Shorten purchasing cycles
- Improve customer retention
- Reduce revenue leakage
- Increase investor appeal
From a customer perspective, they gain greater scalability, more flexibility for upgrades and downgrades, lower upfront costs, reduced cost of ownership, increased operational agility and business efficiency, and improved customer experience. It’s a win-win for the business and customers alike!
Usage-Based Pricing for SaaS Businesses
Pricing plays a critical role in the financial health of your business. Get it wrong and you risk leaving money on the table. So how can you be sure that usage-based pricing is right for your SaaS business?
To start, do your products and services lend themselves to easily track usage metrics? Are your offerings scalable and have increasing usage? Can you associate usage metrics with your offering’s value? If so, read on for examples of SaaS companies that have successfully implemented usage-based pricing, and how it can put you on the path to profitable growth.
With a history that goes back decades, usage-based pricing is fast becoming mainstream among SaaS companies. The transition to this pricing model began with infrastructure companies such as Snowflake, Google Cloud, Amazon Web Services (AWS), Azure, Datadog, and countless others. Following their success, usage-based pricing is now in middleware companies, including Twilio, Zapier, Postscript, PLAID, and Square to name a few. And providers of applications such as Mailchimp, Slack, Salesforce, HubSpot and many more.
As usage-based pricing continues its upwards trend, an ever-increasing number of SaaS companies are taking notice and making plans to test or introduce this pricing model. A study conducted by OpenView Partners determined that 45% of SaaS companies had usage-based pricing in 2021, up from 34% in 2020. What’s more, among SaaS companies that currently don’t have usage-based pricing, 61% plan to test or introduce this pricing model in the future.
Infrastructure Usage-Based Pricing Example
Snowflake, Inc., a cloud computing-based data warehousing company provides cloud-based data storage and analytics services, aka data warehouse-as-a-service. They offer a free trial without a long-term commitment, so pricing is usage-based and per second. This is based on actual usage of one or more of their layers – storage, virtual warehouses, and cloud services, as well as any of their serverless features.
Middleware Usage-Based Pricing Example
Twilio provides programmable communication tools for making and receiving phone calls, sending and receiving text messages, and performing other communication functions using its web service application programming interfaces (APIs). Promoting ‘only pay for what you use’, Twilio customers can choose between pay-as-you-go, volume discounts, committed use discount plans, or hybrid pricing.
Application Usage-Based Pricing Example
Mailchimp provides three offerings – a marketing platform, website & commerce, and transactional email – each with a free option. While pricing structures vary between their applications, the marketing platform provides users with a pay-as-you-go option.
What’s common among many SaaS companies is that their pricing models not only consist of usage-based but others like subscription and/or tiered pricing too. This is especially true for SaaS businesses just launching usage-based pricing that begin by offering usage-based subscription tiers.
When thinking about the metric to use, be sure to choose the one that best correlates to the value of your products or services. Additionally, it should be simple for the customer to understand and allow the customer to easily predict cost. Typically priced around technical metrics, here are some of the most common usage-based metrics.
- Compute or CPU: Seconds a virtual machine was active or milliseconds a service was handling a customer request.
- Data transfer: Gigabytes of data that ingress or egress to the provider.
- Data storage: Gigabytes of data held by the provider.
- Uses or queries: Many API service providers will charge based on the number of times the customer accesses it.
- Execution memory: Gigabytes of RAM per second consumed by service.
- Credits: A prepaid amount of service defined by the provider.
- Other: Software may charge based on specific uses. For example, CRM software may charge based on the number of customer contacts held in the system.
Implementing Usage-Based Pricing
Once you decide on the right metric for your SaaS business, you’ll need to build a usage-based pricing scheme around it. Initially, it may be as simple as the number of API calls or the number of queries. As your customer base grows and your offerings expand, the initial usage-based pricing model needs to adjust. A good usage-based pricing example is HubSpot. In addition to free tools, their SaaS offerings span marketing, sales, customer service, CMS, and operations. Within each of these categories, customers can choose from three packages – starter, professional, and enterprise, as well as bundles.
The success of usage-based pricing requires collaboration from other departments within your organization. Let’s look at how the following departments can support your transition to usage-based pricing:
- Marketing: Incorporate the value of your products and services into your usage metrics needs to be clearly stated across all marketing efforts.
- Sales: Typically, commission is paid once the sale is booked. However, the most successful usage-based SaaS companies have modified this long-standing tradition. In addition to payments made upon contract signing, you can further incentivize reps with payments based on customers’ increasing consumption.
- Customer Support: This team interacts with customers after the sale. Being well-versed on proactively guiding customers on the benefits of increased usage, add-ons, etc is critical. They also should listen to customer suggestions on requests and future requirements.
- Finance: Keeping pricing schemes easy to understand needs to be a top priority. But the unpredictability of revenue with usage-based pricing can challenge finance teams. If pricing changes, new products or services are added, tiers are introduced, or commitment discounts or volume discounts are offered, ensure your finance team knows. Additionally, as you scale, the effort required from your finance team can become laborious and error-ridden. Handling things manually will no longer be a viable option. By automating the financial process, you’ll ensure accurate and timely invoicing, account receivables, revenue recognition, collections, and financial reporting.
Gain A Competitive Advantage with Usage-Based Pricing
Real-world usage-based pricing examples prove time and again how SaaS companies that incorporate the model outperform their peers. The Openview Partners study found that usage-based businesses see continued growth at scale (29.9% vs. 21.7%), driven by best-in-class retention (120% vs. 110%). However, rising above the competition takes more than a ‘me too’ usage-based pricing approach.
Usage-based billing can quickly become complicated – mediating customer usage, rating customer usage, billing the customer, recognizing revenue, handling dunning, and collecting outstanding payments. A billing system that’s purpose-built for usage-based SaaS companies can reduce complexity, give you peace of mind, and ensure that you’re not leaving money on the table.
BillingPlatform’s cloud-based billing platform is just that solution. We enable you to aggregate and analyze usage data from any source then transform it into revenue potential – in real-time. With us as your partner, you get a complete solution that fulfills 100% of your usage-based pricing business requirements, including mediation, rating, invoicing, collections, reporting, analytics, revenue recognition, and A/R subledger. Check out this white paper for even more usage-based pricing examples today.