USAGE-BASED PRICING

We are now in an era where many businesses are flipping their business model and shifting from subscription-based pricing to usage-based models, to better cater to the modern ‘pay-as-you-consume’ buyer.

SO WHAT EXACTLY IS USAGE-BASED PRICING?

Usage-based pricing, also known as consumption-based pricing, enables customers to pay for how much they actually consume a given product or service. According to OpenView Partners, 45% of SaaS businesses adopted usage-based pricing in 2021 (versus 34% in 2020) and it is predicted that 56% of companies will be using this strategy by 2023.

Therefore this trajectory indicates that usage-based pricing will eventually dominate the market and it’s something that SaaS businesses need to keep on their radar!

Let’s unpack the 4 reasons for why we are seeing this shift in pricing strategy.

1. Better aligns with modern consumption behavior

The desire for hyper personalization is driving customers to demand that they only pay for what they actually use. Subscription plans are more so being seen as ‘cookie cutter’ product offers containing features that customers don’t even really need. Furthemore, customers don’t want to have to pay for platform seats that aren’t being occupied.

It also comes down to providing superior satisfaction. There is nothing like when a customer can see the direct value they are receiving for their input (i.e. investment and engagement time with the product).

In order to deliver a flexible consumption-based pricing offer, it is essential that you have an intelligent billing system that can configure your various consumption-based rules so that your products can feel personalized to the customer, but rapidly and easily scaled.

2. Usage-based companies have stronger financial performance

The numbers don’t lie! According to OpenView Partners,  “usage-based companies tend to have best-in-class net expansion or net dollar retention rates.”

Also let’s face it, you can only sell so many subscription upgrades, add-ons, seats and adjacent services before you maximize revenue potential with a particular customer. By having a usage-based pricing model, you grow with your customer’s volume, ultimately creating an avenue for compounding revenue growth.

However, offering usage-based priced products is not where it stops. It’s imperative that your back-end billing system is up to the task of accurately calculating usage to the very last decimal point, in order that potential revenue is not leaked.