Usage based billing models are on the rise, especially in SaaS companies looking to go beyond flat fee subscriptions packages. Traditionally, this model was popular with firms having clear usage units like telecom companies, or gas and electricity providers. But, now the model is evolving, thus adding more factors that affect the choice of adopting one.
Your choice of which sub-tier to go for also depends on which usage based billing platform you partner up with. We’ll be taking a look at which billing model suits your business, and the advantages and disadvantages of adopting said model.
What is Usage Based Billing?
Usage based pricing or the pay-as-you-go billing model, also known as metered billing, enables customers to pay for the amount of service they have consumed in their billing cycle.
Rather than setting a fixed price for a service, usage-based billing models keep track of the customer's usage and charge them accordingly. This model is particularly important for SaaS companies, as it allows them to generate invoices that reflect the customer's dynamic usage.
The model has evolved to develop multiple sub-tiers which we will now be taking a look at.
Types
1. Pay-as-you-go pricing model:
Also referred to as per-unit pricing is a straightforward pricing strategy that calculates the cost based on the quantity of units consumed.
2. Tiered Pricing Model:
The usage-based pricing model known as tiered pricing is widely regarded as the most effective for SaaS companies.
With this approach, customers are charged based on their usage increments. This pricing strategy enables businesses to offer different packages with predetermined features for a set price.
The tiered pricing model allows for flexibility in offering various packages with different features and functionalities, making it possible to target new market segments.
Furthermore, as customers reach the usage limit of their current package, they can be naturally upgraded to higher tiers. This upgrade path can result in increased upsell conversion rates and higher revenue for the business.
3. Volume Pricing Model
The volume pricing model operates on a similar principle to tiered pricing, with charges based on total usage at the end of the billing cycle.
However, unlike tiered pricing, all customers receive the same features and functionality regardless of their usage volume. A common example where this would be applicable would be internet packages (4K for 0-40 GB, 3.5 K for 40-80 GB etc.).
Choosing the Usage Based Billing Model
The price-per-seat or price-per-user model used to be the most common billing model for SaaS businesses, but now usage-based pricing has become nearly as popular. This billing model allows customers to start small or try out a product at little cost, which aligns with providing exceptional customer service.
SaaS companies that use usage-based billing software can easily upsell and expand usage for their current customers, resulting in revenue growth and cost reduction in marketing and sales. Since customers only pay for what they use with this billing model, it increases their satisfaction, loyalty, and CLV.
To determine if usage-based pricing is suitable for a SaaS organization, they should consider:
- if usage can be easily explained and measured,
- if there are value metrics that align with the product,
- if usage can be tracked,
- if costs are affected by usage,
- and if revenue can fluctuate.
If the answer is yes to some or all of these questions, usage-based pricing and billing may be a good fit for the organization.
The Pros and Cons of Usage Based Billing Model
While making the choice to adopt usage based billing in SaaS, it is important to look at some of the advantages and disadvantages of the model:
Pros
- SaaS companies that utilize this model experience revenue growth 38% faster than their counterparts, have revenue multiples 50% higher than the overall industry, and have more robust net dollar retention rates.
- It is transparent, customers feel more in control, which allows for better customer satisfaction, loyalty, and CLV.
- It aids in growing the customer base by allowing prospective customers to test out the product before making a commitment.
- By permitting customers to adjust their usage based on their needs, this model minimizes churn.
Cons
- The unpredictability of revenue due to usage variations can make it challenging to accurately calculate monthly and annual recurring revenue (MRR and ARR).
- The complexity of the products offered can make it difficult to determine the appropriate value metric and corresponding pricing.
- Lack of contractual lock-in makes it easy for customers to switch to a different vendor.
What SubscriptionFlow Has to Offer
SubscriptionFlow provides a billing platform that supports several usage-based pricing models to help SaaS businesses monitor and charge customers based on their usage. The platform offers flexibility in adopting a pricing method that aligns with their business requirements and value metrics.
The platform offers personalized billing services to ensure a smooth customer onboarding experience, better customer satisfaction, and increased revenue. The platform strives to maintain customer satisfaction to help businesses build their brand reputation and achieve accelerated revenue growth.
