Revenue from licensing fees has been a longstanding business model for enterprises. In recent years, the recurring billing model has helped businesses drive greater revenue compared to the traditional one-time payment model. 

Customers initially welcomed subscriptions that gave them access to a core set of features for a flat fee every month. But nowadays, customers are pre-programmed to demand a higher perceived value from each use of a product, and so they are reluctant to pay a flat fee for a subscription they rarely use. 

When you're a SaaS business owner, you want to charge premium rates for your products or services. Of course, to justify those premium prices, you must be able to prove that your product offers more value than your competition.

Why are enterprises switching to Usage-based pricing?

Customers' expectations about the prices and value of subscriptions are changing. Simple subscriptions are inflexible and only offer limited pre-selected bundle options. Customers don't perceive the product’s value to be worth the price they pay for them, so enterprises are increasingly having difficulty monetizing their products with simple subscriptions. The usage-based pricing model helps businesses align the value their product provides the customer with the price they pay.

As a result, more and more enterprises are focusing on diversifying their revenue streams by offering multiple billing models. They are choosing flexible usage-based or consumption-based billing models as it offers a wide range of monetization opportunities. This model allows them to determine various thresholds or tiers to help gauge how the data will be used and collected. These thresholds or tiers determine the amount they can charge per data that's collected, versus just charging a flat fee. By strategically placing thresholds and tiers in the product catalog, businesses can increase revenue based on consumption.

If your business offers a product that allows users to pay for a volume of usage, then it is crucial to know how much that usage is worth. By identifying what each meaningful interaction with your product is worth to each user, you can offer them an incentive to choose your product over your competition’s. The way you price your product or service can make or break your user experience and can affect several aspects of your business — from the ratio of new users to churned users.  

A usage-based pricing model offers a huge competitive advantage and helps drive more revenue as it delivers a flexible, transparent, and affordable billing model to your customers. Usage-based public SaaS companies forecast a 38% higher YoY revenue growth compared to companies that haven’t adopted usage-based pricing. 

Find out more about how usage-based pricing helps boost recurring revenue. 

1. Hybrid Pricing

In some cases, a purely subscription-based model or a pure usage-based billing model will not be sufficient for your customers. In those cases, offering a blend of subscription and usage-based pricing options is a good idea to capture more market share. Many companies charge a lower base price for the core features to appeal to a broader audience and cover their base costs while offering the option for add-ons for additional usage. This pricing strategy allows them to diversify their revenue streams by charging different customers different prices based on usage. It keeps the price from being so high that you lose some customers that don't see a huge value in your product or service.

Other combinations that work with usage-based models include volume or tiered pricing where the price per user decreases or even in some cases increases as the customer purchases more usage seats. This is a great way for businesses to drive revenue by combining flexible usage-based pricing with predictable revenue models. 

2. Attract & delight more customers

Subscription-based models have changed the dynamics between businesses and customers as the recurring transactions increase customer engagement. These interactions help the business to understand the customer’s needs better. Furthermore, these interactions allow businesses to give the right feedback to their customers, which leads to faster product evolution. With that information, you can establish a clear connection between the value they receive from your product and the price they are willing to pay. The result is happier customers

It is also beneficial to customers as usage-based models lower the barriers to entry by allowing them to pay for only what they use. Customers are also empowered to choose the configuration that best suits their needs and the model will personalize itself to the customer based on their actual usage, so even the more risk-averse customers can try out a product. 

Flexible usage-based billing lets customers choose from a blend of pricing strategies like single-use billing, subscription-based billing, consumption-based billing, value-based billing, or quantity-based billing. This is attractive for customers that #1 want to pay for only what they use and #2 enterprise-grade customers that desire predictable revenues for budgetary reasons. 

3. Optimized Pricing

Usage-based pricing allows your business to grow exponentially by aligning the value received by your customer to the amount of money they pay. You can tailor your pricing based on varying demands rather than following a one-size-fits-all approach. You can price based on a variety of different metrics, such as the amount of storage used, the number of API calls made, sensor alerts, and the old metric of the number of users.

With a modern usage-based billing solution and baseline price analysis in place, a business can look at real customer usage data and accurately anticipate the customers’ future needs. It can also segment customers based on previous usage patterns and deliver individualized promotions accordingly. This customer-centric pricing strategy ensures that there is a demand for their products not only during peak usage periods but also during periods of low demand. 

The shift to usage-based pricing provides customers with more options and better ways to manage their budgets. It also presents businesses with opportunities to improve service quality and increase sales velocity.

4. Detailed Usage Analytics

With usage-based pricing and the detailed reporting that comes with it, you can gain insights on customer usage which allows you to understand how your customers react to new products and feature updates. By recording changes in consumption that occur over time, you can identify potential opportunities to adjust your billing method or value proposition for better product adoption. Tracking and analyzing usage analytics highlights potential opportunities to adjust your billing method or value proposition for better product adoption. 

Are you ready to boost your revenue with usage-based pricing?

Customers are increasingly beginning to favor businesses that offer the option to only pay for what they use as it is flexible and affordable. Usage-based pricing is beneficial for enterprises and customers alike. Most companies have started to examine their product catalogs to include usage-based offerings. It is an effective way to attract a wider customer base due to the affordable price which then translates to greater revenue.

If you are looking to switch to a usage-based billing system to boost your recurring revenue, you need a billing system like LogiSense that is built to handle large volumes of usage data in real-time and provides the flexibility to implement a usage-based billing model into your business with ease. 

Discover how LogiSense can help you make the switch to usage-based billing by scheduling a session with one of our billing experts.