In today’s ever-changing marketplace, consumers’ demand to maximize the benefit they derive from using a product is driving change in the way companies price and sell their products. The subscription and sharing economy put a greater emphasis on transparency, customized pricing, and real-time tracking. This has quickly seeped into the B2B SaaS industry which is witnessing a pricing disruption like never before. Increasingly customers choose to pay only for what they use as it is affordable and requires a lower initial commitment.
Organizations that make swift changes to their pricing model to include usage-based pricing can appeal to a wider range of customers, gaining an advantage over the competition. Usage-based pricing enables businesses to ramp up their revenue, enjoy higher customer retention, and build better customer relationships.
What is usage-based pricing?
Usage-based pricing is a pricing model where customers are charged based on their consumption or usage of a product or service. Since customers pay for what they use, charges may fluctuate every period based on the actual consumption.
Although usage-based pricing has recently become popular in the B2B SaaS industry, it is not a new concept. Usage or metered pricing has long been used by public utilities like electricity or water companies, and phone companies that offer pay-as-you-go plans. Recent technological advancements in artificial intelligence (AI) and accurate customer tracking have popularized usage-based pricing in software as a service (SaaS) and infrastructure as a service (IaaS) cloud providers. These advancements in cloud computing have enabled SaaS companies to accurately calculate usage charges in real-time for the most complex usage scenarios including data, API calls, minutes, text messages, downloads, etc. with a robust usage-based billing platform.
Benefits of usage-based pricing
Usage-based pricing is well-liked by both customers and companies. Aligning pricing with usage is welcomed by small B2B customers as it means a low upfront cost, and the price only rises as the usage increases with business growth. This pricing model also makes your product more affordable and creates a wider market for the product.
- The low upfront cost allows even smaller customers to test out and use your product thereby opening up a wider customer base be it small businesses, startups, or enterprises
- The pricing correlates with the usage, so product cost increases only as your customers grow and scale their business enabling your customers to save unnecessary costs. As these smaller businesses grow their usage billing costs also increase.
- Flexible pricing associated with usage-based pricing provides greater customer retention since it does not require customers to cancel their plans during periods of low usage. Budget changes, seasonalities, or slow period do not result in cancellations
- Companies benefit from the granular usage data. If they notice a consistent dip or rise in usage, they can use this information to offer customized packages or upgrades to the customers.
- Tracking usage data may also help them predict upcoming changes in the market and take proactive measures to update their product.
How to succeed with this pricing model?
When you switch from recurring billing to usage-based billing there are a lot of dimensions that need to be considered and accounted for like the different types of customers and the variability of their usage.
As you set up a usage-based pricing model you will find some customers with a lower usage which may drive down revenues. To offset any loss in revenue you can structure your pricing model to include a base fee and charge on usage only when they exceed their allocated amount of usage. This will ensure that your customers derive greater value from your product with this pricing model.
For customers with heavy usage, their prices may go up and in these cases, you need to inform the customers about these changes and the reason behind them in advance so that it doesn’t look like you are trying to extort extra money. In these cases, it is important to be transparent about the new pricing model and spread out the pricing hike. Make sure you are consistent and equitable in your pricing policies
SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges in pricing and billing. I have come up with a few suggestions that will help you succeed with usage-based pricing:
1. Identify the right usage metric
The usage metric you choose should be scalable and predictable - meaning the customers should be able to predict how much they would be charged so that they can budget accordingly. One of the steps you can take to ensure your business succeeds with this model is to tie the value of your services to the pricing. You should understand where customers see value in your product and adjust the pricing accordingly. This is also known as outcome-based pricing where you structure your pricing based on the actual value of your product as well as your customer’s perceptions of that value.
Identify what stands as “usage” for your product and the best way to charge for that usage. Usually, for SaaS or IoT businesses, it is based on technical metrics like data, API calls, minutes, etc. Also, determine how you will charge for the usage. Some businesses charge based on the amount of data used, or time spent using the data, or the number of times the particular service was used. Usage charges can also be defined based on a blend of the different factors.
2. Provide transparency in billing
Unlike recurring billing, your customers will have to pay a different amount every month with usage-based pricing based on their consumption. To avoid any conflict or complaints from customers, you should ensure that your invoices include the following usage details:
- Itemized list of invoiced items
- Billing breakdown
- Usage/ Consumption Summary
- The rate charged per unit
- Period of service
Providing the usage billing details ensures that your customers have clarifications on their bills, improving your customers’ experience with your brand.
3. Notify customers when usage allocation thresholds are met
As you charge your customers based on their consumption, it is necessary to have systems in place to alert your customers in case there is a sudden increase in usage as it affects how much they will be billed. This will allow them to monitor and budget their usage and costs.
Most large enterprises want to monitor the consumption of services by department so that they can budget costs accordingly. Usually, they like to set up pre-determined consumption thresholds for each department. Your usage billing service provider should be able to track consumption data correctly and alert your customers with an email notification when their usage is nearing a certain threshold so that your customers can then decide whether to suspend services or upgrade their plan for that period. Your billing provider should be able to track and identify which customers consistently exceed their usage limits which your sales team can then use to offer an upgrade or upsell a different pricing plan.
You do not want to surprise your customers with an unexpectedly high bill for unwittingly exceeding their allocated usage thresholds. Therefore, it is important to design thoughtful overage policies that give customers the feeling of control over their spending.
4. Provide the right blend of subscription and usage-based pricing
With subscription-based pricing, customers know how much they will be charged every month. Although usage-based pricing provides them with the flexibility of paying for what they use, many enterprise-grade customers desire price predictability for annual budgetary reasons. The finance and legal teams often prefer knowing how much a purchase will cost them. This necessitates coming up with a pricing model that has an optimal blend of fixed as well as variable components in the product offering providing your customers with the right level of predictability and variability. Let your customers choose from a blend of pricing strategies including single-use billing, subscription-based billing, consumption-based billing, value-based billing, or quantity-based billing.
By offering a consumption-based pricing model SaaS companies efficiently acquire a wider range of customers and improve customer retention. If your solution is highly scalable, quantifiable and customers’ usage is variable, this pricing strategy is a great choice.
Although it may be tricky at first to determine an optimal usage-based pricing strategy, I hope that the strategies outlined in this article help to put your business on the right trajectory. Succeeding with usage-based pricing also requires a billing platform that has the most modern technology which has the flexibility to adapt to any pricing model and scale with you. LogiSense’s API-first usage-based billing system can easily adapt to any business scenario or industry allowing you to stay competitive as you grow your business. Contact one of our billing experts to help you get set up with usage-based pricing for your business.