How To Succeed with Usage-Based Pricing

In today’s dynamic marketplace, consumers demand maximum value from products, driving companies to innovate their pricing models. The rise of the subscription and sharing economy emphasizes transparency, customized pricing, and real-time tracking, impacting the B2B SaaS industry significantly. Customers now prefer paying only for what they use, finding it more affordable with lower initial commitments.

Organizations adopting usage-based pricing can attract a broader customer base, outperform competitors, boost revenue, enhance customer retention, and foster stronger customer relationships. Embracing this model ensures alignment with market trends and customer expectations.

What is Usage-Based Pricing? 

Usage-based pricing charges customers based on their consumption of a product or service, leading to fluctuating charges each period. While popular in B2B SaaS, this model has roots in utilities like electricity and water, and pay-as-you-go phone plans. Technological advancements in AI and customer tracking have enabled accurate, real-time usage calculations for SaaS and IaaS providers, accommodating complex scenarios such as data, API calls, and more with robust usage-based billing platforms.

Benefits of Usage-Based Pricing

Usage-based pricing is favored by both customers and companies. It aligns costs with usage, making products affordable for small B2B customers with low upfront costs, increasing only as usage grows. This model expands your market reach to small businesses, startups, and enterprises.

Key Benefits:

• Low Upfront Costs: Attracts a broader customer base.
• Scalable Pricing: Costs rise with business growth, saving unnecessary expenses.
• Customer Retention: Flexibility prevents cancellations during low usage periods.
• Granular Data: Enables customized packages and market trend predictions.

How to Succeed with Usage-Based Pricing

Switching to usage-based billing involves accounting for customer variability. To offset potential revenue loss from low-usage customers, consider a base fee plus usage charges beyond a set limit, ensuring value for all customers.

For high-usage customers, be transparent about pricing changes. Inform them in advance, explain the reasons, and spread out the increase to avoid seeming exploitative. Consistency and fairness in pricing policies are crucial for maintaining trust and satisfaction.

SaaS companies must address go-to-market and operational challenges when adopting usage-based pricing. Here are key strategies for success:

• Identify the Right Usage Metric: Choose scalable, predictable metrics to help customers budget. Tie pricing to the value perceived by customers, known as outcome-based pricing. Define “usage” clearly, whether it’s data, API calls, minutes, etc., and decide the best charging method.
• Provide Transparency in Billing: Transparent billing improves customer experience and trust. Ensure customers understand their invoices by including:
  • Itemized list of invoiced items
  • Billing breakdown
  • Usage/consumption summary
  • Rate charged per unit
  • Service period
• 
• Notify Customers When Usage Allocation Thresholds Are Met: Implement systems to alert customers when they approach their usage limits, allowing them to monitor and budget effectively. Large enterprises often need to track departmental consumption and set usage thresholds. Your billing provider should offer accurate consumption tracking and email notifications for threshold alerts, enabling customers to manage their usage or upgrade their plans. Avoid surprising customers with high bills by designing thoughtful overage policies, giving them control over their spending and improving satisfaction.
• Provide the Right Blend of Subscription and Usage-Based Pricing: While subscription pricing offers monthly cost predictability, usage-based pricing provides flexibility. Enterprise customers often need predictable costs for budgeting. An optimal pricing model blends fixed and variable components, offering predictability and flexibility. Allow customers to choose from various pricing strategies, including single-use, subscription-based, consumption-based, value-based, or quantity-based billing. This approach caters to diverse needs and preferences, enhancing customer satisfaction and financial planning.

Attract a Broader Customer Base

Offering a consumption-based pricing model helps SaaS companies attract a broader customer base and improve retention, especially if the solution is scalable and usage varies. Determining the optimal strategy can be challenging, but the outlined strategies will guide your business towards success.

Using a modern, flexible billing platform is crucial. LogiSense’s API-first usage-based billing system adapts to any business scenario or industry, ensuring competitiveness as you grow. Contact our billing experts to get started with usage-based pricing for your business.