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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Introduction
In today's competitive SaaS landscape, pricing strategy can make or break your business growth. While subscription pricing has dominated for years, usage-based pricing models are rapidly gaining traction. According to OpenView Partners' 2022 SaaS Benchmarks report, over 45% of SaaS companies now offer some form of consumption pricing, up from just 34% in 2020. This shift is happening because usage-based models align vendor revenue with actual customer value—a win-win for both parties. However, implementing and testing these models requires careful planning and execution. This guide will walk you through the process of effectively testing usage-based pricing models for your SaaS product.
Understanding Usage-Based Pricing Models
What Is Usage-Based Pricing?
Usage-based pricing (also called consumption pricing or metered billing) charges customers based on their actual consumption of your service rather than a flat monthly or annual fee. Companies like Twilio (API calls), Snowflake (compute resources), and AWS (server usage) have built multi-billion dollar businesses on this model.
Key Benefits of Consumption Pricing
- Growth alignment: Revenue grows as customer usage increases
- Lower entry barriers: Customers can start small with minimal financial commitment
- Customer value alignment: Customers pay based on the value they extract
- Expansion opportunities: Natural pathway for revenue expansion as customer usage grows
According to a 2022 report by Paddle, SaaS companies with usage-based models experience 38% higher revenue growth rates compared to those with traditional subscription pricing.
Preparing to Test Your Usage-Based Pricing Model
Before diving into testing, several foundational elements must be in place:
1. Identify Your Value Metrics
The first step is identifying the right value metric—the unit of measurement that best correlates with the value customers receive. According to pricing expert Patrick Campbell, "The right value metric grows with the customer's perceived value of your product."
Common value metrics include:
- User-based: Per active user or seat
- Volume-based: Storage used, API calls, transactions processed
- Outcome-based: Revenue generated, leads acquired, time saved
2. Analyze Usage Patterns
Before testing any pricing model, gather comprehensive data on how customers currently use your product:
- What features drive the most engagement?
- How does usage correlate with customer success and retention?
- Are there natural usage tiers among your customer base?
Cloud analytics platform Mixpanel found that companies with the most successful pricing optimizations spend 3-6 months analyzing usage patterns before making structural changes.
3. Build Metered Billing Infrastructure
Implementing usage-based pricing requires robust billing infrastructure that can:
- Track usage in real-time
- Aggregate usage data accurately
- Convert usage into billable amounts
- Handle complex pricing rules
Tools like Stripe Billing, Chargebee, and Recurly offer specialized solutions for metered billing implementation.
Testing Methodologies for Usage-Based Pricing Models
1. Cohort Testing
One of the safest approaches is cohort testing—implementing your new pricing model only for new customers while keeping existing customers on their current plans.
Implementation steps:
- Define test duration (typically 3-6 months)
- Create clear success metrics (conversion rates, expansion revenue, customer satisfaction)
- Compare performance against historical baseline or control group
- Collect qualitative feedback through surveys and interviews
According to SaaS Capital, companies that run structured cohort tests before full pricing rollouts see 18% higher customer lifetime value.
2. Pilot Programs with Select Customers
Invite a subset of customers to participate in a structured pilot program:
Best practices:
- Select diverse customers across different segments
- Offer incentives for participation (discounts, extra features)
- Set clear expectations about the test duration and objectives
- Create feedback mechanisms (regular check-ins, usage reviews)
- Compare actual vs. predicted usage and revenue
Gainsight's research shows that companies running structured pilots with 5-7% of their customer base achieve the most accurate predictions of pricing impact.
3. Shadow Billing
Shadow billing involves continuing to charge customers under the existing model while showing them what they would have paid under the new usage-based model.
How it works:
- Implement usage tracking without changing actual billing
- Include "for information only" sections on invoices showing usage-based calculations
- Collect feedback on how customers perceive the comparison
- Use the data to refine your model before actual implementation
This approach provides valuable data without the risk of disrupting existing customer relationships.
Analyzing Test Results and Refining Your Model
Key Metrics to Monitor
When evaluating test results, focus on these critical metrics:
- Customer acquisition cost (CAC): Are acquisition costs lower with the new model?
- Conversion rates: How do sign-up rates compare to your previous pricing?
- Customer lifetime value (CLTV): Is the predicted value trajectory higher?
- Net revenue retention: Are customers expanding usage over time?
- Churn rate: Are customers more or less likely to cancel?
- Price sensitivity: How does usage change when prices adjust?
Common Pitfalls and Adjustments
Based on test results, you may need to make adjustments:
- Pricing complexity: If customers struggle to understand or predict costs, simplify your model or add spending caps
- Sticker shock: If usage spikes create billing surprises, implement usage alerts and graduated pricing tiers
- Underpricing high-usage customers: If power users get too much value relative to cost, implement tiered pricing or volume discounts
- Overpricing low-usage customers: If small customers feel the pricing is prohibitive, consider a hybrid model with a small base fee plus usage
Implementation Strategies After Successful Testing
Once your tests validate your usage-based pricing model, consider these implementation approaches:
1. Gradual Rollout
Implement the new pricing model in stages:
- First for new customers
- Then for specific segments of existing customers
- Finally, for your entire customer base (with grandfathering options)
2. Hybrid Models
Many successful SaaS companies use hybrid approaches combining subscription and usage elements:
- Base subscription fee + usage charges for excess consumption
- Tiered plans with different usage allowances
- Usage-based pricing with minimum commitments
According to OpenView's research, 61% of SaaS companies with usage-based components actually use hybrid models rather than pure usage-based pricing.
3. Grandfathering Strategies
When transitioning existing customers:
- Offer to keep them on current plans indefinitely
- Provide a gradual transition period (6-12 months)
- Create special migration offers with guaranteed savings periods
Conclusion: Pricing as an Ongoing Process
Testing usage-based pricing models is not a one-time project but an ongoing process of refinement. The most successful SaaS companies view pricing optimization as a continuous cycle of testing, learning, and improving.
As you implement your consumption pricing strategy, remember that it should fundamentally align with your product's value proposition. When customers perceive clear connections between usage, value, and cost, they're more likely to increase their engagement and spending over time—the ultimate goal of any pricing model.
By carefully testing your approach using the methodologies outlined in this guide, you can minimize risk and maximize the chances of successfully transitioning to a pricing model that better reflects customer value and drives sustainable growth for your business.