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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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In the rapidly evolving SaaS landscape, how you charge for your product can be as strategic as the product itself. While subscription models dominated the early days of SaaS, a significant shift toward usage-based pricing (UBP) is reshaping the industry's approach to monetization. This consumption-based approach aligns costs directly with the value customers receive—but is it truly the future of SaaS pricing?
What Is Usage-Based Pricing?
Usage-based pricing, also called consumption pricing or metered pricing, is a billing model where customers pay only for what they actually use. Unlike traditional subscription models that charge a fixed monthly or annual fee regardless of consumption, usage-based pricing scales costs proportionally with customer usage of specific service metrics.
Common examples include:
- Twilio: Charging per API call
- AWS: Billing based on computing resources consumed
- Snowflake: Pricing according to data storage and processing
- Stripe: Taking a percentage of transaction value
According to OpenView Partners' 2022 SaaS Benchmarks Report, 45% of SaaS companies now offer some form of usage-based pricing, up from just 34% in 2020.
Why Usage-Based Pricing Is Gaining Momentum
Lower Barrier to Entry
Usage-based pricing eliminates the upfront commitment barrier that comes with traditional subscriptions. This pay-as-you-go approach enables customers to start small and scale their spending as they derive more value from the product.
"Usage-based pricing reduces the risk of adoption for new customers," explains Kyle Poyar, Partner at OpenView. "They can get started without significant upfront costs and grow their usage as they realize value."
Perfect Value Alignment
Perhaps the most compelling advantage of usage-based pricing is how it aligns vendor success with customer success. When customers derive more value (indicated by increased usage), the vendor earns more revenue. This creates a natural incentive for vendors to focus on customer value and success.
Growth Ceiling Removal
Traditional subscription models can inadvertently create friction for power users. A small startup might hesitate to upgrade to an enterprise plan just to increase usage slightly. With usage-based pricing, customers can scale their usage—and costs—incrementally without artificial tier boundaries.
Bessemer Venture Partners found that public SaaS companies with usage-based models trade at a 50% premium compared to their subscription-based peers, suggesting investors recognize the growth potential of this approach.
Real-World Success Stories
Snowflake
Snowflake's Data Cloud platform charges based on actual data storage and computing resources used. This model has helped them achieve remarkable growth—their revenue increased by 174% in fiscal year 2021.
"Our consumption model means customers can start small, see value, and then grow their usage over time," said Frank Slootman, CEO of Snowflake. "It's been fundamental to our success."
Datadog
The monitoring and analytics platform shifted from a pure subscription to a hybrid model with usage components. Since implementing this approach, their net revenue retention has consistently exceeded 130%, indicating that existing customers continuously increase their spending over time.
Challenges of Implementing Usage-Based Pricing
Despite its advantages, usage-based pricing isn't without complications:
Revenue Predictability
The flexibility that makes usage-based pricing attractive to customers can make revenue forecasting challenging for vendors. Consumption can fluctuate based on seasonal factors or economic conditions, creating potential cash flow uncertainty.
Billing Complexity
Implementing a metered pricing system requires sophisticated billing infrastructure to accurately track usage metrics and translate them into invoices. This technical complexity shouldn't be underestimated.
According to a survey by MGI Research, 42% of companies cite billing system limitations as a major barrier to implementing more innovative pricing models.
Customer Budget Planning
From the customer perspective, variable costs can complicate budget planning. Organizations accustomed to fixed subscription fees may struggle to forecast their expenses under a usage model, especially if usage patterns are unpredictable.
Hybrid Models: Best of Both Worlds?
Many successful SaaS companies are now implementing hybrid pricing models that combine subscription elements with usage-based components. This approach provides baseline revenue predictability while still allowing for upside when customers increase usage.
Examples include:
- MongoDB Atlas: Base subscription plus usage-based data transfer and storage
- HubSpot: Core platform subscription with additional usage-based charges for marketing emails or advanced features
- New Relic: Shifted from a traditional subscription to a consumption model with minimum commitments
Is Usage-Based Pricing Right for Your SaaS Business?
To determine if usage-based pricing fits your business, consider the following questions:
Can you identify clear, valuable usage metrics? Effective usage-based pricing requires metrics that correlate strongly with the value customers receive.
Do your customers have variable consumption patterns? If different customers use your product at significantly different volumes, usage-based pricing might better accommodate this diversity.
Is your billing infrastructure capable? Metered pricing requires systems that can accurately track, aggregate, and bill based on usage.
How will it affect your cash flow? Consider how the shift from predictable subscription revenue to variable usage-based revenue might impact your financial planning.
The Future Outlook
While usage-based pricing is gaining significant traction, it's unlikely to completely replace subscription models across all SaaS categories. Instead, we're witnessing an evolution toward more flexible pricing approaches that align costs more closely with value.
Gartner predicts that by 2025, 75% of SaaS providers will offer some form of consumption-based pricing option, up from approximately 45% today.
The most successful SaaS companies will likely be those that thoughtfully design pricing models—whether subscription-based, usage-based, or hybrid—that precisely match how customers derive value from their products.
Conclusion
Usage-based pricing represents a fundamental shift in how SaaS companies monetize their products. By aligning costs directly with value received, this model creates stronger partnerships between vendors and customers. While implementing consumption-based pricing comes with challenges, its growth advantages are increasingly difficult to ignore.
For SaaS executives, the question isn't whether to consider usage-based pricing, but how to strategically incorporate consumption elements into your monetization strategy to maximize both customer value and business growth. The future of SaaS pricing will likely be more nuanced, with sophisticated models that flexibly adapt to how different customer segments derive value from software.
As you evaluate your own pricing strategy, remember that the best approach is one that makes your customers feel they're getting more value than they're paying for—regardless of what billing model delivers that perception.