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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 evolving insurance technology landscape, carriers are increasingly adopting Software-as-a-Service (SaaS) solutions to modernize operations and enhance customer experiences. However, one critical decision these carriers face is determining the optimal pricing strategy for their SaaS investments. Usage-based pricing (UBP) has emerged as a popular model, but it isn't universally effective for every insurance carriers' SaaS implementation. This article examines when usage-based pricing delivers maximum value and when it might actually harm both the vendor relationship and the carrier's bottom line.
Understanding Usage-Based Pricing in Insurance SaaS
Usage-based pricing is a model where insurance carriers pay based on their actual consumption of a SaaS solution rather than a flat fee. This consumption might be measured by transaction volume, number of policies processed, API calls, or other relevant metrics.
According to research by OpenView Partners, SaaS companies with usage-based pricing experienced 38% higher revenue growth compared to those with purely subscription-based models. However, the insurance industry presents unique considerations that can affect these outcomes.
When Usage-Based Pricing Works for Insurance Carriers
1. Variable Consumption Patterns
Usage-based pricing excels when insurance carriers have genuinely variable consumption patterns. Property and casualty insurers experiencing seasonal claim spikes during natural disaster seasons may benefit from paying only for what they use during normal operations, with the flexibility to scale during peak periods.
2. Alignment with Business Outcomes
When the pricing metric directly correlates with an insurer's business success, usage-based models create a natural value alignment. For example, if a claims processing SaaS charges per successful claim processed, carriers only pay more as they handle more business.
A senior IT director at a mid-size insurer told Insurance Innovation Reporter: "We implemented a usage-based claims processing platform and saw a 22% reduction in our technology costs during slow seasons while maintaining full capability during storm season."
3. New Market Entry or Expansion
For carriers entering new markets or launching new products, usage-based pricing reduces upfront financial commitment, allowing them to test and scale without excessive initial investment. This approach supports experimental growth strategies while controlling costs.
4. Clear Value-Based Pricing Connection
The most successful usage-based models in insurance incorporate elements of value-based pricing. When carriers can easily connect their usage costs to tangible business outcomes, the pricing structure becomes more justifiable to stakeholders and SOX compliance teams.
When Usage-Based Pricing Backfires for Insurance Carriers
1. Unpredictable Budgeting
The financial predictability required by insurance organizations often clashes with usage-based models. According to a Deloitte study on insurance technology spending, 76% of carriers cited "budget predictability" as a top-three factor in technology purchase decisions.
CFOs and financial teams responsible for SOX compliance typically prefer fixed costs that can be accurately forecasted. Unexpected spikes in usage-based costs can trigger additional audit scrutiny and complicate financial reporting.
2. Misaligned Pricing Metrics
When the pricing metric doesn't align with value delivery, carriers may feel they're being penalized for success. For instance, if a policy administration system charges by data storage volume, carriers with longer customer relationships accumulate more data and face higher costs despite these customers being more profitable.
3. Enterprise Scale Inefficiencies
Large enterprise carriers often find that at scale, usage-based pricing becomes more expensive than enterprise pricing with appropriate tiers. Once usage reaches a certain threshold, the per-unit economics no longer make sense.
One CIO of a top-ten insurance carrier shared with Insurance Technology Today: "We switched from usage-based to enterprise pricing after discovering we were paying nearly double what a fixed contract would have cost due to our scale."
4. Over-complicated Price Fences
Some SaaS providers implement complex price fences within their usage-based models that create confusion and frustration. When carriers must navigate multiple pricing tiers, discounting structures, and usage limitations, the administrative burden can outweigh the benefits of the model.
Finding the Right Balance: Hybrid Approaches
Many successful insurance SaaS implementations now utilize hybrid pricing models that combine the best aspects of usage-based and subscription pricing:
Base + Usage: A predictable base fee with usage-based components for specific features or volumes exceeding thresholds
Usage with Caps: Usage-based pricing with predetermined maximum amounts, providing budget predictability
Tiered Usage: Volume discounts at different usage levels that reward scale while maintaining some connection to actual usage
Value-Metric Alignment: Tying usage costs to metrics that directly reflect value creation, such as policy retention improvements or reduced claim processing time
Implementation Best Practices
For insurance carriers considering or reviewing SaaS solutions with usage-based pricing:
Analyze Historical Patterns: Review at least 12-24 months of relevant usage data to understand your true consumption patterns and seasonality
Negotiate Caps and Floors: Establish maximum limits on usage-based costs and minimum guarantees to the vendor
Validate Pricing Metrics: Ensure the metrics being measured truly align with your business value and operational reality
Build in Transition Options: Negotiate the ability to switch between pricing models as your scale or needs change
Conclusion
Usage-based pricing isn't inherently good or bad for insurance carriers adopting SaaS solutions—it's about finding the right fit for your specific situation. When properly aligned with business value, consumption patterns, and financial governance requirements, usage-based models can deliver flexibility and cost efficiency. However, when they introduce budget unpredictability, administrative complexity, or fail to scale economically, they can become a liability.
The most successful insurance carriers approach SaaS pricing discussions with a clear understanding of their usage patterns, value expectations, and budget constraints, then negotiate models that align vendor incentives with their own business outcomes. Whether you ultimately choose usage-based, subscription, or hybrid pricing, the key is ensuring the structure supports rather than hinders your technology strategy and financial governance requirements.