.png)
Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
In the SaaS world, usage-based pricing (UBP) has emerged as something of a darling business model. Companies like Snowflake, Twilio, and AWS have demonstrated its tremendous potential for growth and revenue optimization. But despite the fanfare, usage-based pricing isn't universally applicable – and implementing it when it's not the right fit can damage your business.
What Exactly Is Usage-Based Pricing?
Usage-based pricing means customers pay based on their actual consumption of your service – whether that's data processed, API calls made, or transactions completed. It's often positioned as the most fair and customer-friendly approach: "pay only for what you use."
While this model has clear advantages, there are specific scenarios where implementing UBP could be a strategic mistake. Let's explore when you might want to reconsider this approach.
When Your Usage Metrics Don't Align With Value
Complex or Unintuitive Consumption Metrics
If your product's natural usage metrics don't clearly correlate with the value customers receive, UBP can create friction. According to OpenView Partners' 2022 SaaS Pricing Survey, 42% of companies that avoided usage-based pricing cited "difficulty in identifying meaningful usage metrics" as a primary reason.
For example, a team collaboration platform might track usage by messages sent or files shared, but the true value comes from improved team cohesion and productivity – metrics that are difficult to quantify and bill against.
Unpredictable Value Delivery
When your service delivers value in irregular or unpredictable patterns, usage-based pricing can feel disconnected from outcomes. Consider an AI-powered recruitment tool: its value isn't in the number of profiles scanned but in identifying the right candidate – an event that happens sporadically.
When Predictability Matters More Than Flexibility
Budget-Constrained Customers
For many organizations, particularly enterprises with strict budgeting processes, predictable expenses are non-negotiable. According to a 2023 Forrester study, 67% of enterprise IT decision-makers ranked "predictable pricing" among their top three considerations when selecting SaaS vendors.
When your customer base requires fixed, predictable costs to facilitate planning and budget approval processes, usage-based pricing creates unnecessary friction in the buying process.
Regular, Consistent Usage Patterns
If your customers use your product in a consistent, predictable manner, the primary benefit of usage-based pricing (paying only for what you use) becomes irrelevant. For products with steady usage patterns – like an email client or project management tool used daily – subscription pricing often provides a better experience for both parties.
When Your Cost Structure Doesn't Support It
High Fixed Costs
If your business has significant fixed costs regardless of customer usage, a pure usage-based model can create financial instability. Pendo's 2023 State of Product Report found that 38% of SaaS companies that experimented with usage-based pricing reverted to subscription models due to cost structure misalignment.
This is particularly true for companies that provide services requiring constant infrastructure maintenance, support staff, or other resources that don't scale directly with usage.
Implementation and Billing Complexity
Usage-based models require sophisticated metering, monitoring, and billing systems. According to Zuora's Subscription Economy Index, companies implementing usage-based pricing spend on average 30% more on billing systems than those with fixed subscription models.
If building and maintaining such systems would divert significant resources from your core product development, the overhead may outweigh the benefits.
When It Creates Poor Customer Experiences
Anxiety Over Usage
"Bill shock" is real. When customers can't easily predict their costs, it creates anxiety that can limit adoption. A 2022 study by ProfitWell found that 62% of users reported spending less time on platforms with usage-based pricing due to concerns about unexpected charges.
This anxiety can be particularly problematic for products that benefit from deep, uninhibited engagement. If users are constantly worried about their "meter running," they may never fully integrate your solution into their workflows.
Sales Cycle Complications
Enterprise sales cycles are complex enough. When prospective customers can't determine how much your service will cost them, it adds a layer of uncertainty that can stall deals. According to KBCM's 2023 SaaS Survey, companies with usage-based pricing reported 30% longer sales cycles compared to those with fixed pricing.
Procurement departments typically require defined costs before approval – something usage-based pricing makes inherently difficult.
When Your Market Isn't Ready For It
Industry Expectations
In some industries, subscription pricing is so deeply entrenched that deviating from the norm creates unnecessary friction. HR software, for instance, has traditionally used per-employee pricing models, making it the expected standard for buyers.
Before implementing a radically different pricing structure, consider whether you'll need to expend significant educational resources to help prospects understand your approach.
Competitive Environment
If all your competitors offer simple, predictable pricing while you implement a complex usage-based model, you may place yourself at a competitive disadvantage. Gartner notes that 73% of B2B buyers prefer a straightforward buying process over innovative features when choosing between similar products.
Finding Middle Ground: Hybrid Approaches
Not all pricing decisions need to be binary. Many successful SaaS companies implement hybrid models that combine the predictability of subscription pricing with usage-based components:
- Base subscription + usage overage charges
- Tiered usage pricing with predictable bands
- Subscription pricing with usage-based feature access
According to OpenView's SaaS benchmarking data, companies with hybrid pricing models saw 1.5x higher net revenue retention compared to those with pure subscription or pure usage-based approaches.
Final Thoughts: Align Pricing With Your Value and Customers
The most effective pricing model for your SaaS business should reflect:
- How customers derive value from your product
- The expectations and constraints of your target market
- Your own operational and financial requirements
While usage-based pricing can drive impressive growth when implemented correctly, forcing it into contexts where it doesn't fit can damage customer relationships and impede growth. Choosing the right pricing strategy is crucial - whether it's adapting your monetization as your product evolves or finding the optimal model for your specific market conditions.
Before making any pricing change, test your assumptions with customers through careful research. Consider running pilots with select customer segments before rolling out widespread changes, and always ensure your pricing aligns with your overall company strategy and market positioning.
The best pricing model isn't necessarily the trendiest – it's the one that creates mutual benefit for both your customers and your business. Remember that different segments may respond differently to various pricing structures, so effective customer segmentation for pricing strategy is essential to maximize revenue while delivering appropriate value to