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Estd 4.22.2023
The Rise of Usage-Based Pricing in SaaS
The SaaS industry is experiencing a notable shift in pricing strategies. Subscription models, once the gold standard, are increasingly being complemented or replaced by usage-based pricing (UBP). According to OpenView Partners' 2023 SaaS Benchmarks report, approximately 45% of SaaS companies now offer some form of usage-based pricing, up from just 34% in 2020. This trend raises an important question: Are we heading toward a future where every SaaS solution will incorporate a usage-based component?
Understanding the Appeal of Usage-Based Pricing
Usage-based pricing creates alignment between customer value and vendor revenue. Rather than charging a flat monthly fee regardless of engagement, companies bill customers based on their actual consumption of the service. This model offers several compelling advantages:
For Customers:
- Lower Barrier to Entry: Customers can start with minimal commitment and costs that scale with their success
- Reduced Risk: Organizations pay only for what they use, eliminating the sense of "wasted" subscription fees
- Budget Flexibility: Usage-based models adapt to seasonal fluctuations or changing business conditions
For Vendors:
- Revenue Expansion: According to a Paddle study, companies with usage-based pricing report 38% faster revenue growth than their subscription-only counterparts
- Customer Acquisition: The lower initial commitment can accelerate adoption, particularly in enterprise contexts where procurement processes can be lengthy
- Value Demonstration: Charging based on consumption reinforces the tangible value delivered to customers
Not Every SaaS Category Is Equally Suited for UBP
While the trend toward usage-based pricing is undeniable, the suitability of this model varies significantly across different SaaS categories:
High Suitability:
- Infrastructure and Platform Services: Cloud providers like AWS, Azure, and GCP pioneered the pay-as-you-go model for computing resources
- Data Processing Tools: Solutions that handle varying volumes of data transactions (Snowflake, Databricks)
- API Services: Companies like Twilio and Stripe that process transactions or communications
Mixed Suitability:
- Marketing Automation: Tools may charge based on contacts, emails sent, or campaigns executed alongside a base subscription
- Customer Support Software: Often combines a fixed platform fee with usage components for ticket volume or agent seats
- Business Intelligence Platforms: May blend subscription access with data processing volume charges
Lower Suitability:
- Team Collaboration Tools: Platforms like Slack or Microsoft Teams typically rely on per-user pricing
- Productivity Software: Creative tools, document processors, or project management solutions often maintain straightforward subscriptions
- HR Systems: Generally priced per employee/user rather than usage metrics
Hybrid Models: The Likely Future
The evidence suggests we're not moving toward an all-or-nothing scenario but rather a nuanced evolution of SaaS pricing. According to Bessemer Venture Partners' State of the Cloud 2023 report, 63% of companies they surveyed are implementing hybrid pricing models that combine elements of both subscription and usage-based approaches.
These hybrid models typically feature:
- Base subscription fees that cover core functionality, support, and minimal usage
- Usage components that scale with specific measurable metrics
- Consumption tiers that provide predictability while still reflecting usage
This balanced approach addresses one of the main criticisms of pure usage-based pricing: unpredictability for both customers and vendors.
Factors That Will Shape the Future Landscape
Several key factors will influence the extent to which usage-based pricing becomes ubiquitous:
Economic Conditions
In challenging economic environments, customers tend to favor the flexibility and efficiency of usage-based models. According to Gainsight's 2023 Customer Success Industry Report, 78% of businesses reported intensified scrutiny of SaaS spending, driving greater demand for pricing models that demonstrate clear ROI.
Category Maturity
As SaaS categories mature and commoditize, pricing innovation becomes a competitive differentiator. Early-stage markets often start with simple subscriptions before evolving toward more sophisticated pricing as they mature.
Metering Capabilities
The technical ability to accurately measure and meter usage has improved dramatically. Modern billing infrastructure from companies like Chargebee, Recurly, and Stripe has simplified the implementation of complex pricing structures that would have been prohibitively difficult just a few years ago.
Customer Preferences
B2B buyers are increasingly demanding pricing flexibility. A 2023 Forrester survey found that 72% of procurement professionals prefer vendors that offer options between subscription and usage-based pricing.
The Competitive Imperative
Perhaps the most compelling reason to anticipate wider adoption of usage-based elements is competitive pressure. When market leaders implement usage-based components successfully, competitors often follow. For example, after Snowflake's tremendous success with consumption-based pricing, competitors in the data warehousing space rapidly adjusted their own pricing models.
Kyle Poyar, Partner at OpenView, notes: "Companies that fail to at least experiment with usage-based components risk being outcompeted by more flexible rivals who can acquire customers more efficiently and expand revenue more predictably."
Predictions for the Next Five Years
Based on current trends and market forces, here are four reasonable predictions for SaaS pricing evolution:
The 80/20 Rule Will Apply: Approximately 80% of SaaS companies will incorporate some usage-based component in their pricing within five years, while 20% will maintain pure subscription models where they remain most appropriate.
Industry-Specific Patterns Will Emerge: Different vertical SaaS categories will develop characteristic patterns of hybrid pricing optimized for their specific value metrics.
Pricing Transparency Will Increase: Customer demand will push more SaaS providers to offer clearer pricing, including self-service calculators that estimate costs based on expected usage.
Billing Infrastructure Will Become Strategic: The ability to flexibly implement and adjust pricing models will become a core competitive capability rather than an administrative function.
Conclusion: Evolution, Not Revolution
Will every SaaS company offer a usage-based plan? The answer is almost certainly no—but the vast majority will incorporate usage components where they make sense for both the business model and customer value delivery.
Rather than a wholesale replacement of subscription models, we're witnessing an evolution toward more sophisticated, hybrid approaches that blend the predictability of subscriptions with the fairness and growth potential of usage-based elements.
For SaaS executives, the key isn't to blindly follow the trend toward usage-based pricing but to thoughtfully evaluate where and how consumption metrics might better align your pricing with the value you deliver to customers. The most successful companies will be those that develop pricing models as thoughtfully as they develop their products themselves.