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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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Usage-based pricing might be right for your SaaS business under specific circumstances. Here's how to determine if it's appropriate for your situation:
When Usage-Based Pricing Works Well
Value Alignment: When your product's value directly correlates with usage (like communication services, processing power, or storage)
Competitive Differentiation: As shown in the Twilio case study, usage-based pricing can help fend off competitors and enable new use cases for your product
Growth Potential: It allows customers to start small and grow their spending as they derive more value from your solution
Varied Usage Patterns: If your customers have significantly different consumption habits, usage-based pricing can accommodate this diversity
Implementation Best Practices
If you're considering moving to usage-based pricing:
Include Platform Fee Guardrails: Combining a base platform fee with usage components can protect your baseline revenue while offering flexibility
Conduct Customer Acceptance Testing: Test the new model with select customers to gauge reaction and refine the approach
Align Your Systems: Ensure your product metering, billing, CPQ, and sales compensation systems can properly handle usage-based pricing
Develop Proper Tools: Create pricing calculators and sales enablement materials to support the new pricing model
Potential Challenges
Revenue Volatility: Usage-based models can introduce unpredictability in your revenue forecasting
Implementation Complexity: Requires sophisticated metering and billing infrastructure
Change Management: Transitioning existing customers may present challenges (as noted in the Twilio case, where preventing a 50% revenue reduction was a key concern)
Sales Compensation Adjustments: Sales teams need new compensation models aligned with usage-based metrics
Making Your Decision
To determine if usage-based pricing is right for your SaaS business, consider:
- How directly your product's value correlates with usage metrics
- Your technical ability to accurately measure and bill for usage
- Your customers' preferences for predictable versus flexible spending
- Competitive landscape and whether this model offers differentiation
For many SaaS companies, a hybrid approach combining a platform fee with usage components offers the best of both worlds—predictable baseline revenue with upside potential based on customer success.