Should we use a traditional subscription model or a usage-based pricing model for our SaaS, and which is likely to convert better for our target customers?

Based on our book, Price to Scale, the answer isn’t one-size-fits-all. Instead, it depends on several factors, including what your target customers are used to, your product maturity, and how predictable you need your revenue to be. Here are some key points from our pricing strategy book:

• Customer Expectations: One of the most important factors is what your customers are already accustomed to. As explained in our book, identifying the right value metric begins by understanding your customer's expectations. If your target market is used to straightforward, predictable pricing, a traditional subscription model may convert more easily.

• Revenue Predictability vs. Flexibility: The book explains that the fundamental valuation model of subscription-based software doesn’t directly apply to usage-based companies because the revenue can be less predictable. If your organization values stabilizing cash flow, a subscription model might be preferable. However, if your product’s usage naturally scales with customer demand—and your customers appreciate paying only for what they use—a usage-based model could be both appealing and competitive.

• Customer Adoption for Newer Products: When you’re introducing a new product, especially if customers are unfamiliar with complex pricing, a simpler (often subscription-based) model might encourage faster conversion. Conversely, more mature products, or those with highly variable usage patterns, might perform better with a consumption-based approach.

• Internal and External Alignment: Our book also emphasizes the need for consistent messaging and internal alignment when rolling out any pricing model. Whether you’re adopting a traditional subscription or a usage-based model, it’s crucial to educate your sales team and to clearly communicate the benefits to your customers.

In summary, if your target customers prefer clarity and are used to the subscription model, you’ll likely see better conversion with a traditional approach. However, if your market values flexibility and the opportunity to align costs with actual usage—and if you can manage the variability in revenue—a usage-based approach might be more effective in the long term. We recommend assessing your current customer behavior and product maturity to determine which model is best for your situation. For more detailed guidance, reviewing the relevant sections in Price to Scale that discuss key pricing variables and customer-centric strategies is highly encouraged.