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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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Based on the information I've gathered, here's a comparison of subscription vs. usage-based pricing models for SaaS:
Subscription Pricing vs. Usage-Based Pricing for SaaS
Subscription Pricing
Advantages:
- Predictable revenue streams for the business
- Simpler financial forecasting and planning
- Easier for customers to budget with fixed costs
- Straightforward sales process with clear package offerings
- Lower implementation complexity for billing and systems
- Better fit for solutions where value isn't directly tied to volume of use
Disadvantages:
- May create friction for low-usage customers who feel they're overpaying
- Can limit monetization of new strategic features
- May cause "shelfware" issues when customers don't utilize all they pay for
- Potential for customer objections about paying for unused functionality
- Less flexible for varying usage patterns across customer segments
- May create higher barriers to entry for new customers
Usage-Based Pricing
Advantages:
- Aligns costs directly with customer value received
- Enables new use cases and can fend off competitors (as seen in the Twilio case)
- Lower entry barriers for customers to start using the product
- Ability to capture more revenue from high-usage customers
- Can scale naturally with customer growth
- Often perceived as fairer by customers
Disadvantages:
- Revenue unpredictability and potential for revenue reduction
- Requires sophisticated metering, billing, and CPQ systems
- More complex sales compensation calculations
- Harder for customers to predict costs
- Implementation can be challenging across systems
- May need "guardrail" mechanisms like platform fees to prevent revenue decline
Hybrid Approaches
Our experience with clients like Twilio demonstrates the effectiveness of hybrid approaches:
- Combining platform fees with usage-based components
- Implementing usage-based pricing with "guardrails" to prevent revenue reduction
- Creating combination metrics (e.g., users + company revenue)
- Tiered usage pricing with predictable bands
The optimal pricing model should align with your go-to-market strategy and value delivery mechanism. For example, in our work with a $10M ARR IT infrastructure company, we helped transition from ad-hoc lump sum subscriptions to a more structured approach combining user-based pricing with company revenue metrics.
Selecting the right model requires careful analysis of your specific situation, including customer usage patterns, competitive landscape, and internal operational capabilities for managing the selected pricing approach.