What are the pros and cons of usage-based pricing versus flat monthly subscriptions, especially for an early-stage SaaS?

Below is a summary comparing the two models based on our book, Price to Scale:

Direct Answer:
For early-stage SaaS companies, usage-based pricing and flat monthly subscriptions each come with distinct advantages and challenges. Usage-based pricing aligns costs directly with customer consumption—potentially capturing more value as usage increases—but introduces revenue variability and operational complexity. In contrast, flat monthly subscriptions provide predictability and simplicity, though they may risk leaving money on the table if usage (and therefore value) increases over time.

Key Points from Price to Scale:

• Pros of Usage-Based Pricing:

Customer Alignment: Pricing scales with the actual usage, meaning customers pay for the value they get, which can build stronger alignment especially when usage leads to higher value.
Revenue Upside: When customers exceed basic usage expectations, they can inadvertently pay more, allowing you to capture additional revenue.
Flexibility & Scalability: This model can adapt well as the customer’s needs grow, potentially supporting a long-term relationship where pricing evolves with consumption.

• Cons of Usage-Based Pricing:

Revenue Predictability: As highlighted in our book, the traditional valuation models and metrics like ARR or MRR may not directly apply since revenue becomes variable and less predictable.
Operational Complexity: Establishing robust tracking and billing systems—referred to as “operational plumbing” in Price to Scale—can be a significant hurdle, particularly if systems are not yet mature.
Financial Metrics Adjustment: Shifting to usage-based pricing often requires a rethinking of the standard SaaS metrics, placing an emphasis on trailing spend and adjusted measures like NRR and CAC, which may be challenging during early stages.

• Pros of Flat Monthly Subscriptions:

Revenue Predictability: A flat fee provides a straightforward, stable revenue stream that can simplify forecasting and financial planning.
Simplicity: This model is easier for customers to understand and for sales teams to sell, often reducing friction during the initial phases of market entry.
Early-Stage Focus: For nascent products, a clear and simple pricing structure helps avoid the complexities of usage tracking and metric recalibration.

• Cons of Flat Monthly Subscriptions:

One-Size-Fits-All Limitation: As mentioned in our pricing strategy book, flat pricing may not capture the incremental value delivered to customers as their usage grows, potentially leaving revenue on the table.
Enterprise Alignment: In some cases, especially when targeting larger customers, a flat rate might dissuade adoption if those customers have highly variable or high consumption needs.

Takeaway:
For early-stage SaaS companies, the flat monthly subscription model offers the benefit of clarity and ease of implementation, making it an attractive option while the product and operational foundations are still developing. However, if your product’s value scales notably by usage and you have the infrastructure to track and bill dynamically, then a usage-based model could capture additional revenue—albeit with increased complexity and risk. It is important to consider both the cost of implementing the model and the financial flexibility required when deciding which strategy best supports your early growth objectives.

In essence, the choice hinges on balancing predictable revenue streams against the potential upside of capturing higher value through usage, all while preparing to adjust your financial metrics and operational systems as your business scales.