.png)
Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Usage-based pricing makes more sense than flat-rate pricing in several key scenarios:
Competitive Differentiation
When you need to fend off competitors with similar models, usage-based pricing can provide strategic advantage. As seen in our Twilio case study, they implemented usage-based pricing ($/voice minute and $/message) specifically to counter competition from Amazon while enabling new use cases for their contact center solution.
Aligning with Customer Value Perception
Usage-based pricing is ideal when customers perceive value directly correlated with their consumption. This creates a fair "pay for what you use" model that resonates with customers who have variable needs or are concerned about paying for unused capacity.
Variable or Unpredictable Usage Patterns
For products where customer usage patterns vary significantly, usage-based models prevent low-usage customers from feeling overcharged while capturing appropriate value from high-usage customers. This is particularly relevant when usage metrics correspond directly to realized customer value.
Enabling Lower Entry Points
Usage-based pricing typically allows for lower initial costs, removing barriers to adoption. This makes it easier for customers to start using your product with minimal upfront commitment, facilitating expansion through the customer lifecycle.
Addressing Shelfware Concerns
Our analysis of tier/package performance frequently reveals issues with "shelfware" - features customers pay for but don't use. Usage-based pricing eliminates this concern since customers only pay for actual consumption.
Implementation Considerations
When transitioning to usage-based pricing, our approach includes:
- Setting platform fee guardrails to maintain revenue stability
- Conducting thorough customer acceptance testing
- Implementing proper metering, billing, and CPQ systems
- Adjusting sales compensation calculations to align with the new model
For optimal results, many companies implement a hybrid model combining a base platform fee with usage-based components, as demonstrated in our work with Twilio where we preserved revenue while transitioning to a consumption model.
Empirical Validation
Before committing to usage-based pricing, we recommend conducting usage analysis to verify that your selected pricing metrics correspond meaningfully to actual product usage patterns across customer segments.