Skip to content
How Usage-Based Pricing is Reshaping SaaS | DivByZero blog

Traditional pricing models in SaaS are about as thrilling as wading through old emails—predictable, a huge waste of your resources, and offering little in the way of real value. 

Whether you use it or not, you’re locked into paying for the complete package. 

Usage-based pricing, however, turns that on its head, revolutionizing the way SaaS businesses price their products by aligning costs with actual usage—finally, pricing products in a way that makes you wonder why we’ve put up with the old ways for so long.

What Is Usage-Based Pricing?

Usage-based pricing is a dynamic SaaS model in which customers pay according to their actual consumption of a service. It is ideal for companies that need flexibility and scalability. 

Think of it as ordering food online vs. paying for a buffet—with the former, you only pay for the food you need, but with the latter, it doesn’t matter how much food you consume; the bill will be the same. 

Similarly, usage-based pricing models bill you at the end of the month after calculating how much of their service you have used. 

For example, consider Twilio’s SMS service (where you only pay for the messages you send) and Zapier’s task-based pricing structure (where you only pay for the tasks undertaken). 

Usage-Based Pricing: Zapier
Screenshot provided by the author

Usage-Based Pricing Models

Now that we have some idea of usage-based pricing, let’s explore the different types of usage-based pricing models that exist. 

Usage-Based Pricing With Tiers

Usage-based pricing with tiers is one of the more popular pricing models in the SaaS industry. 

In this model, you pay a base price for a specific service allocation, like a set number of users, messages, or tasks. 

If you exceed those limits, you can continue using the service at a reduced rate per additional unit rather than being locked into a higher plan. 

For example, if you add more users than your plan includes, send more messages, or automate more tasks than your base plan covers, you’ll incur additional charges, but often at a lower rate than the base cost. 

As a reference, here’s an example from Describely (an AI automation tool that uses usage-based pricing with tiers, where 1-50 products cost $28/month, 51-80 products cost $45/month, 81-100 products cost $55/month, and so on): 

Usage-Based Pricing: Describely
Screenshot provided by the author

Due to the benefits this plan offers, such as cost efficiency and customer retention, many experts say it’s shaping up to be the next evolution in software pricing strategies. 

Usage-Based Pricing per Unit

In this pricing model, customers are charged by the units of a product they consume. In most instances, each unit has a fixed price, and the total cost is calculated by multiplying the number of units used by the price per unit. (aka, 5 x 20 = 100). 

As a reference, cloud providers like Sumo Logic use this plan to charge customers based on the gigabytes (GB) of storage they consume or the data points per minute (DPM) they process.

Usage-Based Pricing: Sumo Logic
Screenshot provided by the author

This pricing is a great option for a couple of reasons: 

  • It provides cost-savings (like other usage-based pricing models where you only pay for what you consume).
  • It’s completely transparent, and you even get analytics/insights that allow you to forecast your usage (which can further help with budget planning).
  • It offers flexibility and scalability options.

Volume Usage-Based Pricing

Imagine you’re at the farmer’s market, where you find a watermelon seller with the following pricing: 1 watermelon for $6, 2 watermelons for $5 each, and 3 watermelons for $4 each. 

You quickly realize the more items you purchase, the better bulk discount you’ll get. 

Volume-based pricing works similarly. In the SaaS world, this model encourages customers to buy more by offering discounts for larger quantities.

For example, consider email providers like ConvertKit, which reduces the price of their product with the number of subscribers you acquire. 

Usage-Based Pricing: ConvertKit
Screenshot provided by the author

Another example is Kissmetrics, an events analytical tool that provides volume discounts based on the number of users and events.

Usage-Based Pricing: Kissmetrics
Screenshot provided by the author

Aside from the benefits other usage-based pricing models offer, volume-based pricing encourages customers to buy more from you and use your software more based on the discounts you offer.

Hybrid Usage-Based Billing

Hybrid usage-based billing combines traditional subscription models with consumption-based pricing, offering a flexible and scalable approach to billing. 

This model charges customers both per user or for specific features while incorporating usage limits and allowances. 

By doing so, it addresses the complexities associated with real-time and periodic billing challenges (i.e., usage tracking or predictability) and ensures that customers only pay for what they use while still benefiting from predictable subscription costs.

For example, Userpilot uses a hybrid pricing model that applies usage limits to features like user segmentation, feature tagging, and survey responses.

Usage-Based Pricing: Userpilot
Screenshot provided by the author

Another example is Jira, which includes usage limits within its subscription tiers. 

Usage-Based Pricing: Jira
Screenshot provided by the author

This approach not only allows SaaS companies to increase customer satisfaction but also helps them stay ahead of the game by charging based on actual usage while still offering predictable subscription costs. By leveraging customer satisfaction tools, SaaS companies can gain valuable insights into customer sentiment and identify areas for improvement. This data-driven approach can lead to more satisfied customers, increased retention, and ultimately, a more sustainable business model.

Benefits of Usage-Based Pricing in SaaS

Since many customers often purchase a SaaS solution fairly early in their journey, they look for a solution that’s scalable to their needs and yet offers flexible and transparent pricing. For this reason, usage-based pricing can be a perfect fit for these companies. 

Aside from the obvious benefits like flexible billing, lower entry barriers, and alignment with customer needs that usage-based pricing offers, it’s also a great idea to stick to this pricing model, mainly because it: 

  • Encourages customer retention: Customers don’t feel the need to opt out of a solution because this pricing model can unlock new features and usage limits as they scale in their business. Moreover, leveraging a service marketplace platform will boost adaptability and ensure pricing scales with user growth, keeping the platform valuable and relevant.
  • Provides a forecast for resource allocation: Since the usage-based pricing model only charges based on what you use, customers can easily forecast how much money they’d need to spend during specific events (e.g., they might have to spend more money while running SMS and email campaigns during festive seasons, and would need to consider the extra budget to allocate to these campaigns). 
  • Allows you to demonstrate your value: With usage-based pricing, customers can clearly see the value they are getting from your service. As their usage increases, so does the perceived value, which can justify higher spending.

In fact, more and more SaaS companies are seeing the benefits of usage-based pricing (UBP), which is why its use is steadily increasing in the industry. Almost 61% of SaaS businesses have already incorporated this pricing model, whereas 21% are actively testing it. 

Usage-Based Pricing in SaaS
(Image Source)

How to Implement a Usage-Based Pricing Model for SaaS Companies?

Suppose you’re ready for the next steps on this journey; you might need to identify how to implement a usage-based pricing model for your SaaS business. Well, here’s a guideline that might help!

Identify Your Value Metrics

It’s important to identify the right value metrics to ensure that your pricing reflects the value your customers get from your product. For example, the right metrics for your business can be the number of users, tasks, messages, storage capacity, etc. 

For reference, UCaaS providers often charge based on communication metrics like the number of calls made, minutes used, or messages sent. This flexibility allows businesses to pay for what they actually use, creating a scalable model that adjusts to real-time communication needs. 

To make matters simpler, you can segregate your metrics into the following categories: 

  • Transactions
  • Volume
  • Count 
  • Time

We recommend talking with your customers to determine what usage-based pricing model they’d like you to incorporate. This will help you understand which metrics will foster trust, transparency, and predictability. 

Communicate Your Pricing Structure on the Pricing Page

At this stage, you’d need to create a dynamic pricing structure that can be customized based on the use cases and customer requirements. 

Experts also recommend clearly delineating each subscription tier’s benefits and using a subscription calculator to enhance transparency.

For example, your pricing page can look something like this: 

Usage-Based Pricing: pricing structure
Screenshot provided by the author

As another example, you can also create calculator-based subscriptions (something like what AWS is doing): 

Usage-Based Pricing: AWS
Screenshot provided by the author

It’s also important to educate all your customer-facing teams (such as sales, support, product, research, and marketing) so they can completely grasp the benefits each subscription tier offers and how pricing is calculated upon usage. 

This will help them create better sales scripts and marketing copies and provide better support to your customers. 

Track and Monitor Product Usage Across Segments

To keep the process of usage-based pricing completely transparent, you can track and monitor product usage across different segments by utilizing feature tagging and event tracking—this will not only help you gather insights on user behavior, but it’ll also help you:

  • Understand at which step/timeline people require new feature add-ons.
  • Segment users based on added insights.
  • Market your services better. 
  • Map out customer journeys.
  • Predict churn patterns.

You can use these insights for yourself and create dashboards to provide information to customers so they can forecast usage and visualize trends. You can streamline this process by providing AI/ML-led notifications to your customers when they approach usage limits. 

Enable Scalability and Flexibility 

Last but not least, as the SaaS world continuously changes, you must change with it, too, and do whatever you can to provide the most seamless experience to your customers. 

Microservices enable SaaS providers to scale and adapt their services more efficiently by breaking down applications into smaller, independent modules that can be developed, deployed, and scaled independently. 

This modular architecture allows for seamless handling of varying loads, which is essential for a usage-based pricing model.

As demand fluctuates, microservices can be scaled up or down without impacting the entire system, ensuring that users are charged accurately based on their actual usage. 

The use of a microservices API gateway further enhances this scalability by managing and routing requests to the appropriate microservices, optimizing performance, and maintaining smooth, uninterrupted service delivery. 

This flexibility and efficiency are critical for delivering a reliable and cost-effective usage-based SaaS solution.

How Usage-Based Pricing Is Revolutionizing the Subscription Economy

Just before we conclude this article, let’s compare and contrast usage-based pricing with traditional pricing methods (including the pros and cons of each one). 

Usage-Based Pricing Vs. Flat Rate

Coming back to the example of ordering online vs. going to a restaurant for a buffet, usage-based pricing vs. flat rate works something like that, wherein you only pay for what you need with UBP, whereas you pay a fixed rate with flat rate pricing. 

While usage-based pricing is completely transparent and scalable, it can also be a little complex (especially when users are new to this pricing structure) and a tad bit unpredictable (sure, you pay for what you want, but what if you manage to blow over your budget?).

In that way, flat-rate pricing is far more dependent/predictable and easy to use, but it’s not really scalable, as after a period of time, customers might feel cheated to pay extra costs for the services they’re not even using.  

Besides, every customer can have different needs from your software, and you can’t really customize the limits and features with a flat-rate option!

Usage-Based Pricing Vs. Pay-Per-User

Simply put, Usage-based pricing charges customers based on resource consumption, such as data storage in GB or data points per minute, while pay-per-user models typically involve a flat fee based on the number of users accessing the service.

For example, if you’re running an SMS campaign where you can predict message volume, a usage-based pricing model is more suitable. If your focus is on calling, you likely don’t want to track every minute. In this case, call center pricing with a pay-per-user model makes more sense.

While, like always, UBP provides benefits like scalability, transparency, and flexibility and disadvantages like complexity and revenue unpredictability. 

Pay-per-user pricing, on the other hand, provides pros like a simple understanding of pricing structure and can be scalable as well, but it can also have drawbacks like: 

  • Misalignment of value of product vs. price they need to pay for it (which also discourages adoption). 
  • Higher costs for smaller teams (that already have limited budgets). 
  • Excessive pricing for features all users might not use.

Conclusion

In this article, we touched upon some basics of the subscription economy, including: 

  • What usage-pricing is
  • Why it is shaping up to be the future of SaaS pricing models
  • Different types of UBP
  • How to implement a UBP model

If you found this information helpful and want to know more such information on the happenings of the B2B and SaaS worlds, including Massimo’s personal insights on the best solutions, strategies, and books he recommends, we’d advise you to subscribe to our weekly newsletter

Juwaria Merchant

Juwaria is a freelance writer specializing in the fields of SaaS, marketing, and health/wellness. Backed with 3+ years of experience, she helps brands build content that adds value to their business. In her free time, you can catch her reading her favorite books or studying the latest trends online.

Leave a Reply

Your email address will not be published. Required fields are marked *