Subscription and usage-based billing are two pricing strategies software-as-a-service (SaaS) providers use. Customers are charged a predetermined sum regularly, generally monthly or yearly, regardless of how frequently they use the service. On the other hand, usage-based billing charges consumers depending on how much they utilize the service, such as the number of API calls or the quantity of data processed.
There has been an increasing tendency among SaaS firms in recent years to migrate from subscription-based paying to usage-based charging. Many factors have contributed to this tendency, including growing revenue, enhancing customer happiness, and better matching prices with the value offered to consumers.
According to a Bain & Company analysis, organizations that shifted from subscription-based billing to usage-based billing experienced a 35% boost in income. Furthermore, according to a TechCrunch study of SaaS professionals , 76% expect that usage-based pricing will be the dominant pricing model for SaaS firms.
Cloud storage company Dropbox switched from a subscription-based approach to a usage-based model for its corporate clients, resulting in a 60% increase in income per user. Another example is Adobe, which transitioned from a perpetual license model to a subscription-based one and subsequently implemented usage-based pricing for its cloud-based services, resulting in increased customer satisfaction and retention.
"Usage-based billing is a much more honest approach to charging for SaaS solutions because it connects what the consumer is paying for with the value they are receiving," says Patrick Campbell, CEO of ProfitWell.
Nevertheless, usage-based charging is projected to continue as more businesses see the benefits of this approach for both themselves and their consumers.
Why can usage-based billing be beneficial?
Usage-based billing enables SaaS firms to align their price with the value provided to consumers, increasing customer happiness and loyalty. It also gives useful information about client behavior and use trends.
SaaS organizations may evaluate which products and services are most beneficial to their consumers by measuring client usage. This will assist them in optimizing their product offers and pricing strategy to maximize income. For example, if consumers use a certain feature more frequently than others, the firm may consider charging more for it or providing it as a separate product.
Moreover, usage-based charging can assist SaaS organizations in identifying and mitigating possible churn concerns. Companies can determine whether consumers utilize the service less regularly or not by analyzing user trends. This data may be used to identify areas where the service can be improved and to give tailored offers or discounts to keep the client.
Also Read: Revitalize Your Pricing Strategy to thrive during a Recession
Additionally, usage-based payment can assist SaaS organizations in better understanding the requirements and preferences of their clients. Companies can detect trends and patterns in product development and marketing strategies by examining use patterns across different client segments. This allows them to focus their marketing and product offerings on certain client categories.
Real-world examples show how usage-based charging may help you analyze consumer behavior and use trends. Salesforce has, for instance, altered its pricing model to usage-based charging to understand better how its customers utilize its products. Salesforce has been able to deliver customized suggestions and boost customer satisfaction as a result.
Usage-based invoicing gives SaaS organizations significant information about consumer behavior and usage patterns, helping them to improve pricing and product offers, retain customers, and better understand their requirements and preferences. Companies who embrace this strategy will likely gain a competitive edge in the market, as the trend toward usage-based pricing is projected to continue.
Case Studies of Successful Companies
Zuora
Zuora offers subscription billing, commerce, and finance solutions to other subscription-based enterprises. Initially, the firm used a subscription-based strategy in which consumers paid a predetermined monthly cost for access to its platform.
Nevertheless, Zuora changed its pricing model to usage-based invoicing in 2019.
"We see a big potential for enterprises to profit on the move towards usage-based pricing...customers want to pay for what they use and nothing more," says Tien Tzuo, CEO of Zuora.
Zuora experienced a 300% increase in platform utilization and a 40% increase in client retention following the switch. Revenue increased by 28%, according to the corporation.
Twilio
Twilio is a cloud communications platform with APIs for building messaging, voice, and video applications. The company faced a challenge with its original subscription-based model, where customers paid a fixed monthly fee for access to its APIs, as some customers were not using the APIs as frequently as others.
According to Chee Chew, Chief Product Officer at Twilio, "With subscription-based pricing, there's a mismatch between usage and what customers pay...We wanted to create a pricing model that aligns with usage."
In 2020, Twilio introduced usage-based billing for its messaging APIs to align pricing with customer value. After the shift, Twilio saw a 50% increase in messaging revenue and a 70% increase in the number of messaging customers. The company also reported a 46% increase in revenue.
Datadog
Datadog is a tool for cloud monitoring and analytics that delivers real-time insights into applications and infrastructure. The firm had a problem with its initial subscription-based strategy, in which consumers paid a fixed monthly amount for access to its platform because some customers did not use all of the site's functions while others did.
According to Datadog CEO Olivier Pomel, "We discovered that some clients were paying for more than they needed, while others were paying for less... We intended to develop a pricing strategy that reflected actual consumption."
Datadog implemented usage-based payment for its log management function in 2020 to align cost with the value given to clients. Datadog experienced a 20% rise in income and a 50% increase in log management clients following the change. Revenue increased by 39%, according to the corporation.
See how you can leverage your pricing model to increase profits in this article.
Tips for switching to usage-based billing
Understand customer value
Before making the transfer, SaaS organizations must learn their consumers' value and which products they utilize the most.
"SaaS suppliers should approach pricing from the customer's viewpoint and ensure that the value they give is represented in the price," according to a Bain & Company analysis.
Data analytics may be used by SaaS organizations to analyze consumer activity trends and evaluate which services are the most useful to customers.
This can assist them in determining which features to charge for utilizing usage-based charging. SaaS organizations may boost customer happiness and loyalty by matching price with the value offered.
Be open and honest
Usage-based billing can occasionally result in unexpected consumer costs, it's critical to be upfront about pricing and convey any changes explicitly.
TechTarget notes, "When it comes to usage-based charging, transparency is essential... Make it a point to be transparent about how and why clients are charged."
Pricing information for SaaS firms may be found on their website and in client correspondence. They can also utilize dashboards and reports to give transparency into use and billing. SaaS firms may develop client confidence and reduce customer churn by being honest about the price.
Engage the whole organization
Moving to usage-based charging requires more than altering the pricing model. It is a company-wide initiative that necessitates sales, marketing, and operations adjustments.
TechCrunch states, "Moving to usage-based invoicing should be a company-wide initiative, not merely a pricing plan... To guarantee a smooth transition, everyone in the company must be involved."
Pricing and packaging strategies for SaaS organizations can be developed in collaboration with their sales and marketing teams. They can also include their operations teams in implementing the infrastructure required to monitor consumption and billing.
SaaS organizations may ensure a seamless transition to usage-based charging by engaging the entire company and avoiding any barriers or problems.
Offer payment flexibility
Consumers like payment flexibility. Offering several levels of usage-based pricing or allowing consumers to move between subscription-based and usage-based billing models can give flexibility to SaaS organizations.
Deloitte estimates, "In consumption-based billing, flexibility is essential for success... Consumers should be allowed to move between pricing models as their demands change."
Based on the quantity of usage or the number of features used, SaaS providers might provide multiple levels of usage-based pricing. Customers can also swap pricing models to meet their changing demands.
SaaS firms may attract customers and enhance customer retention by offering price flexibility.
Track and monitor client usage
To ensure correct invoicing, usage-based billing requires recording and monitoring consumer usage. SaaS providers should have the technology to monitor consumption and deliver appropriate billing.
Monitoring tools and analytics may be used by SaaS organizations to measure client use and create accurate billing data. SaaS firms may prevent billing issues and establish client confidence by offering accurate invoices.
SaaS organizations may effectively transition to usage-based invoicing and align prices with customer value. "Businesses that convert to usage-based charging can see a 30% to 50% boost in income and a 10% to 20% increase in client retention," according to a TechCrunch study.
SaaS firms may meet their growth goals while improving customer happiness and loyalty by having a client-centric approach to pricing and providing transparency, flexibility, and accurate invoicing.
Thinking about switching to usage-based pricing? Here are some actionable inputs on implementing it for your organization!
Conclusion
With good reason, usage-based charging is becoming increasingly popular among SaaS organizations. Usage-based invoicing matches the price with the value supplied to consumers, offers flexibility, and can enhance revenue and client retention.
Yet, subscription-based invoicing is still feasible for some firms, particularly those with regular consumption patterns and long-term contracts.
In the future, more SaaS firms will switch to usage-based payment models. According to a TechCrunch analysis, "usage-based pricing is on the increase and is projected to expand in popularity in the coming years."
Consumers are growing increasingly accustomed to paying for what they use, and SaaS providers understand the advantages of usage-based charging for both themselves and their customers.
But keep in mind that usage-based charging is not a one-size-fits-all approach. To establish fit, businesses must assess their strategies, consumer demands, and use habits. We anticipate seeing a combination of subscription-based and usage-based billing models as the sector evolves, with firms customizing their pricing strategies to match the demands of their clients.
While the future of billing models is unknown, one thing is certain: in order to flourish, SaaS firms must remain customer-focused and adapt to changing consumer demands and expectations.
SaaS firms may attract and keep clients by offering value-based pricing, transparency, and flexibility, eventually driving growth and success.
