There are easier ways to grow a SaaS business than doubling down on sales and marketing over and over again. One of the easiest ways for SaaS companies in different stages of growth to tap into an additional revenue stream is to update their pricing model to a pay-per-use (PPU) pricing mode. But this only works if you know how to do it effectively.
To implement a PPU pricing model in your SaaS business, you'll need to define value metrics, set up reliable tracking systems, and design a transparent billing process. It’s also important to know how tools like Togai can simplify each step, making it easier to align costs with actual customer usage.
What is a pay-per-use model?
PPU pricing, also known as usage-based or consumption-based billing, is a pricing model that aligns customer costs closely to their actual product usage. To charge customers based on their usage, software companies must choose and measure a usage metric. A few common metrics include data storage volume, number of API requests, or time spent using a platform.
When you base customers’ charges on usage metrics, you give them more control over their own spending. Your users can also measure their usage and adjust their spending each month based on their fluctuating needs.
How does a pay-per-use model work?
A company will likely need specialized billing technology to implement a PPU business model properly. Specifically, SaaS companies will need robust billing processes to track service usage across the metrics they’re basing their PPU payment model on. And the metrics a company chooses should align directly with the core value proposition of its SaaS product.
For example, a cloud computing company might base its PPU model on storage volume, compute hours, bandwidth consumed, and the number of API requests. But to accurately monitor usage metrics and statistics, the company would also need to utilize APIs, log analysis, and metering tools—like Togai. This real-time data informs the billing process so the company can calculate costs based on the services and features its customers actually leverage.
How does a pay-per-use model compare with a subscription model?
The best pricing model supports your business goals and needs, but many of the models have important differences. Whether you're looking at PPU or traditional subscription plans, each billing model has tradeoffs regarding predictability, flexibility, and perceived value from your customers.
Subscription models charge recurring subscription fees that can give your company reliable revenue and make forecasting much easier. Your customers will also benefit from fixed access costs across all your features—with the exception of any add-ons or additional modules of course.
Meanwhile, PPU billing can result in revenue fluctuations for vendors and offer variable costs for customers. This flexibility makes it easier for your customers to adjust their product usage up or down as needed. This model also reduces customers’ overall risk of churn.
The model you choose will ultimately depend on your customer’s needs and the solution you offer. For example, PPU pricing generally doesn’t make sense for SaaS tools that require consistent and unlimited access to provide value, such as project management platforms.
The benefits of a pay-per-use pricing model
PPU billing provides many advantages beyond flexible cost structures. It can also boost customer satisfaction, improve your reach across your total addressable market, increase your profitability, and make your SaaS business more efficient.
Increased customer satisfaction
By directly linking charges to usage and value, PPU strengthens customer loyalty, resulting in better retention and superior CAC payback rates. Rather than paying a fixed fee, your customers pay for exactly what they use, and this can create a perceived sense of fairness.
Broader market reach
PPU expands your reach across your total addressable market by eliminating cost barriers for startups or companies with fluctuating budgets. The lower entry point and alignment to usage can attract more customers from different cash flow profiles. Plus, as your early-stage customers’ usage scales, your own revenue streams will grow alongside it.
Revenue upsides
Revenue might be variable, but PPU pricing can boost your revenue from high-usage customers who become regular and loyal users. This model also helps increase your market share by making your product more accessible to a wider range of customers with different needs.
More efficient use
PPU pricing incentivizes customers to use their resources wisely, helping them stay within budget. This results in more efficient use of your company’s features. This, in turn, reduces your hosting and infrastructure costs. In other words, it’s a win-win for both you and your customers.
How to implement a pay-per-use model for SaaS
Implementing a PPU model is a great way to earn more revenue and improve customer relationships across your user base, but setting it up isn’t exactly easy. It requires careful planning and the right tools to ensure accurate billing and a seamless customer experience. Here are the five steps you’ll need to take to fully implement a consumption-based pricing model.
Step 1: Define your value metrics
The first step in implementing PPU billing is choosing the appropriate usage metrics that reflect customer value. By selecting metrics that directly relate to the benefits customers receive, you ensure that they see a clear relationship between their usage and their costs.
This approach not only helps prevent sticker shock at the end of each billing period but also builds pricing transparency and trust between you and your users.
You should determine which usage metrics, such as data processed, number of user accounts, API calls, or transactions, best align with your core product functionality. These metrics will become the basis for your pricing plans.
Step 2: Build your usage tracking mechanisms
The foundation of accurate PPU billing is precise usage data. This means you must implement methods to track your usage metrics, whether through custom Internet of Things (IoT) sensors, log analysis tools, APIs, or third-party cloud storage utilities.
These systems should also seamlessly integrate with your billing engine of choice to optimize your usage-based pricing model. For example, Togai offers a range of integrations that help automate the metering of the usage metrics you bill your customers on.
But even once you’ve successfully started tracking your usage metrics, you’ll want to rigorously test your usage tracking and reporting before launching PPU pricing.
All your tracking systems need to provide accurate usage data based on clear metrics to ensure your bills are both fair and transparent. Otherwise, you run the risk of facing backlash from your customers who:
- Don’t understand how your PPU model works
- Don’t feel they’re being billed fairly based on their product usage
Step 3: Design your billing system
Now, it’s time to consider the billing system you’ll use to calculate and administer charges.
The goal of this billing infrastructure is to hold your usage records and rate plans and then automatically compute costs and create invoices. This process may require you to integrate with multiple accounting softwares or specialized billing platforms that are better suited for recurring subscription management.
At Togai, we enable this kind of data connectivity by offering integrations with multiple platforms across payments, billing and invoicing, accounting and ERP, and CRM and CPQ. For more information, you can check out all of our integrations.
Here’s a quick visual of what this billing process looks like from start to finish in Togai:
A flowchart of Togai’s billing data flow (Source)
But even once your billing systems are properly set up, you still need to ensure that your customers understand how your PPU model works.
Step 4: Communicate pricing clearly to your customers
To maintain customer trust, your billing practices must offer complete transparency into what usage activities incur costs. Providing itemized bills that summarize usage levels across defined metrics gives your customers visibility into why their costs may fluctuate each billing period.
By showing these clear details that connect charges to actual usage, you can help your customers understand their pay-per-use bills and make the payment process simpler.
For example, at Togai, we do this by providing our users with a dedicated customer portal that allows their customers to view and manage their price plans, check their pricing schedule, and view usage and cost metrics in real time. The billing details also include the invoices.
This level of transparency makes it easier for your customers to adjust their usage behaviors or identify optimization opportunities during each billing period. It also creates a better user experience for everyone involved.
Step 5: Monitor, optimize, and repeat
PPU models require ongoing monitoring to ensure high customer satisfaction and retention. This means you need to leverage analytics to detect patterns in new customer onboarding, usage trends, billing inquiries, or service cancellations that may signal pricing issues with your product.
At Togai, we simply call them revenue analytics. With these metrics, you can view the real-time usage and revenue metrics (time series data) for each billable item or group of billable items.
Revenue analytics in Togai (Source)
But what do you do once you have access to all this data?
As your customer base grows, you’ll eventually have enough revenue analytics data to make data-driven decisions about how to optimize your pricing strategy. For instance, you could benchmark your company’s usage metrics and revenue metrics against industry standards. We suggest you use a reputable source like Openview’s SaaS benchmarks report to find these benchmarks.
Examples of SaaS companies using pay-per-use pricing
Now that we’ve shown you how to implement PPU in your own SaaS business, let’s take a look at how industry-leading software companies are effectively using PPU pricing.
Infrastructure cloud services
Leading infrastructure as a service (IaaS) providers like Amazon Web Services (AWS) and Google Cloud Platform (GCP) offer broad pay-per-use pricing aligned to resource consumption.
AWS bills for over 15 distinct metrics across storage, computing, networking, and databases based on utilization. For example, customers only pay for the cloud storage capacity they use, and this increases or decreases costs as data repositories grow and shrink. GCP takes a similar approach and charges per minute of virtual machine usage rather than flat monthly server fees.
Communication and payment APIs
Twilio revolutionized communication APIs with pay-as-you-go pricing based on usage. In this case, the usage metrics are voice, messaging, and video, and they accrue based on activities like phone calls connected, messages transmitted, or video streaming minutes.
Stripe’s API for payment processing bills customers based on a percentage of transaction dollar volumes, aligning costs to revenue generation. Both of these models give customers the ability to scale up or down without requiring any upfront commitments.
Specialty SaaS services
Snowflake’s data warehouse, Mixpanel’s user analytics, and ChartMogul’s subscription billing software demonstrate pay-per-use beyond infrastructure. For subscription-based SaaS companies, ChartMogul also bills per imported customer transaction. And Snowflake’s storage and computing charges scale precisely with data use cases. Meanwhile, Mixpanel’s fees map to the volume of user actions analyzed for product engagement insights.
By pricing around metrics driving real value, these services ensure mutual benefits for both the providers and their customers.
What’s the one thing that all these companies have in common? They all have a way to bill, rate, and meter usage effectively. You could do this by building a dedicated billing platform in-house—which would take valuable developer resources away from your other projects. Or, you could use a usage-based billing platform like Togai. All you have to do is schedule a demo with our team to get started.
FAQ
How do companies calculate pay-per-use?
To calculate PPU, SaaS companies track specific usage metrics–such as data processed, API calls, or active users–based on customer activity. The company then multiplies the usage data by the rate set for each metric to generate the customer’s bill. Many companies use automated billing systems to ensure accuracy and transparency.
What are the disadvantages of pay-per-use?
One of the main disadvantages of PPU is the potential cost unpredictability for customers. Bills fluctuate based on usage, and this can complicate budgeting. For providers, this model may lead to revenue variability and require complex infrastructure to track, meter, and bill usage accurately.
Is pay-per-use the same as pay-as-you-go?
Yes, PPU and pay-as-you-go are often used interchangeably. Both models charge customers based on their actual usage rather than a flat fee. While the terminology may vary, both approaches align costs with consumption, offering flexibility to customers and linking pricing directly to the value customers receive.
