TL;DR
- Usage-based Pricing Models (UBP) are revolutionizing billing structures, offering a win-win for companies and clients with their flexible, consumption-based charges.
- Dive into various UBP types, including Pay-as-you-Grow, Per-Unit, Tiered, and Hybrid models, each catering to different business and customer needs.
- Adopting UBP can lead to lower upfront costs for customers, better insights into customer usage for businesses, and opportunities for upselling.
- UBP may be particularly beneficial for companies with seasonal demand, offering more flexibility during peak seasons.
- The shift towards UBP is gaining momentum, with a notable increase in adoption among SaaS companies, indicating a potential standard practice in the future.
- Reassess your pricing strategy to see if UBP aligns with your goals, offering a flexible solution to meet diverse customer needs and streamline revenue generation.
Most individuals are acquainted with the usage-based pricing structure if they buy regulated services from utility companies, like water or electricity. Several SaaS and IaaS cloud solutions are now introducing new usage-based pricing plans into their membership billing structures to capture the value they are delivering to their customers.
From the client's point of view, lower barrier to entry, better scalability, increased freedom for upgrading and downgrading, and no contract to get started with a service. It's a win-win for the company as well as the clients.
The Concept of Usage-based Pricing
Usage-based pricing, also known as consumption-based pricing, charges customers based on their actual consumption. In most cases, customers are charged at the end of the billing period. For a service with a subscription model, the user always pays the same price irrespective of how often they use the service. However, the cost of usage-based billing changes depending on the customer's actual consumption.
Different Types of Usage-Based Pricing Models
As more businesses adopt the usage-based model, pricing structures that factor in customer usage have become standard. Both the company and the client stand to gain from this pricing model. So let's look at different types of usage-based pricing models you could adopt.
Pay-as-you-Grow Pricing Model
Businesses can save money by only paying for the resources they use, using the pay-as-you-go pricing model. For example, phone carriers bill based on minutes used. The pay-as-you-go model is growing popular, with a quarter of the businesses that currently use a usage-based model introducing it within the past 12 months. The major advantages of this type of model are:
- lower upfront costs that attract customers
- customers who consume more can be charged more
- provides insight into customers' usage
- as customer usage increases, so does the money you’re making
Pay-as-you-go plans can take two forms: consumption-based and credit-based.
The first type is where the more customers use a certain resource, they pay more. Cloud resources are a common pay-as-you-go use case. Take AWS as an example. Customers who want to use the AWS storage solution pay based on the size of the objects they store and how long they store them.
On the other hand, in a credit-based model, customers purchase credits that can be exchanged for a service. They purchase credits in advance. As they use the product/service, the credits get depleted. MailChimp offers a credit-based pay-as-you-go plan. Customers can buy email credits as needed. When they send one email, an email credit is used.
Per-Unit Pricing Model
Per-unit pricing is flexible and allows businesses to align customer usage with value. In this model, customers are charged a fixed fee per unit of resource consumed.
Revenue forecasting is simplified by charging all accounts in advance. Customers could be billed based on metrics such as the volume of card purchases, the number of ongoing integrations, or the number of minutes consumed by a mobile subscription. In this scenario, sales increase as more employees start using the product.
Tiered Pricing Model
In this type of pricing model, you are splitting your offering into different tiers based on usage levels. Customers will be charged a higher rate for the next level when they exceed their current limit. The tiers are tailored according to the various needs of the customers.
An example of this would be Mailgun. It offers 4 tiers of usage-based pricing. Each plan is defined by the number of emails sent per month. It also includes overage buckets to support excess emails.
In most cases, customers can get started for free. Typically, they'll have between two and five tiers available to choose from based on their preferences. With this charging method, you may gradually upsell more expensive options to your consumers as your business grows. How you decide your value metrics matter here. The value metrics can be either quantitative, usage, feature sets, or based on how your customers perceive the product. The number of tiers should target different market segments without losing out on revenue.
Hybrid Pricing Model
A blended pricing model is a mixture of different pricing models. There’s usually no one-size-fits-all model that works for every customer. Depending on the business, it is structured in a way that customers can enjoy pricing flexibility with a given set of features. It allows businesses to differentiate themselves from their competitors with subscription-based pricing. It also enables them to create customer experiences tailored to their unique needs and diversify their revenue streams.
For example, many businesses offer freemium where some features are offered to the customers for free. When they scale and need to use other features, they can choose to upgrade.
There is also overage-based pricing where customers are charged a flat fee but are required to pay more for the exceeding usage of features or consumption.
The Growing Popularity of Usage-Based Pricing
Usage-based pricing may provide more leeway, particularly for companies offering services or software which are in demand in specific seasons. For companies that experience significant seasonality, such as retail, a usage-based pricing strategy could be pretty helpful. Take, for example, a retail contact center that typically handles a high volume of calls year-round but sees that number skyrocket around the holiday season.
The shift toward charging customers according to how often they use a product or service is gaining momentum. One-fourth of the businesses that employ UBP models now claim to have implemented them within the past year. Increased UBP use this year is expected to outpace those in 2019 and 2020 put together. In 2021, 45% of SaaS businesses had adopted a UBP strategy, increasing from 34% in 2020 as per the State of Usage-Based Pricing Report. Also, 61% of SaaS companies say they want to roll out or conduct pilots of the model soon. If current trends persist, UBP may become the standard practice in the years to come.
Also Read: Consume Less, Pay Less: The Perks of Consumption-based Pricing
Conclusion
The possibilities that UBP provides are perhaps an essential takeaway for businesses. So revisit your pricing strategy and understand if you would like to implement UBP at your organization.
If you are keen on implementing UBP, we are here to help. We are a cloud metering and pricing software. You can launch any software pricing model in the shortest time. We facilitate collecting events from multiple data sources and help you track, measure, and compute value metrics for your product. If you are curious and would like to take a look, sign up here. Or you can schedule a demo!
