When growing a subscription business, there are many things to consider, including pricing. As pricing is customer-facing, it is crucial to get it right. It's important to keep things simple and easy to understand to achieve this.
The Pay As You Go pricing model is the perfect strategy for such circumstances.
An Introduction to Pay-As-You-Go Pricing Model
The Pay As You Go (PAYG) pricing model is exactly what it sounds like- Customers pay for how much product or service they consume for a particular period.
For instance, cloud storage service providers charge based on the amount of storage used, phone carriers bill based on minutes used, and SaaS providers based on the number of APIs used.
What Makes the Pay-As-You-Go Pricing Model Popular?
1. Flexible usage & scalability
One reason this model is so popular is the ability for users to control their usage and expenses flexibly. It allows customers to scale their use based on requirements and avoid overpaying for unnecessary or underutilized resources.
On the business end, it aligns well with the dynamic needs of upcoming businesses and those streamlining their operations. It gives them a low-risk entry to test waters without making a significant investment.
2. Cost-effective option
This model allows customers to pay only for the resources they use, resulting in substantial savings in the long run. Traditional licensing models' high upfront costs can be avoided, and customers can only pay for the resources they need as and when required.
3. Good user experience
The kind of user experience this pricing model gives is second to none, which is another reason for its popularity. By utilizing automatic billing and integrating with payment systems, customers can avoid the hassle of remembering their payments and dealing with tedious paperwork. Pay-as-you-go pricing can be advantageous for SaaS businesses looking to attract a wider range of users who may be deterred by traditional tiered pricing models.
4. Easy revenue prediction
Basically, the model charges customers based on their product usage, which is a boon for software providers, because it gives them better control over their revenue prediction and growth planning. It is particularly useful for businesses with fluctuating software usage as it enables better cost management on a monthly basis.
For customers, the cost transparency simplifies the budgeting process based on their usage patterns.
Thus, the pay-as-you-go model serves the SaaS and software businesses in more ways than one. However, the model is not advantageous for everyone. Our next segment explains why.
Why Pay-As-You-Go May Not Be The Ideal Choice
1. It is highly complex.
Businesses relying on traditional licensing models may find the pay-as-you-go model more complex because of the time-consuming process of accurately measuring usage and billing customers accordingly. These processes are not only time-consuming, but also require significant investment, which may not work out for all companies.
2. It has limited features.
Some SaaS providers may limit access to certain features or services for pay-as-you-go users when compared to those who choose long-term contracts. Depending on your specific needs, this could reduce the software's usefulness.
3. It hurts customer retention.
Users unsatisfied with paying for the product usage may not think twice about switching providers offering a sweeter deal. Moreover, the model lacks long-term contracts, which makes it easier for customers to churn when they find cheaper or more feature-rich alternatives.
4. It is not easy to predict revenue.
Yes, the model provides a steady revenue stream by billing users based on usage. However, there is no way of predicting how much each customer will pay every month or year because they may change their usage unexpectedly. This usage fluctuation leads to revenue fluctuation, thus making it more difficult to predict revenue.
Now that we’ve explored the pros and cons of the pay-as-you-go pricing model let’s analyze some use cases to understand this strategy better.
3 Significant Uses of the Pay-As-You-Go Pricing Model
The pay-as-you-go pricing model is extremely flexible for many business verticals and products. Currently, this pricing model is mostly used in three business scenarios, such as:
- Telecommunication, where customers pay to use mobile data packages, phone plans, and roaming fees.
- Software as a Service business. These companies use the pay-as-you-go pricing model for better resource allocation and revenue tracking.
- Cloud infrastructure businesses that face unpredictable capacity requirements. In such situations, the PAYG model is the only feasible pricing method to adopt.
PAYG pricing is slowly becoming the most preferred pricing method for SaaS companies, primarily because of its potential for positive customer experience and rapid business growth.
