SaaS consumption model: A simple guide for businesses

Alvaro Morales

Touted as a fairer pricing method, the SaaS consumption model keeps growing in popularity. It’s natural for questions to start coming up:

Why are SaaS companies using this model?

How does it compare to other models?

Should my company start using this pricing model?

This blog post aims to explore the SaaS consumption model and find answers to these questions and more. 

Here’s what we’ll cover: 

  • A definition of the SaaS consumption model
  • Reasons why SaaS businesses are using this model
  • How to tell if your organization should implement usage-based billing
  • A quick comparison of the SaaS consumption model versus other models
  • Five tips to help you start your implementation journey

Let’s begin.

What is the SaaS consumption model?

The SaaS consumption model, also known as usage-based pricing, is a billing model where users are charged based on how much they use your product. Contrary to metered billing, the SaaS consumption model charges users per instance of usage, the computing power they use, or any other relevant usage indicator specific to your service.

This could be as simple as how often customers use specific features. It can account for as many variables as you need.

The model is often regarded as a much fairer way of charging users. Meaning, it makes the value of SaaS products more tangible and trackable. It’s not like a subscription model in which the value that users get from SaaS products is often less quantifiable. 

Why do companies choose the SaaS consumption model?

The SaaS consumption model offers benefits, making it an increasingly popular choice for businesses. Here are some of those key advantages:

  • Save on costs: Customers gain greater control over their spending. They can adjust their usage based on their needs, often leading to cost savings compared to a fixed subscription fee. This is especially helpful for businesses with fluctuating demands.
  • Grow with your customers: The SaaS consumption model scales with your customers. As their usage increases, so does your revenue — without needing to overhaul your pricing structure. It's a built-in mechanism for growth.
  • Keep customers happy: This advantage directly refers to what we said in the previous section. Each event is billed separately, which makes most users feel they’re in control of their spending. The result is, of course, delighted customers. 
  • Predict revenue growth: While usage might vary, this model can lead to predictable revenue growth over time if you use the monitoring features well. Your revenue naturally follows suit as customers find more value in your product and increase their usage.

How to decide if a SaaS consumption model fits your business 

Don't switch to a SaaS consumption model because it sounds like it'll help. Assessing various factors to confirm they align with your business goals and customer needs is crucial. Here are four key areas to consider:

1. Understand how your customers use your product 

Look closely at how your customers use your software and look for clear patterns. Is there a lot of variation in how much or how often they use it? Having systems in place to keep track of these metrics is highly recommended. 

A consumption model could be a good fit if some customers are power users while others barely touch it. This way, you can charge heavy users more while lighter users pay less, making it fairer for everyone.

2. Keep your financial stability in check

Be prepared for a bit of a financial rollercoaster. Unlike subscription models, consumption-based billing can lead to ups and downs in your monthly revenue. Ensure your business can handle this variability and that you have a solid financial plan.

3. Look at your competitors and your industry’s landscape

What are other companies in your space doing? If your competitors successfully use a consumption model and customers seem to like it, you might need to consider adopting it, too. After all, you don't want to lose customers to a competitor because of your pricing model.

4. Go to the source by asking your customers

The best way to know what your customers want is to ask them. See if they'd prefer paying based on how much they use your software. Use tools like surveys to help you gauge the progress of the product-customer relationship.

Their feedback can be invaluable in making the right decision. If they express a clear preference for usage-based pricing, then it’s pretty much a green light. 

How does the SaaS consumption model stack up against others?

Though very popular, the SaaS consumption model isn’t the only option available. 

Let's take a quick look at how it compares to other popular billing models:

Subscription-based pricing

With subscription-based pricing, customers pay a recurring fee to access your software, regardless of how much they use it. This contrasts with the consumption model, where fees correlate to each instance of usage (or event).

Pros

  • Get steady, predictable revenue for your business.
  • Budgeting and forecasting revenue is easier.
  • Pricing is straightforward for quicker customer understanding.

Cons

  • It’s less adaptable to changing customer needs or usage patterns.
  • Customers might end up paying for more than they use, unlike the consumption model, which aligns cost with value.

Tiered pricing

Tiered pricing involves offering different pricing levels, or tiers, each with its own set of features and capabilities. It differs from the consumption model as it doesn't directly bill based on usage but rather on the features included in each tier.

Pros

  • You give customers options to choose a plan that suits them.
  • Your company provides opportunities to upsell as customers' needs grow.

Cons

  • It can be trickier to manage with multiple pricing tiers.
  • Potential customers may feel resentment about being pushed into higher tiers to get the features they need.

Freemium model

The freemium model offers a free basic version of your software, with premium features or services available for a fee. It differs from the consumption model in that it doesn't directly charge for usage of the basic version. 

The freemium model's end goal is also completely different. It aims to use the SaaS solution’s standout features as a selling point to convert free users into paying users.

Pros

  • It attracts a wide range of potential customers to try your product.
  • This model gives you the chance to convert free users into paying customers.

Cons

  • You collect many free users who might never upgrade to a paid plan.
  • It requires resources to maintain both free and premium versions.

Feature-based pricing

Feature-based pricing means charging customers for specific features users choose to use. It's similar to the consumption model in its focus on paying for what you use, but it centers on features rather than individual billable events.

Pros

  • Customers can tailor their subscriptions to their exact needs.
  • This model is highly adaptable to various use cases and industries.

Cons

  • It can be challenging for customers and providers to manage multiple features and their associated costs.
  • Feature-based pricing may not provide the same level of predictable revenue as other models. The SaaS consumption model can offer more predictable growth as usage scales.

Tips for implementing a SaaS consumption model 

Interested in giving the consumption model a try? Here are some tips to set yourself up for success:

Tip 1: Choose the right metrics

The first step is to decide what you'll measure. Will it be API calls, the amount of data processed, the number of users, or something else? Choose metrics that directly relate to the value your customers get from your software. 

Remember that this also applies to your product. Check that you’re tracking the effect usage-based pricing is having on your operational costs.  

Tip 2: Create transparent pricing

Once you know your metrics, establish clear pricing tiers or rates based on different usage levels. This gives your customers predictability, helping them understand how their bills are calculated.

Tip 3: Keep a close eye on usage

Regularly track how your customers are using your software. This ensures accurate billing and helps you spot any potential issues or areas for improvement. You might find, for example, that certain features are underutilized and could benefit from adjustments.

Tip 4: Keep customers in the loop

Ensure your customers know how they're being billed and why the SaaS consumption model is good for them. Provide them with detailed usage reports or dashboards to see exactly what they're paying for. Transparent communication builds trust and results in happier customers. 

Tip 5: Don't be afraid to make adjustments

Your consumption model isn't and shouldn’t be static. As you gather more data and feedback, refine your pricing and usage metrics. Stay on top of market trends and adapt your model to keep it relevant and competitive.

Next steps

By now, you have a solid understanding of the SaaS consumption model and whether it fits your business. If you're ready to take the plunge, you might be wondering about the practicalities of implementation.

That’s when using Orb becomes a clear choice. 

Orb is a specialized usage-based billing solution that makes implementation smooth and hassle-free. Here's how Orb simplifies the process:

  • Easier usage tracking: Orb integrates with your existing data warehouse and offers robust APIs. This makes usage tracking a breeze, so you'll be up and running in no time.
  • Customizable metrics: With Orb, you define the metrics that matter most for your business. These can be API calls, data storage, or anything else. This ensures your billing aligns perfectly with your product's value.
  • Simple pricing design: Orb's intuitive tools help you craft the ideal pricing structure for your customers. Whether it's per-unit, tiered, or a hybrid model, you can create tailored plans without coding skills.
  • Automated billing: Let Orb handle the tedious billing tasks. It automatically tracks usage, calculates costs, applies discounts, and generates invoices. This helps you save time and minimize errors.
  • Transparent customer experience: Orb's dashboards give users real-time insight into their usage. This transparency builds trust and reinforces the value of your consumption model.
  • Adaptable pricing: Orb's platform is designed to evolve with your business. You can easily adjust or introduce new plans as your product and market change.

Learn how Orb can help you implement the SaaS consumption model with ease.

posted:
June 28, 2024
Category:
Guide

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