Is usage-based pricing right for your SaaS product?

Alvaro Morales

Did you know? According to OpenView’s SaaS Benchmarks Report, 58% of SaaS companies use some form of usage-based pricing in their model. This trend doesn’t seem to be slowing down anytime soon. 

If you’re considering usage-based pricing for SaaS, we’ll give you a complete breakdown of what you need to consider and analyze before you implement your plan. 

We’ll cover: 

  • A quick definition of usage-based pricing for SaaS
  • A complete guide on how to know if usage-based pricing would work for you
  • How to get started with implementation

Let’s begin.

A quick look at usage-based pricing for SaaS

Usage-based pricing is a model where customers pay according to how much they actually use a service. Instead of a flat subscription fee, charges are directly tied to individual billable events like data processed or messages sent. 

This model offers a "pay-as-you-go" approach that continues to gain popularity, particularly for cloud services, digital platforms, and SaaS products. 

Why the shift? Customers sometimes pay for features they don't fully use with standard subscription-based models. 

Usage-based pricing aims to better align costs with the value customers receive. It also makes it easier for customers to try new services, as they don't face significant upfront investments, and it lets them control their spending more directly.

How to tell if usage-based pricing is right for your business

Look for and evaluate patterns in how customers use your SaaS

Before diving into usage-based pricing, getting a good picture of how your customers interact with your SaaS product is essential. Start by considering two key points:

Variability in use

The question in your mind when evaluating this factor should be:

  • Does your service experience wide swings in how much and how often it's used?

Some customers might be light users, while others rely on it heavily. Usage-based pricing works particularly well when there's meaningful variation across your customer base. This means it lets you capture more value from those who find your product especially useful and lets users who use it less pay potentially less than what a flat fee might be.

Predictable peaks

The question you should be asking yourself here is: 

  • Are there times of day, week, or year when usage spikes?

For example, an accounting SaaS might see high activity around tax season. 

If you can identify predictable usage surges, a usage-based model can help maximize your revenue. While subscriptions might leave you underpaid during these peak seasons, implementing usage-based pricing for SaaS lets you benefit from a surge in usage.

Make sure your pricing accurately reflects your SaaS’s value delivery

One of the most crucial questions when considering usage-based pricing is whether your SaaS's value aligns closely with how much customers use it. Think about the following:

Direct value correlation

Before considering usage-based pricing for your SaaS, ask yourself: 

  • Does increased usage of your product lead to a direct increase in value for the customer?

For example, a service that sends out text message notifications provides clear value for every additional message. 

So, if there's a tight link between usage and the benefit a customer gets, usage-based pricing often makes sense.

How customers perceive value

Even if there's a direct value correlation, it's critical that customers also understand this link. 

  • Do they see usage increases as directly tied to the value they get from your product?

If customers don't naturally see this alignment, a usage-based model might feel unfair, no matter how logically you can justify it. In these cases, you'll need to invest heavily in educating customers about the value proposition.

Keep a close eye on market trends and what your competitors are doing

It's wise to look beyond your own product and consider what's happening in your industry and the broader market. Here are two areas to investigate:

Competitive analysis 

If you want to make sure you’re making the right call, try to answer these two questions:

  • What pricing models are your competitors using?
  • Is usage-based pricing the norm, or are other pricing models dominant?

If competitors are successfully using usage-based pricing, it's a good sign that this model might resonate with customers in your market. However, if you also adopt this approach, you'll want to think carefully about how to differentiate your offering to stand out.

Market demand

When it comes to analyzing the market, these are the questions that should be on your mind:

  • Is there a growing customer preference for flexible pricing models?
  • Do potential customers express a desire for options that align their costs more directly with how much they use a service?

If there's a clear market shift toward usage-based pricing, adopting such a model could position your SaaS favorably, especially if larger competitors are slower to adapt.

Assess the financial impact and feasibility of choosing usage-based pricing

Before crowning usage-based pricing for SaaS as the best choice for your business, it's essential to take a realistic look at the implications for your company’s finances and operations. Here's what to consider:

Revenue predictability

Be prepared for the possibility of fluctuating income. Unlike subscriptions that offer a steady stream of revenue, usage-based pricing means your earnings can go up or down depending on how much customers use your product. 

To add some stability, consider using a hybrid pricing model. This approach combines usage-based and subscription pricing elements, offering the best of both worlds. 

For instance, you can provide a base subscription fee for a certain level of usage, ensuring a predictable baseline revenue. Then, you can layer on usage-based charges for any additional usage beyond the included amount.

This hybrid model provides customers with the flexibility of usage-based pricing while offering you a more stable revenue foundation.

Billing complexity

It can be challenging to track customer usage accurately and transform that data into invoices. You'll need to assess whether you have the systems in place to handle this without hiccups. 

Ask for customer feedback

Before making a significant change, like switching to usage-based pricing, you should consider your customers' perspective. Here are two effective ways to gather their input:

Use customer surveys and conduct interviews

Directly ask your customers about their thoughts on potential pricing model changes. 

  • Do they see the value in a usage-based approach? 
  • Do they have concerns about costs or predictability? 

Surveys can quantify feedback, while in-depth interviews can reveal valuable insights and concerns.

Consider doing some pilot testing

If feasible, run a pilot test of usage-based pricing with a small group of customers. This will allow you to collect real-world data on customer behavior, revenue impact, and operational challenges. 

You can then use this feedback to refine your pricing model and communication strategy before a full-scale rollout.

Next steps

Whether you decide to implement usage-based pricing for your business or not, you should now better understand why usage-based pricing for SaaS can be a good choice. 

If you have decided that you want to start using this pricing model, the practicalities of implementation may start to feel daunting. New questions will begin to crop up:

  • How do I accurately track all the different types of usage?
  • Can my systems integrate usage data seamlessly with billing?
  • What if usage spikes create a data overload I can't handle?

That's where a specialized usage-based billing solution like Orb can give you that extra competitive edge you need and render those questions obsolete.

Here's how Orb simplifies the implementation process:

  • Seamless data flow: Orb's data warehouse integrations and robust APIs are designed to streamline the process of usage tracking. Get started with minimal setup time.
  • Define your usage metrics: Orb's adaptability lets you define the usage metrics that align with your business model, from API calls to computing power used. Track what matters and bill accordingly.
  • Pricing plan design made easy: Orb's intuitive Plan Builder helps you create the perfect pricing structure, whether it's per-unit, tiered, or hybrid. No coding experience is required to tailor plans to your customers' needs.
  • Billing on autopilot: Orb automates the entire billing process — usage tracking, cost calculation, discount application, and invoice generation. Save time and eliminate costly errors.
  • Build trust with transparency: Orb's customer-facing dashboards empower users with real-time visibility into their usage and how it translates into costs. This transparency aligns your pricing model with clear value delivery.
  • Pricing agility: Orb's platform is designed for change. You can easily modify existing plans or create new ones based on market trends or customer insights. Adapt your pricing strategy without disrupting your billing operations.

Learn how Orb can help you execute a hassle-free usage-based billing solution.

May 30, 2024

Ready to solve billing?

Contact us to learn how you can revamp your billing infrastructure today.

Let's talk.

Thank you! We'll be in touch shortly.
Oops! Something went wrong while submitting the form.