Usage-based Pricing
Where is it and where’s it going?
Photo by Josh Newton on Unsplash
Seat-based pricing made sense when software lived on your desktop. More people, more installs, more licenses. But in a world of cloud automation, API integrations, and AI, tying value to human seats is starting to feel… outdated. At least for some SaaS.
You build a product that automates manual work. Your customer loves it: fewer staff need to touch the tool. But then they ask: “Why are we still paying per user, when we need fewer users now?” Your pricing model just penalized them for your product doing its job.
On the other hand, one month, your customer’s usage spikes, maybe due to a marketing campaign or seasonal growth. They didn’t notice until your invoice landed, 3x higher than usual. Now they’re spooked, and asking if there’s a more predictable option.
Herein lies the dilemma for SaaS founders. Do you charge people a per-seat licence, or do you go down the usage-based route. Both have their pros and cons. As a result, what we’re seeing is a trend towards hybrid pricing models.
Usage-based Pricing - what is it and why has it grown in popularity?
Usage-based pricing, as the title suggests, means you just pay for what you use: emails sent; GB of storage; API calls etc. In a world where SaaS has become a key expense for most companies, there is a rising feeling that companies aren’t always getting the value that they’re paying for.
You’ve probably experienced the same thing, where you sign up for something and six months later you see this monthly expense come through and realise you’ve barely used the product. Once in a while it’s valuable, but not month-in, month-out.
As AI and other automations have come along, the trend is towards less human involvement in processes and so, a pricing strategy that says we will charge for every human user of this product (even though by definition the usage per human should have declined over time) starts to feel wrong.
When you subscribe to something that has a tier which is ‘up to X’ and you know you are only using a fraction of that allowance (whatever it may be), there is a feeling that you are paying for a service you aren’t fully using.
Usage-based pricing seeks to solve that by saying you only pay for what you use. Now it might be that you end up paying the same as if you were on a tiered plan, but psychologically, it might feel better to think that you’ve actually used every unit of value that you paid for.
The Paradox of UBP vs Predictability
Usage-based pricing seems on the face of it to solve the issue of declining value of seat-based pricing. But, it also throws up a couple of problems:
Companies, especially larger ones, hate unpredictability. Their budgets are set in advance and based on a broader view of the company itself. The idea that their SaaS budget is a moving target won’t wash and so someone has to make a call on what they think it will be. At least with a tiered pricing strategy that is fixed annually in advance they know what they are up against, even if they might feel that they are over-paying sometimes for what they are using.
UBP could actually foster a fear of success. If you are responsible for your SaaS budget and your team does a stellar job on driving more engagement from prospects driving your usage (and the related costs) up, then do you get in trouble for mis-calling the annual spend?
The Emergence of the Hybrid Model
Inevitably, this clash of models has resulted in companies offering a bit of both. Customers want a degree of certainty AND a sense of fairness in the utility of what they are paying for.
The broad (and sometimes overlapping) models include:
1. Base fee + usage (e.g. $X/month + $Y per 1,000 requests)
Chargebee offers a basic fee of that gives you a base fee of the $599 for up up to $100k of monthly billing. After that you pay 0.75% of everything over the last $100k a month. So they cover their base up to a point, then give their customers a clear link between costs and revenue growth.
2. Tiered usage plans with overage
Kind of similar to option 1, but you also have tiers based on an assumption of your overall likely requirements. Then the overage is slightly discounted for the higher tiers.
Mailgun is a good example of this. Three paid tiers, with overages on emails and validations.
3. Prepaid usage packs
Zapier allows you to buy a subscription based on your level of usage that you define in advance.
4. Either/Or
Twilio offers you the option of either paying for usage (per hour) or paying per user.
Where it’s going?
It depends on what you’re selling and whether your customers are comfortable with what is driving cost. For example, if they only spend an extra dollar with you when they make an extra 100, then they should be OK with that. If they are getting hammered as they add more staff to their team just because that’s how it’s priced even though it doesn’t add additional value, they might start to get angsty.
My view is that seat-based isn’t dead but will be better suited for people-centric workflows such as CRM collaboration). Pure UBP will probably be reserved for dev tools. And for the rest, it will be some form of hybrid.
Maybe it’s time to revisit your pricing plans. Does it help or hinder adoption and trust?
