The usage-based pricing model almost feels like a cheat code — it enables SaaS companies to more efficiently acquire new customers, grow with those customers as they’re successful and keep those customers on the platform.
Compared to their peers, companies with usage-based pricing trade at a 50% revenue multiple premium and see 10pp better net dollar retention rates.
But the shift from pure subscription to usage-based pricing is nearly as complex as going from on-premise to SaaS. It opens up the addressable market by lowering the purchase barrier, which then necessitates finding new ways to scalably acquire users. It more closely aligns payment with a customer’s consumption, thereby impacting cash flow and revenue recognition. And it creates less revenue predictability, which can generate pushback from procurement and legal.
SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges spanning from pricing to sales compensation to billing.
There are numerous potential usage metrics that SaaS companies could use in their pricing. Datadog charges based on hosts, HubSpot uses marketing contacts, Zapier prices by tasks and Snowflake has compute resources. Picking the wrong usage metric could have disastrous consequences for long-term growth.
The best usage metric meets five key criteria: value-based, flexible, scalable, predictable and feasible.
Enterprise customers often crave price predictability for annual budgetary purposes. It can be tough for traditional legal and procurement teams to wrap their heads around a purchase with an unspecified cost. SaaS vendors must get creative with different usage-based pricing structures to give enterprise customers greater peace of mind.
Image Credits: Kyle Poyar
Customer engagement software Twilio offers deeper discounts when a customer commits to usage for an extended period. AWS takes this a step further by allowing a customer to commit in advance, but still pay for their usage as it happens. Data analytics company Snowflake lets customers roll over their unused usage credits as long as their next year’s commitment is at least as large as the prior one.
Nobody wants to see a shock expense when they’ve unknowingly exceeded their usage limit. It’s important to design thoughtful overage policies that give customers the feeling of control over how much they’re spending.