Cracking the code for SaaS success: Is a usage-based pricing model the key?

Usage-based pricing (also known as consumption-based or pay-as-you-go pricing models) are one of three main types of pricing models used in SaaS businesses today. 

For SaaS companies, usage-based pricing models can offer an opportunity for faster growth as well as many other benefits. However, they can also introduce a lot of complexity into your business, which you’ll need to consider prior to trading in your tried-and-true subscription-based model.  

The pricing model you choose doesn’t have to be an either-or decision, though. Today, there are also hybrid pricing models that combine the predictability of subscriptions with the flexibility of usage-based models.

In this article, we’ll explore usage-based pricing models and their benefits, along with the challenges and the extent to which hybrid pricing can help you overcome some of them, to  help you decide what model might be right for your SaaS business.

How to evaluate whether a usage-based pricing model is suitable for your business

Most SaaS companies still use a subscription-based pricing model because it’s simple and predictable. However, usage-based and hybrid pricing models continue to grow more popular among SaaS businesses and their customers alike. 

Many SaaS customers like the ability to pay only for what they use. For one thing (and it’s a big thing), they don’t end up paying for the service or features they don’t use. This helps control costs , which helps them control their costs. The flexibility built into most usage-based, pay-as-you-go models also reduces financial risk and commitment while offering the ability to cost-effectively scale as needed.  

SaaS businesses benefit, too. For example, adopting a usage-based pricing can give them a competitive advantage in a crowded market. Because usage-based pricing aligns the product’s cost with the customer’s perceived value, it also improves customer satisfaction and retention.

Usage-based pricing can also help retain more customers during economic downturns because it offers them the ability to reduce their costs without fully canceling the service. Given the outsized impact of churn on a SaaS business, this is a particularly attractive feature of usage-based pricing models. 

While these and other benefits make a pretty compelling case for adopting a usage-based pricing model, it’s important to know that doing so does not come without cost.  

For example, usage-based pricing makes predicting revenue a lot trickier. Calculating key SaaS metrics also becomes more complex as many metrics were developed based on the reliable revenue inherent in With more variability in monthly revenue, usage-based pricing also impacts cash flow and budgeting. Given these concerns, moving from a subscription model to a usage-based model requires thorough evaluation. 

Key questions to ask yourself

While many businesses stick with a traditional subscription-based pricing model because it’s easy, It’s also true that not every SaaS product or service is well-suited to usage-based pricing. 

Here, we’ve compiled a list of seven key questions designed to help you figure out whether adopting a usage-based pricing model might make sense for your business. 

Note that fully answering some of these questions will require some work, including market research, analyzing usage data, and working with your customer success team to understand how your customers use your product/service and what aspects deliver the most value. 

However, just reading through the list and thinking a bit about each question will give you a pretty good idea of whether or not it’s worthwhile to more fully explore usage-based pricing. The more of these questions you can answer “yes” to, the better suited to usage-based pricing your product/service is likely to be. 

1. Can usage be tracked easily and accurately? 

Usage metrics are measurable indicators of how much a customer utilizes a SaaS product or service, which in usage-based pricing models, directly correlate with how much that customer is billed. For usage-based pricing to work, you must have one/more reliable usage metrics to measure and track customer usage effectively.  

2. Can you identify specific aspects of your product that deliver tangible value for your customers that increases the more they use it?  

This question asks you to 1) determine what your customers value about your product, and 2) make a clear, measurable connection between those things that deliver value for your customers and their usage. 

Value drivers could include both tangible and intangible aspects of your product. Tangible value drivers might include specific features or customizations, or some other aspect of your product or service that provides measurable benefits for your customers. In contrast, your customer support team’s responsiveness and willingness to help, isn’t really a tangible benefit to your customers but they always value it. 

To the extent that these factors are tangible and easily measured, they may be good usage metrics to consider. Further, if increased usage of your product or service translates in a tangible way to greater value or customer success, usage-based pricing can effectively align with customer growth and satisfaction. 

3. Do different customers use the product at widely varying levels and/or do individual customers’ usage vary from month to month? 

This is where you need to dive deep into your usage data to see if there are any usage patterns that emerge at the individual customer level. For example, some customers may use the product heavily while others may use it only minimally. Or the data may indicate a lot of variability in usage for individual customers. 

In either case, usage-based pricing can offer customers more flexibility in aligning their costs with their individual needs, giving them more control over their expenses.

4. Is usage-based revenue compatible with the company’s financial strategy? 

While usage-based models can lead to significant growth as customers scale, they also make stable and predictable revenue streams harder to achieve. 

Thus, it’s important to evaluate whether shifting to a usage-based model will align with your goals for revenue predictability and the degree to which your business can weather potential fluctuations in revenue. If revenue stability is a priority, a hybrid model with a subscription-based component may be more appropriate for your business. 

5. Is there a competitive advantage to offering usage-based pricing in this market? 

If your competitors are already using a fixed subscription model, usage-based pricing can be a differentiator, especially if customers in your market are seeking flexibility.

However, you also have to consider what prospects in your market are looking for and whether they generally prefer flexible or predictable pricing. Some markets are more receptive to usage-based pricing than others, especially if customers have fluctuating needs. 

Understanding both the competitive landscape and customer preferences is key to deciding if usage-based pricing is a smart move. 

6. Would usage-based pricing help you win the types of customers you want? 

To answer this question, you need to have a good understanding of the types of customers you’re trying to attract in order to evaluate their potential usage patterns and what they might need in terms of flexibility.  

For example, usage-based pricing can attract smaller companies or startups by reducing upfront costs and allowing them to start small. On the other hand, if you’re courting enterprise customers, those with higher, more stable usage may prefer a flat-fee subscription for better predictability and potential cost savings. Whereas, enterprises with variable usage or growth are more likely to lean toward usage-based or hybrid models. 

It’s worth noting here that hybrid models are becoming increasingly popular as they provide customers predictable base costs combined with flexibility for scaling as needed. And for SaaS, they offer more revenue predictability than a purely usage-based model.   

7. Can usage-based pricing cover your variable costs with a healthy margin? 

Variable costs in SaaS are closely tied to the number of customers and how much they use your product. 

If providing the service becomes more expensive as customers use more (e.g., cloud infrastructure, bandwidth), usage-based pricing can help offset these costs. However, if usage costs are fixed or marginal, a flat-rate subscription might be more profitable.

In either case, it’s important to determine whether usage-based pricing can generate enough revenue to cover costs sustainably and deliver a healthy profit margin as usage grows.

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Determining the potential impact of usage-based pricing on your profitability

Once you have put together a usage-based pricing model, it’s important to determine its potential bottom-line impact on your business prior to implementing it. 

Scenario analysis and what-if analysis are extremely useful tools for identifying the boundaries of profitability with a usage-based pricing model.  

• Scenario analysis: By analyzing the best-case, worst-case, and most likely scenarios with different usage patterns, you can estimate the revenue potential under each scenario. This will help you determine potential profitability and assess the long-term sustainability and growth potential of different pricing models. 
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• What-if analysis: By adjusting different variables such as usage rates, and pricing per unit and adjusting assumptions about customer growth rates or churn, you can determine what aspects of your usage-based model are most sensitive to change. This information will help you better understand the conditions under which your model will be profitable.

Strategies for successfully implementing a usage-based pricing model 

Switching to a usage-based pricing model requires careful planning. Here are some  strategies to help you successfully implement a usage-based pricing model.

Identify the right value metric and start simple

Determine your usage-based metric and that it’s one that customers can easily connect with the value they get from your product or service. Translating cost as a percentage of the value generated can help to make your pricing fair and transparent.

Develop a plan for communicating your new pricing model to existing customers

Thoughtfully communicating with your existing customers about your new pricing model before you implement it is essential to maintaining trust and minimizing confusion, both of which can help you avoid a lot of churn when you roll it out. 

Your communication plan should explain the reasoning behind the new model, highlight the added value and benefits it will have for customers. In addition, building in opportunities for customers to express their concerns, ask questions, and get additional support can help them understand the changes and strengthen the customer relationship.  

Develop customer monitoring, alerting, and reporting processes

Customers get frustrated when they get hit with an unexpected overage. 

Create tools and dashboards to help customers monitor their usage in real-time, notify them when they are approaching thresholds or exceeding usage limits, and make their usage easy for them to manage.  

Explore ways to help your customers predict and manage their costs

Usage-based pricing makes it harder for customers to predict their monthly spending. New customers will need help estimating their usage. Provide historical data, industry benchmarks, or usage calculators to help them forecast usage.

Designing, implementing, and optimizing usage-based pricing models is easier with Drivetrain

Today, more than 60% of SaaS companies are implementing a usage-based pricing model and the trend continues. This isn’t surprising given the many benefits of usage-based pricing. 

If designed well and implemented strategically, aligning your pricing model with customer needs can accelerate growth. However, given their complexity, doing the types of informed, data-driven analysis necessary to make all that happen can be a challenge without robust SaaS financial planning software and financial forecasting tools.  

Drivetrain – comprehensive FP&A platform purpose-built for SaaS – provides both. Drivetrain is a powerful yet simple-to-use solution that makes it easy to: 

• Get detailed insights into customer usage patterns in aggregate and at the individual  customer level.
• Determine the potential profitability of your pricing model using scenario analysis and use a what-if analysis to test the effect that different pricing structures will have on your revenue.   
• Accurately forecast usage-based revenue using historical usage data and optimize cash flow based on your results.
• Optimize pricing strategies on an ongoing basis, adjusting them to match trends in usage.
• And more.

Explore Drivetrain to learn about these and all the other ways it can help you build and implement usage-based pricing to grow your business faster.