Usage Based Pricing: Pay for what you use!

Over time, there are some trends that are changing how the SaaS industry behaves. PLG was one of them, and usage-based billing is another.

Usage Based Billing has gone more mainstream over the last few years. If you look at the results of Boston-based VC firm OpenView’s annual Financial and Operating Benchmarks survey, of the nearly 600 SaaS companies that responded, 45% say they are using this flexible pricing model, up from 34% in 2020.

What does that mean? It means that the customers are billed on the basis of the usage of the software like no. of integrations, amount of data ingested, no. of WhatsApp calls, etc. It started as a concept from telecom companies(think how Airtel charges) moving to AWS and cloud telephony companies(Twilio) to now more and more companies adopting it.

Why the shift?

The usage-based billing model for SaaS industry has been gaining popularity over the past decade as it allows for a more flexible and customizable pricing structure for software as a service. This model allows customers to pay for only the features and services they use, rather than a flat monthly or yearly fee for a predetermined set of features.

• This can be particularly beneficial for companies with a wide range of customers, as it allows them to offer more tailored pricing plans that meet the specific needs of each individual customer.

• Furthermore, the usage-based billing model allows SaaS companies to better align their pricing with the value they provide to their customers.

One of the factors driving this shift is that charging for “seats” makes less sense than it used to, according to OpenView. Poyar noted that the value a customer receives rarely ties in directly with how many people log in, especially as more and more startups now offer solutions built around automation, AI or APIs.

“In fact,” he said, “it might even be negatively correlated: When AI can automate tasks, the more successful the solution is, the fewer people need to be logging in. So seats are just an outdated way of charging and don’t allow a company to communicate value or invest in features that would add more value.”

However useful Usage Based Billing is, there are still some challenges associated with it which one needs to take care of:

• Complex Implementation: Effort required to accurately track and measure usage is way higher. In order to accurately charge customers for the services and features they use, SaaS companies must have a robust system in place to track usage data and calculate charges. This can be a time-consuming and costly process, and can be difficult to implement without the right tools and systems.

  

• Difficult to automate billing: Though there are a number of software claiming to solve this in the market like Chargebee, Chargify, Recurly, Metronome, NetSuite billing module, etc., a lot of them are still evolving to be able to cover the complexities of usage-based billing and a lot of work is still happening outside the system, in Excel sheets.

• Difficult to accurately predict and forecast revenue: Because usage-based billing is based on actual usage data, SaaS companies may not be able to forecast their revenue based on past usage patterns accurately. This can make it difficult for SaaS companies to plan and budget for future expenses and investments.

Despite the above, if implemented well, one can use usage-based data to get early signals of churn, figure out which accounts are more important, better price the customers and take actions faster.