As the software industry continues advancing further from simply providing software towards delivering a service, we’re seeing increased interest in usage-based pricing (UBP; sometimes called consumption-based pricing).
According to OpenView’s 2023 State of Usage-Based Pricing report, coming in January 2023, 46% of SaaS companies already have a UBP model, 15% are actively testing it, and 4% expect to test UBP in the next 6-12 months.
In this guide, we’ll cover everything you need to know about usage-based pricing:
With usage-based pricing, the price a customer pays for a service is based on their consumption (or usage). So, instead of paying for how much they expect to need (an estimate of capacity), they only have to pay for how much they actually use.
UBP has been around for a long time in other contexts, for example with telecommunications, utilities, and logistics. Its application with B2B software, however, is newer.
There are a variety of ways for UBP to be implemented. Some clearer examples range from charging based on resources consumed to the number of leads generated to the number of tasks or API calls. Other pricing models take more of a hybrid approach, layering UBP on top of their feature-based tiers or ‘seat’ fees.
One of the predictions in our 2023 B2B SaaS Pricing Predictions Report was that UBP will continue to grow, but many are choosing these hybrid pricing models. Read all the predictions from SaaS pricing experts here.
Now, let’s cover a few examples of usage-based pricing.
Usage-based pricing can come in many forms, depending on factors like the company itself, the product or service, customer personas, usage patterns, economic conditions, and more. Here's a quick list of illustrative UBP techniques:
You can read about all these usage-based pricing examples in-depth in our blog, 5 usage-based pricing examples to improve your pricing strategy.
Usage-based pricing works particularly well when it links costs to value received and allows fees to scale as customers grow. UBP isn’t right for every business, but for those, it works well for, the benefits are significant.
Usage-based pricing (consumption pricing), offers several benefits that contribute to its attractiveness:
UBP faces challenges including the need to carefully consider the right pricing metric, customer objections, and effective mitigation strategies to ensure its long-term success.
Despite these advantages, UBP also faces challenges that require careful consideration:
By recognizing these challenges and implementing appropriate strategies, businesses can harness the benefits of UBP while mitigating potential drawbacks, paving the way for sustainable and successful adoption of consumption-based pricing.
The impact of usage-based pricing on Net Revenue Retention (NRR; the most important metric for SaaS businesses) is notable. In fact, according to SaaS expert Todd Gardner, UBP is the best way to drive Net Revenue Retention, which in turn positively impacts valuation.
In Todd’s guest post on the m3ter blog, he dives into some models on how UBP can impact NRR over 10 years. His final assertion is this:
Usage-based pricing deserves serious exploration by all management teams running SaaS companies.
Todd Gardner, Managing Director of SaaS Advisors
Another guest post from Todd focused on customer churn – more specifically, how not all churn is the same. This is especially relevant in a time of cost-cutting and uncertainty in SaaS.
According to Todd, UBP reduces overall churn in the long term because it automatically scales down cost, making it less likely customers will fully cancel.
However, consumption models are more susceptible to shrinkage than other pricing models, so there are a variety of factors to consider during economic downturns.
Since UBP’s application to B2B software is newer, it’s important to consider the implications of the pricing model for operational and Go-To-Market (GTM) capabilities. Here are four major areas affected by UBP, all of which come back to the data issue:
Another guest post by Todd Gardner focuses on deciding whether usage-based pricing is right for your SaaS business. The short answer is that it depends – UBP is highly effective for many (as can be seen in the benefits and NRR impact discussed above), but it might not be the right pricing model for others. Understanding where UBP has been historically successful can help companies assess the pros and cons of deploying a usage-based pricing model.
Based on Todd’s research and conversations with SaaS experts, here are some company and product characteristics that lend themselves to usage-based pricing:
You can read Todd’s full analysis in his guest post, Is Usage-Based Pricing Right for My SaaS Business?
m3ter has also started creating resources specific to certain industries and their adoption of UBP. Check out this post to learn more: Why are Database Companies Moving Toward Usage-Based Pricing?
m3ter’s stance on the tech stack needed for UBP implementation is simple: your existing systems don’t need to change, they just need better access to data.
So what’s needed?
A new category of data infrastructure tooling built with cloud-native, cloud-scale, developer-first capabilities that elegantly captures and rates customer data while allowing it to be federated across systems and users to make the most of it.
Marek Rubasinski, VP of Business Development at m3ter
Billing might be the original driver for tracking customer usage, but in order to glean information about customer engagement and profitability, other systems require that spend and usage data as well. Learn more in Marek’s post on the m3ter blog, The Tech Stack for Usage-Based Pricing.
When choosing a solution to deploy and manage your UBP model, you’ll need to consider many factors, including integrations – how the platform will fit within your existing software stack. Some key factors to look for when searching for a UBP solution include:
Learn more about these evaluation areas on the m3ter blog: 5 Tips to Evaluate Usage-Based Pricing Vendors for Integrations.
According to a 2021 survey from Coatue Partners, the hardest part of deploying usage-based pricing is finding the right metric. This can be difficult for a variety of reasons: some companies have used UBP since the beginning, and others might be using UBP even if it’s not the right fit for their business. (Read “Is Usage-Based Pricing Right for My SaaS Business?” for more on this.)
No matter how you started using UBP, choosing the right metric is crucial. To help, pricing experts Todd Gardner (Managing Director at SaaS Advisors Ltd.) and James Wood (Insight Partners) put together a blog on choosing the right pricing metric, including a metric selection template you can download.
Go even deeper to prepare finance teams with this blog: Implementing Usage-Based Pricing: What Your Financial Teams Need to Know.
When implementing a usage-based pricing model, you may be wondering how your customers are going to take the change. Remember: the core value proposition for UBP is very compelling; you just need to know how to respond to customer objections if they do arise. Objections typically fall into two categories:
There are mitigations that can be used to respond to and manage both of these categories, for instance simplifying pricing, choosing a pricing metric with strong ties to value, prioritizing transparency, etc. Read our full breakdown on the m3ter blog: How to handle customer objections to usage-based pricing
Usage-based pricing is a hot topic across the SaaS industry and in many other verticals, so you might be wondering where to look for accurate, insightful resources. We’ve got you covered with our usage-based pricing reading list, which includes:
We’re always adding to our reading list, so let us know if there’s a new resource that should be included.
m3ter is a metering and pricing engine for SaaS companies that launched from stealth in February 2022. The origin story of the company runs from co-founders Griffin Parry and John Griffin’s first company, GameSparks, through their acquisition by AWS, to building m3ter with the goal of enabling other companies to intelligently deploy and manage usage-based pricing.
We have five key points of view regarding how best to deploy UBP:
Read the full manifesto on m3ter’s distinctive approach to usage-based pricing on our blog.
As you decide whether to implement a usage-based pricing strategy and seek to deploy and manage it effectively, consider trying m3ter. Learn more about our products or contact us.
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