If you’ve been in B2B SaaS long, you know there are a lot of pricing strategies out there. Software as a Service lends itself to creative, flexible pricing models with no guiding rules or regulatory body regulating SaaS billing practices. With the benefit of ever-improving technology, SaaS is capable of harnessing ever-increasing precision in pricing options… a benefit for those willing to take advantage of it.
While there is something to be said for traditional pricing structures like flat rates or tiered pricing, these models fall short of the flexibility that some audiences require. In an unlimited world of quantification, why should a business pay for anything more (or less) than exactly what they want?
That’s why consumption-based billing was invented. Also called “usage,” “metered billing” or “pay-as-you-go,” this model allows you to charge customers at the end of the billing cycle for exactly the amount of usage they have consumed. In other words, consumption-based billing charges clients in arrears based on total actual consumption. No longer do customers have to pay for a tier of usage that they may or may not max out.
Consumption-based billing method enables a perfect value match between each customer and the service level they want. Once your prospective customer is in the door and experiencing a well-developed, useful product, it’s much easier to retain their business or upsell to a higher level of service (in this case, more usage).
How does “pay-as-you-go” work in real life? Here are six ways to leverage consumption-based billing to promote adoption of your product.
Six ways to boost product adoption with consumption-based pricing
1. Reduce the risk.
The consumption model increases conversion rates for B2B SaaS businesses because it offers your customers a low-risk way to try your product. Since there is no set monthly price—just a fixed price per unit (whatever the charged unit is)—customers are in charge of their spending rather than relegating the control to you.
Of course, while lowering entry costs may attract customers, per-unit pricing alone makes it just as easy for customers to quit your product as it was for them to start. Converting newly-acquired customers into long-term fans requires consistent quality. If you notice increased customer churn after adopting usage-based billing, you need to adjust your value proposition to better meet your audience’s needs.
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2. Take the guessing game out of variable billing.
While there are plenty of reasons for your customers to love consumption-based billing, this model is admittedly harder to budget for than traditional up-front payments. Making it too difficult for your customer’s accounting department to estimate their upcoming bill will weaken your ability to drive product adoption.
One of the ways you can mitigate this risk is by combining billing strategies into “hybrid models.” By incorporating consumption-based billing with other models that are easier to forecast, you can help the customer better predict the cost of using your product while simultaneously stabilizing your revenue. For example, you could combine other common pricing models (flat rate, subscription, or tiered pricing) with a per-unit rate for add-on features or overage (use over the monthly limit).
If you want to commit to the benefits of a pure consumption model, there are still plenty of ways to create a more steady flow of income/usage.
First, provide cost estimate and forecasting tools to your customers to help them plan ahead and visualize the results of various usage levels. (For example, Amazon Web Services provides a pricing calculator right on their pricing page.)
Second, make your unit of usage easy for the customer to identify and calculate. According to investment firm Sapphire Ventures, the company InfluxData implemented easily-estimated metrics “to eliminate unanswerable pricing questions for our customers…. So we decided to charge by query count, which is knowable by the customer, instead of query compute duration, which is not.’”
Don’t make your customer bend over backward to budget for your product. If you’re going to count units of usage, it should be something they can count too.
3. Adopt value-based pricing.
For metered billing to successfully drive product adoption, your customer has to be convinced that each additional unit of usage is worth the price. But how do you know what that price should be?
Thankfully, consumption-based billing lends itself perfectly to one of the best pricing methods available to B2B SaaS: value-based pricing. Rather than deriving price from production costs or competition, value-based pricing is buyer-focused. It strives to answer the question “How much would someone happily pay to use this product?” Answering this question takes market research, customer feedback, and experimentation, but the result is often a higher profit margin unlimited by competitors’ prices or overhead costs.
Through customized and detailed billing, you can show customers exactly where their money is going. Sapphire Ventures challenges SaaS companies to select a unit of consumption that relates directly to what your customers value about your product. When you base billing on value, your company will begin to sync up with your customers’ preferences and expectations, fueling the long-term success of your brand.
4. Make growth seamless.
Consumption-based billing provides ultimate control and flexibility to your B2B audience. Per-unit scalability makes it easy for them to adopt the product and grow their usage over time. Rather than customers being forced to increase a maxed-out subscription mid-month or overpaying for services they don’t end up using, per-unit upgrades are frictionless and happen naturally.
However, as wonderful as it is from a customer’s perspective, the idea of flexible billing can be scary for the B2B SaaS companies doing the billing. After all, putting the power in your customer’s hands means taking it out of yours. It’s not hard to predict that, without subscription commitments or up-front billing, usage-based pricing will lead to a fairly unpredictable revenue as consumption ebbs and flows.
Is giving the customer that much power worth it? Yes, and here’s why:
- Consumption-based billing allows you to capture heavy users’ revenue that would otherwise be lost (capped by the price of your highest pricing tier).
- The consumption model boosts your reputation as a fair and honest business by fully disclosing billing costs (no hidden fees or mysterious charges).
- This billing model builds brand loyalty because of the immense flexibility and value you provide (loyalty = consistent revenue and potential for growth).
Some B2B SaaS businesses try to insulate their revenue by retaining “control” of billing, but at the end of the day, the truth remains: power is in your customer’s hands anyway.
Your revenue shouldn’t rely on a restrictive pricing model, some form of digital Stockholm syndrome, or hoping your business customers are too busy to think about switching to a competitor. Instead, your product should be so transformational that your customers stay with you—not because they have to, but because they firmly believe your product is the best.
When you have a product that you—and your customer—believe in, consumption-based billing isn’t a risk. It is a path to greater value for the customer and greater scalability for your B2B SaaS.
5. Consider other usage-based billing options.
Consumption-based pricing is a straightforward billing model, but it has many permutations that allow you to further customize your billing to benefit you and your customers. When advanced financial or technological flexibility is needed, options like prepaid usage-based subscriptions and event-based billing make trying your product even more accessible to prospective customers.
Prepaid usage-based billing with drawdown allows a customer to sign up for a usage-based subscription while still only paying for what they use. After paying a certain amount upfront, their usage is subtracted—or “drawn down”—from their account balance as they use the service throughout the billing cycle. Chargify’s billing platform allows drawdown and top-up in real-time, so customers have no interruption to their service, they simply consume and Chargify will automatically notify them, notify their customer service representative and/or top up their account when they meet certain thresholds. You can also set accounts to automatically refill once they hit a certain threshold, making it easy for your clients to have uninterrupted service while also helping you retain some amount of predictability in your revenue.
Event-based billing is another form of consumption-based pricing. This billing model tracks data events occurring in your system and assigns value to each billable event in real time. Billing systems like Chargify allow you to record and stream data events into your billing platform as they occur, equipping your business to offer truly value-based pricing. Whether you want to bill based on login frequency, interactions with your support team, upgrades, or a custom metric, this advanced tool allows you to quantify, analyze, and bill based off of any collectable data point in your business.
Consider these alternative usage-based models to give your customers new options and provide you with fresh ways to leverage your services.
6. Use usage analytics to refine your billing practices.
As part of your billing strategy, put a system in place to record the changes in consumption that occur over time. These usage analytics can highlight potential opportunities to adjust your billing method or value proposition for better product adoption.
For high-usage customers, look for ways to refine product packages and billing options to increase the value they get from your company. For casual or light users, look for opportunities to deepen their engagement or adjust underutilized product or billing features to attract more use.
There are a host of free and subscription-based analytics tools available to track and view your consumption metrics, but only one merges seamlessly with your billing software to provide real-time analytics—check out our new self-service analytics suite, Business Intelligence by Chargify.
Consumption-based billing is a powerful tool for increasing product adoption and helping you understand exactly how your customers are using your services. However, this billing model isn’t “set it and forget it.” To keep up with market changes and shifts in your customer base, it requires frequent maintenance and optimization.
If you want to fully take advantage of consumption-based billing, you need a billing solution built to handle it. Chargify delivers real-time usage analytics and easy-to-setup custom pricing options, so you can spend less time managing your billing and more time making your product the best it can be.
If you want a billing partner that can grow and adapt with you, ease your monthly workload, and enhance your customer relationship management, Chargify is for you.
Sign up for a free demo, and unlock the flexibility of consumption-based billing today.