by Abigail Endsley
The way that SaaS companies price their products has changed. Flat fee and per seat models that bundle heaps of functionality into a single plan are on the decline, while usage-based pricing is seeing a meteoric rise. This pricing trend, which charges based on value rather than feature access, started with infrastructure services (think: AWS, Snowflake, GCP). However, it’s now proliferating to all areas of the SaaS industry.
The reason is simple. Customers no longer want to pay recurring fees for functionality they don’t need. They would much rather just solve today’s problems and only pay for more functionality as their needs grow.
In this model, revenue growth is not led by sales or marketing teams, but by the product itself. The product-led growth model is favored by the fastest-growing SaaS companies because it results in the lowest customer acquisition costs (CAC) and highest net dollar retention, allowing these companies to outperform their competitors. And usage-based pricing is a key aspect to developing this powerful, product-led strategy.
Ready to price like industry titans? We’ll teach you how to do it.
How to Implement a Usage-Based Pricing Strategy
Step 1: Identify Your Key Value Metric
A value metric is the core of a SaaS company’s usage-based pricing model. It’s the quantifiable functionality that provides value to your customers. This could be the number of emails sent for an email marketing platform, MB of data transferred for a data warehouse, or amount of revenue invoiced for a billing platform. This one crucial metric is the criteria for measuring usage, and is what customers are ultimately billed for.
Collecting product usage data is an important first step to identifying your value metric and implementing your usage-based pricing strategy. Most companies achieve this by adopting a data ingestion solution like Apache Kafka or AWS Kinesis. But it’s not enough to simply capture this data, you also need to analyze it and extract meaningful insights. This requires an analytics solution that provides you with the flexibility to slice and dice your data exactly how you need.
Step 2: Connect your data to your billing platform
In order to start billing on your value metric, you need a billing engine that can rate and invoice using your collected data. If you’re doing this in house, that means building the engine yourself. But let’s face it; ain’t nobody got time for that. More commonly, companies rely on a billing and subscription management platform to handle this for them.
For companies interested in usage-based pricing specifically, we recommend choosing a platform designed with granular data usage in mind. It should be able to process user actions as small and seemingly-insignificant as a button click or API call. Here’s why.
Even if your key value metric is relatively simple (e.g. number of emails sent per month), once you dip your toe into the world of usage pricing, you’ll quickly learn that your options are endless. Your strategy can be as simple or complex as necessary to best serve your customers. Take Mailchimp for example. Consider how differently these pricing models impact their business:
- Feature gated plans charged at a flat rate per block of contacts for the marketing platform
- Feature gated plans with flat rate for Websites and Commerce
- Prepaid credits with volume discounts for transactional emails with a monthly subscription
- Prepaid credits for the seasonal sender, no subscription required
When just starting out, it’s unlikely your company (or your customers) will be ready to implement a complex pricing model like some of the examples above. However, once you’ve proven the benefits of usage pricing—and learned more about your customers in the process—you’ll be ready to evolve your pricing based on the true value delivered. This will not only increase your revenue, but customer loyalty too.
On a practical note, connecting your customer usage data to your billing platform will look a little different depending on 1) how much data you’ve chosen to collect, and 2) what billing software you’re sending that data to. However, sophisticated tools should make this process easy for you.
For example, at Chargify, we simplify this process by offering a number of methods to stream data. These include via API, a Kafka connector, and even a seamless integration with Airbyte, an open-source data integration application which empowers your team to skip the heavy lift of getting your real-time data where it needs to go.
Step 3. Roll out usage-based pricing
Once you’ve determined where your customers derive value from your product and connected that data to your billing platform, you’re ready to roll out a usage-based pricing model.
You’ve already connected your customer usage data and identified your company’s value metric—now all you need to do is connect your value metric (or metrics) to your business objectives. This is called rating. Rating your customer’s usage data is a highly individualized process, as it depends entirely on your company’s goals.
When determining the right price for you value metric, consider:
- Average usage per customer
- Your company’s revenue goals
- Pricing expectations in the market (this can be done through surveys, competitor research, etc.)
- What your customers are currently paying. (Your shift to usage pricing won’t go over well if current customers suddenly pay more for their current level of service.)
You did it! The hard part is over. Once you’ve determined the price for your business’s value metric, your billing system should handle the rest.
For example, Chargify provides out-of-the-box tools which enable SaaS companies to design their desired usage-based billing model with a few clicks. Stream in the data you want to bill on, tell us what that usage is worth, and Chargify will automatically rate and invoice your customers accordingly. Plus, you get the analytics tools you need to test, iterate, and optimize your usage-based strategy as you go.
It’s no wonder usage-based pricing is gaining traction in the SaaS industry. Usage pricing comes with the flexibility to package your products exactly the way your users need. And from day 1, you’re set up to evolve your pricing strategy according to product developments, market changes, or customer demand. This is why so many SaaS businesses are flocking to the usage-based pricing structure. It’s the pricing structure your company will never outgrow.
Make the Change
Chargify equips your SaaS company with hassle-free tools you need to leverage the power of usage-based pricing. We can handle it all—from the simplest subscriptions to the most complex. Sign up to get a free 30-day guided trial and learn how Chargify can transform your business.