Usage-Based Pricing Models align pricing with consumer usage, promoting business growth and customer satisfaction.
Table of contents
- What Is a Usage-Based Pricing Model and How Does Pricing Work?
- Usage-Based Pricing Model vs. Subscription Pricing Model
- Types of Usage-Based Pricing Models and SaaS Companies Examples
- Per-Unit Pricing Model & Twilio SMS pricing
- Tiered Pricing Model & Zoom Plans and Pricing
- Volume Pricing Model & Stripe Volume Pricing
- Overage Pricing Model & Mailchimp Pricing Plans
- Multi-Attribute Pricing Model & HubSpot Pricing Strategy
- Tiered with Overage Pricing Model & AWS Pricing and Billing
- Hybrid Pricing Model
In the fast-paced world of software, pricing is one of the factors that can make or break a business.
Finding the right pricing strategy can often mean the difference between scaling up and going under.
And with an increasing number of businesses looking for the perfect approach to attract and retain customers, usage-based billing has emerged as a solution.
However, there is no “one-size-fits-all” usage-based pricing model – each one comes with its own set of advantages and challenges that businesses need to consider.
In this article, we’ll explain the ins and outs of all the different usage-based pricing models, help you understand how each one works, and explain why this pricing strategy is booming in the SaaS industry.
Let’s dive in.
What Is a Usage-Based Pricing Model and How Does Pricing Work?
Usage-based pricing models are flexible pricing strategies that companies use to align the cost of a product or service with each customer’s actual consumption.
Instead of charging a fixed subscription price, the fees are dynamically calculated based on customers’ real-time usage of the service, providing more transparency and flexibility.
Depending on the exact model you implement, usage-based pricing might work a bit differently, but the point stays the same – charge customers for the resources they actually use.
While some usage-based pricing models may charge a flat fee for a certain level of usage, with additional fees added for usage above that level, other models may charge a variable rate for each unit of usage, with the price per unit decreasing as the volume of usage increases.
Usage-Based Pricing Model vs. Subscription Pricing Model
A subscription pricing model is when customers pay a recurring flat fee (e.g., monthly or annually) for access to a product or service, regardless of how much they use it.
Microsoft with its Microsoft 365 suite of productivity tools is a good example, where customers pay a fixed monthly fee for access to applications such as Word, Excel, and PowerPoint.
The key difference between the two models revolves around the billing method – usage-based pricing charges customers according to their actual consumption, while subscription pricing applies a fixed fee for access.
While subscription pricing does have its advantages (e.g. predictable revenue), usage-based pricing brings a lot more to the table in terms of flexibility, cost-efficiency, finance management, automation, etc.
Types of Usage-Based Pricing Models and SaaS Companies Examples
Depending on the customer’s preferences and the nature of their services, companies can choose between several different usage-based pricing models.
Let’s explore each model in detail to better understand how they work.
Per-Unit Pricing Model & Twilio SMS pricing
With the per-unit pricing model, companies charge customers a fixed fee for each unit of a product or service they consume.
To implement this model, businesses first need to specify what will be the unit of measurement.
For example, Twilio is a cloud communications platform that leverages per-unit pricing (one of the three usage-based pricing structures it offers). It charges users for each message they send using their SMS product.
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In this case, the SMS messages are the predefined units.
Once they define the measurement unit, businesses strategize the “sweet spot” price that can cover costs, generate profits, and maintain market competitiveness.
Tiered Pricing Model & Zoom Plans and Pricing
In a tiered pricing model, businesses organize usage levels into distinct tiers, each with a different price, features, and functionality.
The “tiered” aspect refers to the different levels or tiers of usage that the pricing is based on. As the customer moves between tiers, the billing adjusts.
When implementing this model, businesses set usage tiers based on service-related factors and price them accordingly. It’s often used by businesses that provide more complex services with variable costs.
An example of this usage-based pricing model is Zoom.
Zoom includes several tiers based on attendee capacity and the required meeting time.
The company’s Basic plan is free and includes hosting for up to 100 participants with a 40-minute meeting time limit.
The Pro plan is the second tier, it costs $13.99 per host a month and includes hosting for up to 100 participants with a 30-hour time limit on meetings, as well as additional features such as cloud storage.
Volume Pricing Model & Stripe Volume Pricing
The volume pricing model is an activity-based pricing strategy that offers customers lower costs per unit as their usage volume increases.
This way, businesses motivate customers to use more of their products with attractive discounts and pricing.
For example, Stripe charges businesses based on their transaction volume, and they offer special volume-based plans for clients that process larger numbers of transactions.
This model provides cost savings for customers who consume more and makes it easier for them to calculate how much they’ll spend.
That’s why it’s great for B2B customers or when your clients are companies with bigger teams that all need your services.
Overage Pricing Model & Mailchimp Pricing Plans
The overage pricing model is when businesses combine a fixed base fee with extra charges, in cases when a customer’s usage surpasses a predefined threshold.
Customers use the service up to a limit for a set price, paying more for additional consumption.
For instance, Mailchimp is an email marketing company that charges based on the number of contacts a user has in their account and on the number of emails they send on a monthly basis.
If a user exceeds the number of emails sent, they pay overage fees for each additional one.
Multi-Attribute Pricing Model & HubSpot Pricing Strategy
The multi-attribute pricing model is when companies take multiple factors into account to determine the cost of their product/service.
This approach is often used when there are multiple features of a product or service, and they’re all valued differently by customers.
These different attributes are assigned different values, and these values are used to determine the overall price.
For example, a customer relationship management (CRM) platform might base its pricing on the number of users, level of automation, and integration options.
HubSpot is one of the famous companies that leverage this value-based pricing model.
Tiered with Overage Pricing Model & AWS Pricing and Billing
The tiered with overage pricing model charges customers based on the amount of a product or service they consume, but also offers different tiers and additional charges for usage beyond certain thresholds.
In other words, businesses create tiers with base fees and limits, and set overage rates for extra usage.
One example is Amazon Web Services (AWS), which is a cloud computing platform that provides a wide range of services including computing, storage, and databases.
AWS uses tiered plans based on usage, but also implements an overage pricing model. If a user exceeds their usage limit for a particular service, they will be charged an overage fee based on the additional usage. The exact amount depends on the service and the region where it is being used.
Hybrid Pricing Model
The hybrid pricing model is when businesses merge two or more pricing strategies.
Businesses use it to offer a customized pricing solution to their customers based on their unique needs and usage patterns, and when standard models just don’t cut it.
One common hybrid model we’re seeing in the latest SaaS industry trends is a combination of tiered pricing, based on features or user roles, with per-unit pricing for specific resources like data storage or bandwidth.
Interestingly, a whopping 46% of SaaS companies implement a hybrid model, making it one of the most prevalent models in the industry.
Usage-based pricing models are here to stay.
Whether it’s tiered pricing, overage pricing, or some hybrid type, these models provide a way for businesses to align their pricing with customer value and increase revenue.
And by experimenting with different pricing strategies, companies can find the optimal balance between profitability and customer retention.
If you’re a business owner, it’s worth considering how you can incorporate usage-based pricing into your business model to better serve your customers.
Understanding the benefits and limitations of usage-based pricing models will be essential for any business looking to stay ahead of the curve.
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