You know that pricing is not just a number. It’s a powerful lever that can make or break your business. Pricing affects how your customers perceive and value your product or service, how much they are willing to pay for it, and how loyal they are to your brand.
But finding the optimal pricing model for your SaaS product or service is not easy. You have to balance your customers’ needs and expectations, your costs and margins, and your competitive landscape and market dynamics.
One pricing model that’s becoming more popular among SaaS businesses is usage-based pricing (UBP), a pricing model that charges customers based on their actual usage of your product rather than on a fixed set of features or tiers.
UBP is not a new phenomenon. It’s been used by many industries for decades, such as utilities, telecoms, and transportation. But it’s becoming more appealing and relevant for SaaS businesses as well, especially those that offer innovative and scalable solutions that can grow with their customers.
In this article, I’ll reveal why UBP is a game-changer for SaaS businesses and their customers, how to design and execute it successfully for your SaaS business, and some examples of UBP SaaS businesses that are crushing it in their markets.
Why UBP Works for SaaS
UBP has several benefits for SaaS businesses and their customers:
- It aligns your revenue with your value proposition. The more value you deliver to your customers, the more you get paid. This creates a win-win situation where both parties are incentivized to grow together.
- It reduces churn and increases retention. Customers who pay based on their usage are less likely to cancel or switch to a competitor because they only pay for what they use. They also have more flexibility and control over their spending and can adjust their usage according to their needs and budget.
- It drives customer expansion and upsell opportunities. Customers who pay based on their usage are more likely to increase their usage over time as they see the benefits of your product or service. This means you can grow your revenue from existing customers without having to add new features or tiers.
- It lowers customer acquisition costs and increases word-of-mouth referrals. Customers who pay based on their usage are more likely to recommend your product or service to others because they feel like they’re getting a fair deal and a great value. This reduces your marketing expenses and boosts your organic growth.
How to Implement UBP for Your SaaS Business
UBP is not a one-size-fits-all solution. It depends on several factors, such as:
- Your target market and customer segments
- Your product or service offering and value proposition
- Your competitive landscape and differentiation
- Your cost structure and profitability goals
Here are some steps you can take to implement UBP for your SaaS business:
1. Define your usage metric(s).
This is the key variable determining how much your customers pay to use your product or service. It should align with the core value you provide and reflect how your customers perceive and measure it.
- Stripe charges a percentage of each transaction processed by its payment platform
- EmailOctopus charges based on the number of email subscribers managed by its email marketing tool
- Slack charges based on the number of active users per month using its collaboration software
2. Set your pricing rate(s).
This is the amount you charge per usage metric(s) unit. It should be based on the following:
- The perceived value of each unit of usage metric(s) by your customers
- The willingness-to-pay (WTP) range of different customer segments
- The cost-to-serve (CTS) each unit of usage metric(s) by you
- Stripe charges 2.9% + 30¢ per successful card charge in the US
- EmailOctopus charges $20 per month for up to 10k subscribers + $5 per additional 5k subscribers
- Slack charges $8 per active user per month for its standard plan
3. Communicate your pricing clearly and transparently.
This is crucial for building trust and loyalty with your customers. You should:
- Explain how UBP works and why it benefits them
- Provide tools and resources to help them estimate their usage and spending
- Offer flexible billing options (e.g., monthly vs annual, prepaid vs postpaid)
- Send timely notifications and alerts when they reach certain thresholds or limits.
Stripe provides an online calculator where potential customers can estimate their fees based on different scenarios.
EmailOctopus shows how many subscribers each plan covers on its pricing page.
Slack sends an email every month showing how many active users were billed in that period.
Examples of Successful UBP SaaS Businesses
Here are some examples of SaaS businesses that have successfully implemented UBP:
Mailgun: An email delivery service that combines fixed-price tiers and usage-based pricing. Customers pay a monthly fee based on the number of emails they send, plus a variable fee based on the number of recipients they reach1.
WordStream: A marketing platform that combines subscription and add-ons. Customers pay a monthly fee based on the number of managed ad accounts, plus additional fees for extra features such as landing pages, call tracking, and lead management1.
MessageBird: A communications platform that offers usage-based billing and fixed-price bolt-ons. Customers pay per message or call delivered through various channels such as SMS, voice, WhatsApp, etc., plus optional fees for advanced features such as number verification, chatbots, and video conferencing1.
VMWare: A cloud services provider that offers pay-as-you-go (PAYG), pay-as-you-grow (PAYG), and flat-rate subscription models. Customers pay based on their consumption of resources such as CPU, memory, storage, network, etc., with discounts for longer-term commitments or reserved capacity1.
Zocdoc: A healthcare marketplace that charges doctors based on the number of bookings they receive through its platform. Doctors pay a flat fee per new patient appointment booked via Zocdoc1.
These examples show how UBP can help SaaS businesses capture more value from their customers while providing them with more flexibility and transparency.
UBP is a powerful pricing model that can help SaaS businesses grow faster and more sustainably by aligning their revenue with their value proposition.
To implement UBP successfully, you must:
- Define your usage metric(s) that reflect how your customers perceive and measure your value
- Set your pricing rate(s) that balance your customers’ willingness-to-pay and your cost-to-serve
- Communicate your pricing clearly and transparently to build trust and loyalty