For years, Software-as-a-Service (SaaS) platforms have been providing their products with income predictability in mind, offering customers fixed monthly charges or annual fees for a reliable stream of recurring revenues. But today's economic climate has meant many customers are questioning whether their subscriptions are providing good value for money.
On top of budgetary concerns, consumers are also feeling the effects of 'subscription fatigue' after signing up for a multitude of subscription services during lockdown, from streaming media and meal delivery to beauty boxes and flowers. As a result, subscription-based businesses, many of which boomed at the height of the pandemic, have since experienced the 'Great Unsubscribe'.
This change in customer behaviour is forcing businesses to reconsider their pricing structures in favour of more customer-centric alternatives like usage-based pricing (UBP).
UBP adoption is on the rise
UBP is a pricing model where customers are charged based on their actual usage of a product or service rather than a fixed price whether they use it or not.
Instead of asking consumers to commit to subscription plans for products and services they aren't sure they will keep using, UBP is a solution that reduces barriers to entry and convinces consumers to sign up – and, importantly, stay subscribed.
UBP is gaining popularity among businesses, with a recent survey revealing that 74% of SaaS companies will likely offer more products on usage-based pricing in 2023, and more than a third of those companies want to turn usage-based pricing into their core revenue stream, per Chargebee research. A study by OpenView shows that over 55% of companies surveyed have at least tested usage-based pricing and have seen higher median Net Dollar Retention in the past year.
Given UBP's positive impact on revenue and retention, it becomes clear why more and more businesses are embracing UBP as a strategy.
How to make UBP work
Before offering UBP, SaaS companies need to decide how to define and measure usage in a way that makes sense to customers. A billing system might charge based on numbers or the amount invoiced, while a developer platform might charge based on the number of times customers use its application programming interface (API). However, using metrics that are too technical can confuse customers.
To utilise UBP effectively, SaaS companies need to make sure their billing platform can track usage accurately. This involves implementing metering capabilities that can assign a monetary value to the measured usage and integrate with billing functions.
B2B SaaS companies like Snowflake, Stripe and Zapier use metered billing, with Snowflake tracking usage based on compute resources and Stripe using per-unit billing, where they bill their users per successful card charge.
Keep revenues recurring
Although fluctuations in customer usage can lead to unpredictable revenues in UBP models, there are several ways to maximise revenue predictability. For instance, it's vital for businesses to cultivate a critical number of heavy users in their customer base for revenue stability. These are the 'MVP' customers who use the product or service frequently and heavily and help provide revenue stability because their usage is less likely to fluctuate.
Another strategy is to use a hybrid pricing model that combines tiered pricing with usage-based add-ons. This approach allows businesses to provide a basic level of service at a fixed price while also offering additional features or usage capacity that customers can pay for based on their needs. This helps ensure that businesses have a steady revenue stream from the base service while also generating additional revenue from customers who need more usage or features.
Enhance customer experience
UBP ultimately puts the customer front and centre because they are in the driver's seat when it comes to how much they use and spend on a product or service. Customers have the flexibility to adjust their usage based on their needs, often seeing greater value in what they're using, and resulting in increased customer satisfaction and retention.
By monitoring demand and usage levels, businesses can see in real-time whether they are impressing customers and make adjustments as needed to improve customer satisfaction. Rather than waiting until customers are ready to cancel, businesses using the UBP model will be in touch with customer needs and concerns in the now.
By tracking customer usage, online web conferencing platform Livestorm found that its pricing was too low, leading consumers to question whether the company's software was too good to be true or had hidden costs. This feedback from usage data led Livestorm to increase prices and see a 95% jump in margins, with a notable growth in sales volume.
UBP as a growth-driver in 2023 and beyond
In today's tough economic landscape, where consumers are scrutinising their spending, usage-based pricing has emerged as a customer-centric alternative for businesses to enhance customer experience, satisfaction and retention.
Chargebee's research shows that a significant 85% of surveyed companies are actively refining their usage-based pricing models, demonstrating the potential for even more revenue to be unlocked through UBP. As a result, it's imperative for businesses to make the most of the UBP best practices and tools available to navigate the subscription market's rough waters – and stay ahead of the competition.
