Should you use the Usage Based pricing model for your SaaS application?

The usage based pricing model is playing an increasingly important role in the SaaS business: but which are the pros and cons of this strategy?

Keep reading if you are wondering why is it so popular and if you are trying to understand whether it is right or not for your business.

Usage model vs subscription model

Nowadays, many companies sell their products through a subscription model: probably, you have at least one subscription to Netflix, Adobe Creative Cloud or Office 365. They all offer a recurring fixed fee to use the service.

Many software vendors believe that since the subscription model was chosen by many popular services, they have to do the same or they will not be appealing to customers. However, the truth is that the subscription model is not right for every business and not every SaaS service fits into it.

Are you worried that only small businesses can benefit from this model? Consider the some of most popular cloud storage services and billing platforms chose this pricing. Have you ever heard of Amazon Web Services, Stripe or PayPal? They all use a pay per use pricing model and manage thousands and thousands of transactions every day.

With the Usage Based pricing model, also known as consumption based or pay as you go pricing model, software vendors bill customers only for what they actually use.

This pricing model is popular for services that have a transactional nature, where the value of the product can be easily tracked and measured.

Pros and cons of the usage based model

Pros

Reduce barriers to use

Customers pay only for the actual use of a service, rather than paying a flat rate for features that they may not fully use or that they are not interested in.

Access to scalable, high-quality resources without large capital investment allows smaller entities to start using an application. This means that the adoption of the service is much easier.

Cost is aligned with consumption

Small companies, start-ups and even companies that use a product infrequently, or unpredictably, benefit from the alignment of price and use. This is not negative for you as a vendor: one month they might use your service once or twice, but the next month they might use your service many times and your revenues might be much higher than with a flat subscription.

Easier management of per-user costs

With the subscription model, you always have users that take up incredible amounts of your resources without compensating for it. In this way, heavy users will pay for the resources they consume.

Cons

Unpredictable revenues

Since customers use the service only when they need it,  it is much harder for vendors to predict revenues. And even if you have enough data to predict it, you might see unexpected fluctuations.

Unpredictable costs

As usage can vary from month to month, you might have different costs. For example, one month you might need a certain amount of resources and the next month you might not need it. If you choose the consumption pricing model, you need to be able to manage these fluctuations.

Customers might not want flexibility

Smaller companies might appreciate the fact that the costs for your services can increase or decrease every month according to the usage. On the other hand, larger companies might need more predictable costs. You need to understand your ideal targets and their needs.

How you can implement a usage based pricing model in Cloudesire

The Cloudesire marketplace platform allows software vendors to easily implement different pricing models, including the usage based pricing model.

This is how you can implement the usage based pricing model on the Cloudesire marketplace:

Step 1: set up pay-per-use metrics

Step 2: set up unit-prices for each metric

Step 3: Save & publish on the marketplace

For more information about the "Metrics" feature for syndicated apps take a look at this video.
For more information about the "Metrics" feature for deployed apps, take a look at this video.
To learn how to add prices to your custom metrics, take a look at this video.

 

 

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