What is usage-based pricing?
A usage-based pricing (UBP) approach lets customers pay for goods or services based on how much they use them. This pricing model is replacing the traditional subscription- and seat-based ones, especially for software-as-a-service (SaaS) products.
Digital pricing models based on usage let customers start at a cheap price. This gets more people to use the service; over time, the business makes money from the customers’ use of the product. Companies that use membership models are more likely to use pricing models based on how much users pay. This type of price can be good for both the business and the customer.
Synonyms
- pay-as-you-go
- tiered pricing
- consumption-based pricing
- consumption-based billing
- metered services
Most Common Pricing models based on usage
Pay as you go
With pay-as-you-go (or “pay-as-you-grow”) pricing, companies only pay for the tools they use. This price can help businesses whose resource needs change or are hard to predict. You usually get an essential service for less when you use pay-as-you-grow pricing. After that, if a business needs more resources, it can pay for them. This pricing plan is often used in business areas like storage, SaaS, and the cloud.
Pricing by unit
Prices are set so customers pay a set amount for each unit of a good or service they use. This is called “per-unit pricing,” also called “price-per-unit.”
Levels of Use
With usage rates, you charge various amounts for different use amounts. Usage-tier pricing is becoming more popular because it lets businesses charge different types of people different amounts of money. Customers can also buy an amount of service and change how much they use it as needed.
The Move Toward Pricing Based on Usage
A rising trend is toward pricing based on how much you use something. TechCrunch asked about 600 SaaS companies how they set prices for their goods in 2021. Their State of Usage-Based Pricing (UBP) Report says that 45% of SaaS companies had a UBP plan in 2021. This is up from 34% in 2020 and 30% in 2019.
More and more businesses are using this way of Usage-Based Pricing (UBP), whether they provide utilities like water and energy or services like internet service and cloud storage. Companies can offer flexible billing choices without long-term contracts using usage-based pricing. This allows customers to change quickly based on market conditions and makes it easier to scale up or down as needed.
One of the best things about usage-based pricing is that it can be changed quickly. In most cases, the base level of a product or service is enough for new businesses or small to medium-sized businesses. As the business grows, though, it may need to be able to get more goods or services. These are the times when pricing based on usage is valid. A company doesn’t have to change a product or service because it doesn’t meet a customer’s needs anymore. Instead, they can add usage levels or charge for each extra unit used.
How much does it cost?
Customers may be able to afford your product more if you price it based on how often it is used. You can give people who use your product less often a lower price if you charge them based on how often they use it. This might be a great way to get new customers or keep the ones you already have happy.
Not Committed At All
Customers don’t have to commit as much when prices are based on usage. This way of paying is expected for services that aren’t used very often or by businesses that don’t know how often they’ll use them. Customers can save money this way and not pay too much for services they rarely use.
Use-based pricing can help you make more money.
A pricing strategy based on usage has many benefits that can help with revenue, such as shorter buying cycles, higher customer satisfaction, lower customer churn, and a better appeal to investors.
Less time between purchases
Customers are more likely to buy a product or service when they know they will only pay for what they use. This can shorten the time between purchases. On the other hand, Usage-Based Pricing (UBP) may make buyers not want to use a product or service if they don’t know how much it costs, so it’s essential to be clear about prices during the sales process.
Customer satisfaction went up.
There are a few reasons why prices based on usage can help customers and make them happier.
- Customers don’t have to worry about spending on services they don’t need because they only pay for what they use.
- It makes people more likely to save—if users know how much they’re using and how much it costs, they’ll be more aware of how much they’re using and probably cut back where they can. This could save money in the long run.
- Customers always know how much they’re paying, and no extra fees or charges come out of the blue. People can trust a business more if they do this.
- It is simple to understand—using-based pricing can make customers happier by giving them a more open, transparent, and simple way to pay. Less customer turnover happens when customers are happy.
Trying to Get Investors
Investors may be interested in usage-based prices for several reasons. First, it can help improve the lifetime value of a customer. Customers who use a product more often are likelier to stick around longer, which means more sales over time.
Second, usage-based prices can help keep customers longer and make them happier, as we already said. Third, usage-based pricing can help bring in new customers because it may be cheaper than other pricing plans. With more customers, you may be able to make more money.
Why usage-based pricing is a good idea
We’ve already discussed some of the perks of pricing based on usage. Let’s talk more about these:
It brings in more customers
Businesses can attract new customers who might not want to commit to a standard subscription by charging them based on how much they use their services. Businesses can show potential customers that they’re flexible and ready to meet their needs by giving them a usage-based option. Also, businesses can get more customers by appealing to a wider range of people with usage-based pricing.
Cost Scale for Users
One of the best things about UBP is that it lets people try out your product or service for free. Customers can buy things when they have cash or when spending money grows. The best thing about this plan is that your customers can put more money back into your product the more they make with it.
More customers are staying with you.
This pricing plan depends on being able to change prices as needed. Customers will stay with you longer if you give them more options. No one wants to feel trapped in a long-term service or deal. As a bonus, giving customers the freedom to spend according to their wants and habits makes them more loyal.
Which goods and services work best with pricing based on usage?
If you want to offer Usage-Based Pricing (UBP), the most essential thing to consider is whether your goods and services can be scaled up. These are some examples of the kinds of goods and services that Usage-Based Pricing (UBP) does well.
These are some examples of goods and services that work well with prices based on usage:
- Software as a service (SaaS) companies usually charge based on how much you use their services. This price can help businesses that use a lot of data or need to change how much they use quickly. Zapier, Adobe Creative Cloud, and Slack are all SaaS providers that offer usage-based prices.
- Companies that offer infrastructure (IaaS) also charge based on how much they use their services. Amazon Web Services, Google Cloud Platform, and IBM Cloud are examples.
- Phone companies often use usage-based pricing. These are AT&T, Verizon, and Sprint as examples.
- This is how utility companies set their prices. Electric, water, and gas businesses are some examples.
- Other goods and services, like cloud storage, web hosting, and online backup services, work well with prices based on how much you use them.
How CPQ and usage-based pricing can help your business
UBP can be hard to control and put into action. On the other hand, there is software that can help. Making a price quote (CPQ) is one of them. A CPQ system can help you automate the process of giving sales quotes. When your sales team uses CPQ software, they can quickly and accurately make quotes. CPQ solutions can also help you keep track of your pricing rules and ensure you follow business policy.
Businesses can better control their prices with DealHub CPQ software. We have features that work with usage-based pricing models, such as connecting to your goods and services price book, syncing data back and forth with your CRM, and offering an upsell and cross-sell recommendation engine.
