It is not surprising that usage-based pricing is seeing the hottest adoption rate amongst businesses. This trend is backed up by data, which shows that businesses adopting usage-based pricing tend to have better Net Dollar Retention (NDR) rates (122% versus 109%) and significantly lower Customer Acquisition Cost (CAC) (5 versus 8) than those that don’t, as reported by Kyle Poyar from OpenView.
It’s also a lever that businesses can pull to differentiate themselves from their competition and demonstrate that they are bringing added value to customers. At the same time, businesses can reap the benefits of driving incremental revenue beyond just steady subscription-based income.
However, when you peel the onion, there are many layers and nuances between each type of usage-based pricing model, and therefore it’s important for businesses to consider the best option for their business strategy.
Let’s explore the pros and cons of 13 usage-based pricing models:
For this model, customers pay a minimum charge each period for a base plan that gives them access to particular features, usage quotas, and support services. The benefit of this model is that businesses have a way to entice customers to adopt their product with a low cost of entry, but then can drive incremental revenue through pitching additional one-time services or bundled purchases over time. Consequently, managing customers through this journey and pushing upgrades takes a well-thought-out go-to-market strategy and execution, as it’s important not to bombard customers with new offers, but target them at crucial purchase consideration moments.
This model refers to when customers only pay for the units, they actually end up consuming at the end of each period. Many customers find this option favorable as they feel that they are truly paying for what they have actually used in reality. On the flip side, this can mean that businesses experience more volatile revenue cycles as there will be periods where customers have less usage than others. Moreover, it requires businesses to be accurately recording and ensure that usage is accurately billed to the end customer.
With the time-based model, customers are charged based on the particular time of day or date that they use their service. The benefit of this model is that businesses have the autonomy to fluctuate rates based on demand, charging higher rates during peak periods. Consequently, this model is perfect for businesses that operate in markets that experience seasonality. It does, however, require businesses to really forward-plan and carefully monitor demand to be able to push rate increases at the optimal time.
Similar to the flat-rate model, with the allowance model, customers pay a fixed rate each period. The key difference is that this model puts a certain limit on the number of goods, services, or usage events included. Many businesses then have the benefit of charging overages when a customer uses beyond their allotment for each period, driving an opportunity for increased revenue. This does come with the added responsibility for businesses to accurately monitor usage and accurately bill for overages as well.
With tiered pricing, customers pay a discounted amount for the larger quantity they consume. For example, if a customer buys 100 units, they get charged $100 per unit. However, if they buy 200 units, they get charged $80 per unit. This can be a clever way for businesses to lure customers into purchasing additional units. At the same time, businesses need to ensure that the discounted income and added volume requirements don’t adversely affect their profit margin. It requires pricing and scenario analysis to determine the appropriate thresholds.
This pricing model is adopted when businesses want to offer a plan for multiple users, but not all users have the same usage. This way, a customer can get charged for a certain number of usage units, but they have the autonomy to split the usage differently between each department within their company. In this scenario, businesses just need to ensure that the usage between each department is clearly defined on the bill, to make settlement as streamlined as possible on the customer’s end.
7. Stored Value
Stored-value models enable customers to preload their digital wallet or account with a specific value. The business then draws from that amount as the customer uses the product. Once the stored amount hits zero, the customer loses access to goods or services until they reload their account. This particular pricing model requires businesses to have an advanced billing solution that can manage digital wallets and accurately recognize revenue. It also requires the extra effort of setting up triggers and reminders to ensure customers are not defaulting on topping up their wallets.
The benefit of all the pricing models discussed above is that they can be combined to truly offer customization that provides value to customers and maximizes revenue.
In this model, customers are provided with a predetermined allocation or entitlement of resources or services based on certain criteria, such as a grant or a subscription level. Customers can utilize these resources throughout the billing period without additional charges. This model is commonly used in industries like education, research, or government sectors, where grants or allocations are given to users for specific purposes.
The volume-based pricing model charges customers based on the total volume or quantity of resources used during a specific period. This can be applicable to various scenarios, such as data storage, data transfer, or API calls. As the volume of usage increases, the price per unit typically decreases, encouraging customers to consume more, resulting in potential cost savings for high-volume users.
Threshold-based pricing sets a baseline for usage, and customers are charged based on their usage either above or below that threshold. For example, if a customer’s usage exceeds the threshold, they will be charged a higher rate for the additional usage. Conversely, if they stay below the threshold, they may receive a discount. This model can incentivize customers to stay within certain usage boundaries or encourage them to upgrade when they consistently exceed the threshold.
Feature-based pricing enables businesses to offer different sets of features or functionalities at different price points. Customers can select the package that suits their needs, and the pricing corresponds to the features included. This model provides flexibility for customers and allows businesses to monetize their unique offerings effectively.
13. Number of Users/Seats
This model is widely used in the software-as-a-service (SaaS) industry, where customers are charged based on the number of users or seats accessing the service. Businesses can offer various pricing tiers based on the number of users a customer wants to include in their subscription. This model scales well with the customer’s needs and encourages businesses to grow their user base.
Each of these usage-based pricing models has its advantages and disadvantages, and businesses must carefully consider their product, target audience, and revenue goals before implementing a specific model. It is essential to select the model that aligns with the company’s overall business strategy and customer preferences.
Ultimately, a reliable billing solution like OneBill can be of great help in successfully implementing and managing these diverse pricing models. Such a platform simplifies the complexities of billing, invoicing, and revenue recognition, enabling businesses to focus on delivering value to their customers while maximizing revenue through usage-based pricing. Explore how OneBill can get you started with usage-based pricing today.