Usage-Based Pricing May Be A New Differentiator As SaaS Competition Grows

SaaS companies often sell their services with a subscription model. The subscription-based model has essentially transformed the digital landscape, entering a technological era with more mobility, agility, and most of all, accessibility.

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The concept is simple, with customers paying a set amount, whether that’s every week, month, or year, and in return they receive a service. However, there are a slew of downsides to the subscription model. Some customers experience unwanted charges and are likely to downgrade or cancel services. SaaS companies can no longer afford to remain static or offer a few fixed-price options that only appeal to a limited number of potential customers.

This is where usage-based pricing comes into play. It’s less common than the subscription model, with only 38% of SaaS businesses opting for a consumption-based scheme. Meanwhile, it’s estimated that by 2023, 75% of all companies will be offering their product or service on some form of subscription-based plan.

Usage-based pricing allows for more flexibility and has become a key differentiating factor in competitive markets as they develop. Charging customers per-use not only makes the product more affordable and accessible, but also empowers users to only take advantage of the features they need.

For some cloud giants like Microsoft Azure, it’s best to charge per million API calls. If AWS were to charge per singular API call, the price point would be so low that it would simply be too difficult for potential customers to comprehend the value and the expected cost.

But other companies can benefit from usage models of payment. This type of billing is best for firms that can easily break down their service, such as ridesharing, utilities, marketing automation platforms, and cloud computing. Cloud service company Datadog, for example, has grown 88% year-over-year using a usage pricing model.

Digital Ocean, a U.S.-based cloud infrastructure provider that offers a variety of services in cloud storage and computing, has also benefited from this model. In 2012, Digital Ocean was one of the first companies to offer SSD-based virtual machines to their clients. But what set the company apart was how they priced and billed for their service. By adopting usage-based billing, the company established a core market of software developers and growing software companies. Instead of offering recurring monthly subscriptions, Digital Ocean provides their services billed per hour of active use.

Amazon Web Services was one of the first hosting storage providers to offer usage-based pricing, and today it stands as an example of some of the most complex tiered metered billing for cloud services.

Subscription-based pricing is here to stay, but as competition grows, likely so will the prevalence of SaaS companies differentiating themselves with a usage-based pricing model.