Transitioning From Flat-rate Pricing to Usage-Based Pricing
Is there a symbiotic relationship between SaaS businesses and usage-based pricing? If so, how does it impact product architecture and leverage market opportunities for SaaS organizations? Let’s explore this topic in more detail.
Devising an effective pricing strategy to sell your software may not be as complex as rocket science, but it definitely requires a lot of groundwork. It is a continuous process that relies on operational and market validation, competitive analysis, constant negotiation, and customer acceptance.
The same applies to SaaS companies moving away from traditional flat-rate pricing to usage-based pricing. It is true that tech companies offering Software as a Service (SaaS) revolutionized their operations with the recurring flat-fee subscription model. This pricing model charges a single, fixed rate for using the software and does not fluctuate irrespective of the usage.
However, this very nature of flat-rate pricing is why thousands of SaaS businesses are transitioning to other pricing models. Flat-rate pricing is fixed and does not include any usage beyond the agreed amount, which, in other words, is a big loss for the company. There are more reasons:
- Although it is simple and straightforward, the practical application of flat-rate pricing lacks fairness for the users.
- It lacks the pricing flexibility to charge users according to their varying activity levels.
This restrictive nature of flat-rate pricing may not be amicable for SaaS businesses because they require an optimized infrastructure to support their expanding user base. The best solution in this sticky situation is to opt for usage-based pricing, suggests Togai, the leading billing platform for usage-based pricing.
Why Is Usage-Based Pricing the Perfect Match For SaaS Businesses?
Usage-based pricing is an innovative business model for Software as a Service (SaaS) that allows customers to pay exclusively for the resources they utilize precisely when needed. The charges are based purely on consumption of the product or service. Costs are calculated on a “per-use” basis, and customers are changed at the end of every month. Users can be charged based on the total number of API calls made or the number of subscribers they have reached.
So, how did SaaS businesses opt for usage-based pricing as opposed to flat-rate pricing?
Cloud computing is one prime reason for transitioning from on-premise legacy software to tiered pricing subscriptions. As software shifted to the cloud, it transformed the perception of pricing and revenue. Businesses soon devised ways to sell software based on actual usage rather than seats and subscription usage.
This shift from flat-rate pricing (which is, of course, the easiest to implement) allowed SaaS businesses to revamp pricing for services with higher running costs, such as:
- Video processing
- Large-volume data storage
- AI model training.
In such scenarios, charging customers based on the usage of such expensive services contributed significantly to revenue, which obviously wasn’t a possibility with flat-rate pricing.
Hence, usage-based pricing is a win-win situation for businesses and customers. The model fosters transparency, where customers know how much they are paying and what they are paying for. Likewise, SaaS businesses can optimize this strategy to offer their services at various prices, which customers can choose as they see fit.
Metering and billing platforms like Togai help businesses draft comprehensive infrastructures for various aspects of their SaaS product. These metering platforms also monitor each usage- right down to every single API call, transaction, or resource used, thus giving you invaluable data to base your pricing decisions.
7 Fantastic Reasons to Adopt Usage-Based Pricing For SaaS
As far as SaaS companies are concerned, usage-based pricing is a boon that has unlocked a crucial advantage: To charge customers based on value rather than product access. Amazon Web Services identified and harnessed this potential early on, and so did many other SaaS companies.
In short, usage-based pricing has made itself indispensable for the following reasons:
- It is the most profitable and scalable option for SaaS players.
- The starting low costs make the service accessible for low-budget customers.
- Allows businesses to maximize their long-term monetization potential by aligning prices with product value.
- Its openness to any number of customers unlocks countless opportunities for exploring innovative use cases.
- It fosters customer lifetime value and encourages sustainable growth and success.
- It enables businesses to transform churn-risk customers into long-term patrons.
- Allows customers to reduce their product usage and continue using the product rather than abandoning it altogether.
The real power, however, lies in combining usage-based pricing with other models, and Togai’s Usage-based pricing software serves as a perfect example of this. The software allows you to:
- Process your usage data and transform the functions to enable accurate metering.
- Optimize pricing as a tool and experiment with various pricing strategies.
- Experiment with multiple pricing strategies and fine-tune your product value.
So, it is apparent that usage-based pricing has immense potential to make the most of your SaaS product. But here’s a word of caution: transitioning from flat-fee pricing to a usage-based model can be pretty tricky. Here are some guidelines to help you with the process.
3 Important Criteria to Consider While Transitioning to Usage-Based Pricing
- Understand your customers’ patterns.
Harnessing data from disparate sources allows you to collate vital insights into identifying your customers’s buying patterns selling trends, and conducting surveys to gather direct customer feedback. Having a comprehensive understanding of how customers utilize your product or service is absolutely crucial.
- Pick a pricing model that suits you best.
You cannot pick any pricing usage-based pricing model without analyzing its pros and cons and how it fits your customer needs and aligns with your product. If you find yourself struggling with this step, a great source of inspiration is to analyze popular examples of usage-based pricing.
- Establish appropriate price points.
Setting high or low rates for your software will erode your revenue and impact your sales. Hence, your price points should reflect the actual value of your product, but guesswork won’t do. You should be ready to:
- Conduct market research
- Evaluate pricing trends
- Analyze customer requirements
- Test potential markets with various pricing levels
- Identify the delicate balance between revenue and customer satisfaction.
The conclusive proof here is that it takes more than mere billing systems to make usage-based pricing a success. What matters is data management- Get it right, and you are on the right track with usage-based pricing.
If you are a SaaS business relying on rigid, one-size-fits-all pricing policies, it’s time to rethink and revamp it all. You need to be scalable, adaptable, and flexible to make the most of your cloud-based SaaS products.
In the end, the suitability of usage-based pricing for your SaaS company depends on your proficiency in customizing it to fit your unique circumstances and meet your customers’ expectations.