How To Unleash Your SaaS Product’s Potential Using Consumption-Based Pricing
According to Chargebee, more or less 38% of all SaaS companies use a consumption based pricing model.
While most SaaS businesses use a subscription-based model with different tiers, it’s not always the best pricing structure. Sometimes, it doesn’t really accurately reflect the value that your customers are getting from your SaaS product.
That’s why the consumption based model is gaining a lot of popularity among SaaS companies today.
But what is consumption based pricing for SaaS? How does it work?
In this article, we will talk all about the consumption based pricing model, its pros and cons, and how to maximize it for your SaaS business.
First, let’s define what it is.
What Is The Consumption Based Pricing Model?
Consumption-based pricing, also called usage based pricing, is a SaaS pricing model that ties the cost of your product to your customer’s level of “consumption” or “usage” of its features.
In other words, you charge your customers based on the level of their engagement with your SaaS solution, often in terms of a particular resource or value metric.
Common examples of value metrics include credits, the amount of storage used, or whatever resource is relevant to your product.
This model works well when your product usage is unpredictable and varies greatly between customers. In a way, it allows your users to customize their pricing plans by only paying for what they need.
Value Metrics: How Consumption Based Pricing Works In SaaS
At its very core, the usage based pricing model is centered around a particular functional value metric, which is the basis of your customer’s usage of your SaaS product.
A functional value metric is any action or resource from your SaaS platform that your customers use.
That could be one of the following value metrics:
The most commonly used and most flexible functional value metric is credits. You can use it to quantify almost any action or engagement done within your SaaS product.
For example, let’s say you have an AI-driven content generation platform that can create both text and visual content. You may use a credit-based approach to each instance of content generation.
For text content, users may need to spend 1 credit per 100 words. One image could be worth 5 credits. And one video could be worth 10.
Using this value metric makes sense if your SaaS product’s main feature is something that your users will likely run over and over again (such as generating or scanning content).
Although per-user pricing can be a separate SaaS pricing model in its own right, it is still a form of consumption-based pricing, especially for B2B SaaS companies.
This value metric can maximize your revenue if your SaaS product is something that teams can use.
For example, let’s say you have a project management platform that enables users to assign tasks to their team members. You may want to charge your customers per user (or team member) they add into the system. The bigger their team, the more they need to pay.
If your SaaS solution has something to do with file management, the amount of storage they can use can also be a strategic value metric for a usage based pricing model.
You could charge your customers for each gigabyte they need. Or, you could also offer it in tiers like Dropbox does.
For example, your “Basic” plan might allow users to store up to 15 GB of files. Your “Professional” plan could let them have up to 50 GB of storage. Then your “Enterprise” plan may allow up to 500 GB.
Some SaaS providers that use a consumption-based pricing model may also use the number of contacts they have as a value metric.
This makes sense if your SaaS product is something that marketing or sales teams can use. It could be a contact management solution or a full-blown customer relationship management (CRM) platform.
If you’re going to use the number of contacts as a value metric, you will also most likely mix it up with a tiered pricing structure.
For example, Plan A might enable your customer to manage a maximum of 1,000 contacts. Plan B users may have at most 10,000. Then Plan C could have as many as 50,000 contacts.
Now, this value metric is specifically applicable to voice over internet protocol (VoIP) solutions or other types of software that may have a built-in telephony tool.
You can charge your customers per minute, depending on the type of VoIP plan they want to get. But then again, you may also craft distinct plans for this to work.
For example, you could offer a “Standard” plan that gives them a total of 1,000 minutes of inbound and outbound calls each month. Then you could also have an “Advanced Plan” that allows up to a total 5,000 minutes of calls.
If any customer wants to go beyond their plan’s limit, they may also pay extra for additional minutes.
Or you could have an “All You Can Call” plan that allows them unlimited call minutes every month.
Benefits Of Consumption-Based Pricing
As we’ve gone through the value metrics that may apply to a usage-based pricing model, you may now have an idea of what would work best for your SaaS product.
But before you dive in and brainstorm a consumption based pricing structure with your team, let’s first look at some pros and cons you can expect.
Here are some benefits you may experience from a usage-based pricing model:
Flexibility & Scalability For Customers
One characteristic that makes a SaaS product so attractive to potential customers is scalability. The easier it is to scale a SaaS platform (whether up or down), the better it is for them.
This is where a consumption-based pricing model shines. It ensures that your SaaS product is flexible and scalable according to each of your customers’ needs.
If they have increasing needs, they can simply purchase more credits, or gigabytes, or whatever value metric you’re using. If they’re looking to scale down, they can simply buy only what they need.
It Ensures Value For Money
Usage pricing can also be a fairer pricing model than traditional subscription pricing models because customers only pay for what they use.
This provides a sense of value for money, which can help to boost customer satisfaction and retention in the long run.
It Helps You Track Customer Usage
Not all of the benefits of the consumption-based pricing model are on the customer’s side. It can also benefit you by providing direct insights on how your customers are using your SaaS product.
For example, you may see that most of your users are using only one or two key features. That may mean that these two features are the ones that are most in-demand in your customer base right now.
Being able to track customers’ usage data allows you to adjust your product roadmap and development efforts to ensure that your SaaS product is relevant and is addressing a real demand in your target market.
Potential Drawbacks Of Consumption-Based Pricing
While usage pricing has its benefits, it also has certain potential pitfalls and drawbacks.
Let’s talk about a few of them:
What makes the SaaS business model so effective and lucrative is that it generates recurring revenue. Each customer you have could continuously pay your SaaS company over the course of months (or even years, if you have a decent customer retention strategy).
This makes it easier to predict future revenue.
However, using a consumption-based pricing model might work against that.
Since customers only pay for the resources they need, you wouldn’t know for sure how much they would pay from month to month.
This could lead to revenue inconsistency and make it harder to accurately forecast your future revenue.
It May Limit Your Customer’s Commitment To Your Product
While the lack of commitment may be attractive for a user, it could also lead to reduced customer loyalty.
If a customer knows they can just pay for what they need and when they need it, there is less of an incentive to remain loyal to your SaaS product.
What’s more, they could just easily stop paying once they decide they don’t need your product anymore.
This could make it more difficult to retain customers in the long run and result in a decrease in overall revenue for your business.
It Could Lead To Unsustainable Pricing Strategies
In order to be profitable, you need to set prices that cover the costs associated with delivering your SaaS product.
When using consumption-based pricing, however, it can be difficult to predict how many resources each customer will purchase in the future — and therefore how much revenue you will make.
Meanwhile, you will still incur costs for maintaining their accounts, such as hosting fees and the expenses needed to provide technical support to them.
This could result in an unsustainable pricing strategy in the long run and might lead to losses for your business.
How To Maximize Consumption-Based Pricing For Your SaaS Business
As you can see, there are quite a few things to look forward to and some things to look out for if you want to have a usage-based pricing structure.
And if you have decided to use it, then you’d best know how to maximize the benefits and prepare for the risk associated with it.
So let’s talk about some strategies that can help you make the most out of a consumption-based pricing model:
Choose A Value Metric That Can Scale Along With Your Customer’s Growth
As you may see above, there are a lot of possible functional value metrics that you can use as a basis for your pricing structure. But how do you know which is the best one?
The answer: choose a functional value metric that your customer will need more as they grow.
If your SaaS product does what it’s supposed to do, then your customer’s company should grow as they use it. And you should be able to ride along with that growth by capitalizing on what specific aspect is growing on their end.
For example, why do a lot of sales-related SaaS providers charge per contact added to their system? It’s because growth for their customers means more contacts and leads to engage.
And why do file management SaaS businesses charge based on storage allotment? It’s because their customers would need more storage as their businesses grow.
How about your customers? What needs would also grow as their companies grow?
Maybe that should be the functional value metric you need to use for your usage-based pricing.
Mix It With Another Pricing Model
As you may have noticed from our earlier examples, you can use consumption-based pricing in tandem with other SaaS pricing models, usually the tiered pricing model.
You may choose to offer your credits, or minutes, or user seats at different volumes at different tiers.
This can alleviate one of the risks of having a usage based model and make your recurring revenue more predictable.
What’s more, you can also optimize which features you would include for each tier.
For example, let’s say you have a project management platform. If you have a subscription plan for small teams, customers subscribed to that plan may not necessarily need complex features, like variable user permissions and large-scale reporting.
Overall, mixing consumption-based pricing with other SaaS pricing models can bring out a more accurate and strategic way to price your SaaS product.
Just be careful not to make your pricing structure too complex. If it gets too complicated you might end up confusing your potential customers instead of attracting them to sign-up.
Build A Pricing Calculator
If you go the other route and choose a consumption-based model in its pure form, a pricing calculator can help you get more customers.
An interactive pricing calculator on your pricing page can present upfront costs for the amount of resources they want to buy.
This level of transparency can help you show that your company is an honest SaaS provider. In turn, this could earn their trust and nudge them toward clicking the “Sign-up” button.
Track Customer Usage Data
Since one of the strengths of consumption-based pricing is outright showing product usage data, you should maximize it and get as much insights as you need.
Which features are they using their credits for? How much has their usage grown in the past few months?
Tracking your customers’ in-app behavior can help your customer success team provide personalized help for them.
This could help your customers’ businesses grow, which means their need for more of your product would also grow.
What’s more, it could also help you have a more targeted upsell strategy.
For example, imagine you notice that a customer subscribing to your file management platform’s “Basic” plan is almost at their storage limit. You can craft a personalized offer highlighting how a more advanced plan would help them grow even more by giving them access to more storage.
Final Thoughts About Consumption-Based Pricing For SaaS
While it’s not the go-to pricing model for most SaaS products, consumption-based pricing can be strategic for some types of SaaS platforms and their respective target markets.
And if you decide that this is the best pricing structure for your SaaS product, you need to be aware of the potential benefits and risks that come with it.
Generally speaking, a usage-based pricing model can be attractive to potential customers due to its flexibility and scalability. But it can also make it hard for you to establish a consistent recurring revenue.
Still, there are strategies (like the ones we discussed in this article) that can help you not just avoid the drawbacks, but also maximize the benefits.
With the right strategy in implementing a consumption-based pricing model, you can unleash the potential of your SaaS product.Not just in terms of revenue, but in customer experience as well.
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