Usage-based pricing is the new talk of the SaaS market, consider this:
- During 2023, we noticed 63% of SaaS companies have switched to a usage-based billing model.
- Moreover, it’s driving a 38% higher growth rate compared to traditional subscription models.
So what is the usage based billing?
Usage-based billing is a payment system where customers are charged based on how much they use a product or service, like paying for electricity or phone data.
From cloud giants like AWS to streaming services like Azure, this model is becoming the go-to choice for businesses that want to offer flexibility and fairness to their customers.
With usage-based billing, customers only pay for what they actually use. Pretty cool, right?
But here’s the flip side:
It appears challenging for business owners to manage complex accounting and adjust with unpredictable revenue – like seriously no MRRs & ARRs.
In this blog, I’ll take a closer look at the different types of usage-based billing, will go deep into its pros & cons, and provide practical solutions to common issues.
Table of Content
- The Evolution of SaaS Billing – Types & Trends
- Types of Usage Based Billing (12+ and Counting)
- How Usage-Based Billing Works in SaaS?
- Is Usage-Based Billing Right for You? Pros and Cons
- Solution: ReveniQ – Platform Supporting Usage-Based Billing
The Evolution of SaaS Billing – Types & Trends
Over the years, SaaS pricing has shifted from perpetual licensing to usage-based and hybrid strategies to fit customer needs.
See the table below for a quick overview:
Perpetual licensing was really popular in the 1990s. Subscription-based and tiered-pricing models, however, are now more streamlined, and most of us already know what they are, how they work, and why they’ve become so common.
That’s why I’d prefer to provide a detailed analysis of the newer models, such as Usage-Based, Value-Based, and Hybrid Pricing.
These models have become the go-to choices for business owners today due to their flexibility and customer-focused approach.
Now let’s dive into details of each:
Usage-Based Pricing (2010s)
“The more you use, the more you pay, and if you use less, you pay less.”
Usage-based pricing is exactly what it sounds like: you pay based on how much you use. It’s a “pay-as-you-go” model. Companies like Twilio and AWS (Amazon Web Services) use this model.
The best part about this model is flexibility – you only pay for what you need, so if you’re not using the service much, you don’t pay a lot.
Value-Based Pricing (Late 2010s)
You’re buying a tool that helps your business grow, and instead of paying for each feature, you’re paying based on how much value it brings to you. That’s value-based pricing!
Companies like Tableau use this model. Let’s say Tableau helps a company understand their data so well that it boosts their sales. The company is willing to pay more because the insights are worth a lot to them.
So, the price isn’t about the number of features but about the money it helps a company make or save. It’s all about what you get out of it!
Hybrid Models (2020s)
It’s like you’re shopping at a store that lets you pick and choose how you want to pay. That’s what hybrid models are all about!
Companies like Zoom and Stripe use this approach. For example, Zoom gives you a free version for basic meetings, but if you want to chat for hours or have a huge group, you can pay for an upgrade.
Similarly, Stripe charges you based on each transaction, but they also offer plans that change depending on how much your business needs. It’s like starting small and growing big without getting stuck in one plan.
Now that we’ve seen how SaaS pricing has evolved over time, let’s dive into Usage-Based Billing and really get to know how it works.
Types of Usage Based Billing (12+ and Counting)
Usage-based pricing isn’t a one-size-fits-all deal. It’s flexible and can look different depending on the company.
Some businesses charge based on how much time you use their service, while others might count how many items or features you use.
Have a look at this table to know how it works:
How Usage-Based Billing Works in SaaS
Now that we’ve covered the history of SaaS pricing and the different types of usage-based pricing, it’s time to understand how it really works. Like, what goes into it?
Let’s dive in!
Billing in Arrears vs. Advance
Have you noticed how some companies bill you at the end of the month, while others want payment upfront? This isn’t just a random choice – it’s a system that shapes how you manage your money and how businesses secure their cash flow.
Whether you’re a customer or a business, knowing how billing works can help you make better choices, plan ahead, and avoid surprises.
Check out the section below where I break down the key differences between billing in arrears and advance, so you can choose what works best for you!
1. Billing in Arrears
Around 56% of SaaS companies follow a billing model where customers pay after using the service.This means customers pay after they’ve used the service. Imagine going to a restaurant where you eat first and pay later.
For example, SaaS companies like Twilio charge in arrears. You use the service throughout the month, and then at the end of the month, you’re billed for the minutes, data, or features you’ve used.
This model gives customers flexibility because they only pay for what they’ve used.
Billing in Advance
Nearly 30% to 40% of SaaS businesses prefer billing in advance? It’s like paying for your concert ticket before the show begins. Companies like Spotify and Netflix use this method, where customers pay upfront for a fixed time period.
It’s like having a steady paycheck – you can focus on the big picture instead of worrying about when the next payment will arrive.
While this upfront payment gives businesses peace of mind, customers might feel a little hesitant since they’re paying before fully getting into the service.
How Usage Fees Add Up
When it comes to paying for what you use, businesses use clever models to ensure fairness and flexibility. Usage charges can vary depending on how much of a service or product you actually consume.
Think of it as paying for electricity – you’re only charged for the energy you use, not a flat amount every month. This approach is used widely, especially in tech, where services like cloud storage or communication platforms rely on precise usage billing.
To get clearer, take this example:
If a service charges $0.05 per email sent and you send 1,000 emails in a month, your total bill would be $50. This model is not only cost-effective for users but also ensures businesses have a scalable revenue strategy.
How Different Usage Models Work (With Examples)
Imagine paying only for what you use – whether it’s storage, messages, or even video calls. This is the beauty of usage-based billing. It’s like filling your car’s gas tank; you only pay for the fuel you need, no more and no less.
Below, I have created a table showing how different platforms have various packages for usage:
Is Usage-Based Billing Right for You? Pros and Cons
Think like this:
Your customers love paying only for what they use, but your finance team struggles to predict next month’s revenue. Usage-based billing feels like a win-win for flexibility, yet it can create headaches in planning and cash flow.
Let’s explore the highs and lows of this model to see how it fits your business goals.
1. The Upsides of Usage-Based Billing
Usage-based billing is all about fairness and flexibility. Customers only pay for what they actually use, making it easy to manage costs. For businesses, it’s a smart way to grow alongside their customers’ needs.
Let’s look at why this model works so well!
a) Save More, Spend Smarter
Imagine you’re running a startup, and every penny counts. With usage-based billing, you’re only paying for the services you actually use, not a flat fee for features you might never need.
This model eliminates unnecessary fixed costs, giving finance teams precise predictability and control over cash flow – a win for keeping the books balanced and efficient.
b) Giving Customers the Freedom They Need
Flexibility isn’t just a perk for business owners – it’s a necessity. Usage-Based Billing makes it easier to manage costs and scale up or down whenever you need to, keeping things simple and stress-free.
2. Why Usage-Based Billing Might Not Work for You
It’s like trying to set a budget when your expenses keep fluctuating – that’s the downside with usage-based billing.
a) The Hurdles in Estimating Revenue
Predicting revenue can be a real headache with usage-based billing.
Suppose:
Trying to plan your business’s future when the income you’re expecting keeps changing each month. It’s tough to forecast when you can’t be sure of the numbers coming in.
So, while usage-based billing sounds flexible, it also adds a level of unpredictability that can make it harder to plan for growth or manage cash flow smoothly.
b) Billing Systems – Not as Easy as It Seems
Setting up a usage-based billing system can be tricky. It’s like trying to organize a lot of moving parts at once.
For businesses, it means tracking each customer’s usage carefully – whether it’s how much they use, how long they use it, or what features they access.
c) Downside of Changing Billing Fees
When usage-based billing is in place, a customer’s bill changes based on how much they use. When a customer’s usage changes, their bill has to change too.
This means businesses need to constantly track how much a customer uses and update their charges accordingly. If the changes are too big, customers might feel confused or frustrated, which could hurt your relationship with them.
d) The Headache of Monitoring Data
Consider the idea:
A SaaS company that offers cloud storage. One of their customers suddenly increases their data usage, but the system doesn’t update in real time. As a result, the business misses out on charging for the additional storage, leading to lost revenue.
The risk doesn’t end here, if the system overestimates the customer’s usage, they might receive a surprise high bill. This could frustrate the customer and harm the relationship, as they might feel like they’re being charged unfairly.
e) When Systems Don’t Play Nice Together
It’s like you run a SaaS business, using Salesforce to manage customer data and a separate system for billing. If these systems aren’t linked properly, a customer who upgraded last month might still get charged for their old plan.
This leads to wrong bills, causing frustration and even cancellations.
Now that I have walked you through how there are different downsides attached to usage-based billing, let’s move to a practical solution that can solve all your issues altogether:
Solution: ReveniQ – Platform Supporting Usage-Based Billing
Managing accounting for usage-based billing in SaaS can be a challenge for business owners, especially when it comes to invoicing, tax calculations, and real-time analytics.
However, ReveniQ simplifies this process by offering automated solutions that track customer usage and generate accurate invoices based on consumption.
For example, if you are running a SaaS business offering cloud storage services might have customers whose usage varies every month. With ReveniQ, usage data is continuously monitored, so that when a customer’s storage needs increase or decrease, the system automatically adjusts their invoice accordingly.
What’s even better
Since it’s challenging to measure MMRs in usage-based billing, ReveniQ’s advanced analytics help you track Monthly Recurring Revenue (MRRs), customer churn, and usage trends.
Like I run a SaaS company offering tiered services, and some customers decide to upgrade or downgrade their plan, ReveniQ makes it super easy for me to adjust the invoices and track those changes in real time.
This way, I don’t have to worry about losing any revenue or accidentally overcharging anyone. It’s all automated, giving me peace of mind and accurate billing, no matter how my customers’ usage fluctuates.
Conclusion
To sum it up, usage-based billing gives businesses the flexibility to charge customers for what they actually use instead of a fixed price. This makes it super appealing to businesses because they only pay for what they need, which feels fair and transparent.
But it’s not all easy! There are challenges like tracking how much customers use, avoiding billing mistakes, and handling the complexity of sending accurate bills. These problems can grow even bigger as the business and its customers expand.
That’s where ReveniQ comes in. I personally love it because it makes billing stress-free by automating the process, ensuring accurate invoices, and tracking key numbers like MRR and churn. Plus, it helps businesses quickly adjust pricing when needed