No matter how exciting a customer finds your SaaS product, one of the first things they want to know is, “how much does it cost?”
That’s why choosing the right pricing model is as critical as developing the right features or having a strong sales strategy.
A flat-rate pricing model is simple to understand and implement, but will it give you the competitive edge? Before you make a decision about SaaS pricing, consider the pay-as-you-go model.
This article tells you everything you need to know about pay-as-you-go, including what it is, its pros and cons, and how to get started.
The pay-as-you-go (PAYG) pricing model means that users pay based on how much they consume. For example, a cloud storage service provider could charge based on the amount of storage used, while many phone carriers bill based on minutes used.
You’ll also hear pay-as-you-go referred to as a usage-based or consumption-based model.
It’s not as common as a per-seat pricing model, which is what 42% of Inc. 5000 SaaS companies use, or the flat-rate model used by 37% of those businesses. But it’s still popular at 21%.
And pay-as-you-go is growing in the SaaS world. A quarter of the businesses that currently use a usage-based model introduced it within the past 12 months. Meanwhile, 61% of companies that don’t use pay-as-you-go pricing are planning to launch or test it in the near future.
It’s likely that pay-as-you-go will be the dominant SaaS pricing model soon.
Pay-as-you-go pricing can take many forms and is customizable to a company’s needs. Let’s look at what pay-as-you-go looks like for two well-known SaaS companies.
Cloud resources are a common pay-as-you-go use case. One of the most famous examples is Amazon Web Services (AWS). AWS offers over 200 cloud services, each of which has its own pay-as-you-go pricing system.
For example, if you choose to run applications on the EC2 virtual server, you pay for computing resources by the hour or second. Or, you could use an AWS storage solution and pay based on the size of the objects you store and how long you store them.
An example of a different type of pay-as-you-go model is the email marketing platform MailChimp. In addition to its usual tiered pricing plan, MailChimp offers a credit-based pay-as-you-go plan.
In this plan, you can buy as many or as few email credits as you need. Each email credit can be used to send one email, and credits expire after twelve months.
As you can see from the examples above, pay-as-you-go plans come in two main types.
The first is consumption-based. The more you use a certain resource (like transactions, storage, bandwidth, minutes, and so on), the more you pay.
For example, for credit card payments, payment processing service Stripe charges 2.9% of each transaction plus 30¢. You don’t have to pay a monthly fee, just a pay-per-use price for each transaction.
The second type of pay-as-you-go model is credit-based. In a credit-based system, you purchase credits that can be exchanged for a service.
The main difference is that you typically use what you want and get billed accordingly with a consumption-based plan. In a credit-based system, you purchase what you need in advance and then use it.
An example of a credit-based service is Audible, which lets you purchase audiobooks for credits. You get credits every month that you’re on a subscription plan, but you can purchase more using a pay-as-you-go system if you run out.
Credit-based pricing models are appealing to the company because you get paid upfront. But they’re a risk to end users — they don’t always know if they’ll use all of the credits or let some go to waste.
Pay-as-you-go plans are becoming more popular because they benefit the business and customer alike.
Potential customers might like your business but feel intimidated by committing to a subscription plan. A pay-as-you-go model has a low upfront cost — all the customer has to pay for is what they’re going to use right away.
This low level of investment often leads to customers making a quicker purchase decision. They also like how pay-as-you-go puts them in control. They won’t pay for anything they don’t use.
Pay-as-you-go is ideal for businesses that won’t use your product or service consistently from month to month. If you offer an email platform, the customer can pay to send 5,000 emails one month and pay nothing the next month when they send none.
Some customers use more resources than others. This typically costs you more, so you should be able to charge them more. But in a flat-rate system, these major users pay the same amount as everyone else.
Even with a tiered system, some customers in the higher tier may be using a lot more resources than the others who are paying the same rate. Pay-as-you-go accounts for that.
A pay-as-you-go plan helps you understand exactly how much your customers use and when they use it. This information is valuable for determining future offerings and prices.
Some SaaS companies worry that the inconsistent nature of pay-as-you-go customers will hinder growth, but the opposite is true.
That’s because pay-as-you-go is naturally scalable in real-time. When customer usage increases, so does the money you’re making. Immediately. You don’t have to bother with reworking your monthly rates and rolling them out to existing customers gradually.
Pay-as-you-go is taking the SaaS world by storm, but not everyone loves it. Here are a few disadvantages of the model.
Businesses with monthly subscription plans often require customers to pay for several months or a year at a time. Others offer a discount if the customer pays annually rather than monthly.
Even without these requirements or incentives, customers are likely to stick with a monthly subscription service whether they’re using it every month or not.
But pay-as-you-go customers may drop away quickly since they haven’t made any commitment. This can result in increased churn rate for your Saas business.
(That said, pay-as-you-go also has an advantage for customer retention: if a customer can’t afford their usual rate for a month, they don’t have to cancel their subscription.)
With pay-as-you-go, you have no idea how much each customer will pay per month or year. This makes it hard to forecast revenue.
For example, an enterprise customer might test your service with one small team first. They like what you have to offer, and suddenly the whole company is signed up. Usage goes up by 2000% overnight.
Want a payment model that’s easy for your customers to understand and easy for you to calculate? Use a flat-pricing model (Charge everyone $25 per month, every month) Or use a tiered pricing model to charge end users at three or four price points.
Pay-as-you-go gets a bit more complicated, especially if you have separate pricing schemes for different types of resources (like our AWS example).
It’s hard to know much you’ll pay if it’s calculated on a per day or per gigabyte basis. So some customers will opt for a company with a simpler flat rate. Typically small startups and medium-sized businesses with limited budgets like the predictability.
If you’re not choosing a pay-as-you-go pricing system, what other options do you have?
Your customers all pay the same amount for your service. They’re usually billed for this amount monthly or annually.
For example, Basecamp charges every customer $99 per month. They all get the same thing — unlimited projects, unlimited users, and 500 GB of storage space.
A more common type of flat-rate pricing involves offering several different pricing tiers. The higher-priced tiers offer more features or resources than the lower tiers. Each tier costs the same amount every month or year.
Some SaaS service providers charge based on how many users will be on your account. This is often combined with a tiered system. For example, the lower tier charges $20 per month per user, while the higher tier charges $40 per month per user.
You don’t have to stick to just one pricing type. There’s an endless variety of hybrid plans you can create to suit your organization’s needs.
Some companies, like MailChimp, offer a monthly flat-rate subscription as well as a separate pay-as-you-go plan.
Other businesses offer pay-as-you-go as an add-on service. For example, your monthly subscription gets you 20 GB of storage and you pay-as-you-go for every GB after that.
Related Read: Learn about the other SaaS pricing models here.
Pay-as-you-go can be customized for many companies in a wide variety of industries, but it’s not right for everyone. Here’s how you know that pay-as-you-go is a potential fit for your SaaS business.
If all of your customers use roughly the same amount of resources, you might as well charge them all the same rate. Likewise, if you can easily break your customers into two clear groups based on their usage, a tiered plan might suit.
Pay-as-you-go makes the most sense when your customers range from super users who would be willing to spend a lot of money with you to frugal newbies who just want to test the waters for a low rate.
It’s pretty straightforward: you can’t charge for bandwidth if you don’t know exactly how much bandwidth each customer is using.
Make sure you’re set up to track usage easily and precisely. This is also important for customer loyalty — if there’s any suspicion that your subscription billing is based on incorrect information, it will be damaging to your reputation.
With a subscription plan, you can cap customer usage. No one is going to use more storage space than their price tier allows.
What if you switch to a pay-as-you-go system and a few of your customers start using ten times their previous maximum storage allowance? Can your cash flow support it?
These big usage jumps are exactly what allows pay-as-you-go businesses to scale quickly, but they can also cause you to incur costs quickly. If you’re not prepared for that possibility, you should hold off on switching to pay-as-you-go.
A sure sign that your customers would be happy with a more flexible pricing model is if they frequently jump between tiers of your existing subscription plan.
They’ll be grateful when you make their lives easier by letting them pay as they go.
You’re convinced — pay-as-you-go is the future of SaaS, and you’re on board. But unlike your current subscription plan, pay-as-you-go is complex. How do you get started?
Making the change doesn’t have to be daunting. Just follow these four steps.
What resource are you charging your customers for?
Sometimes the answer is obvious, like a cloud storage company choosing to charge for storage space. But sometimes, you have more than one option. For example, some web services may be able to charge for storage, bandwidth, or hours of usage.
If you’re not sure of the best option, step 2 might help you decide.
Before you implement your pay-as-you-go model, you need to do some analysis of current customer usage.
Start by tracking any metrics that might be used for billing. As we discussed, it’s important to make sure your tracking is precise and reliable.
Tracking usage will help you optimize how much you should charge for each billable unit of the resource. It can also help you figure out which of two resource types will be the best to charge for.
When you’ve chosen your metric, you can use that information to bill customers.
First, you have to decide between a pre-pay (credit-based) or post-pay (consumption-based) pay-as-you-go plan.
The advantage of a credit-based plan is the upfront cash flow. The customer pays you before you incur costs for their services. It also makes things a little more predictable — if a customer has only pre-paid for 500 emails, they can’t unexpectedly send 5,000.
On the other hand, customers aren’t always thrilled with pre-paid systems. They may not know how many minutes of cloud computing they need in advance, or the credits might expire before they use them. Overpaying doesn’t give customers a good impression of your business.
You’ll also need to decide how frequently your customers will be billed. A monthly billing model is common but not the only option. For example, some companies send a bill once a certain balance is reached.
Google Ads is an example of a company with a mix of billing practices. You can be billed monthly or receive a bill whenever you’ve spent a predetermined amount.
The biggest problem with pay-as-you-go pricing is that it’s more complicated than other models. But the right subscription billing solution can make it simple.
You need a tool that can take a customer’s usage statistics and accurately bill the customer without requiring you to do a lot of extra work.
Chargebee's metered billing offers everything you need for pay-as-you-go pricing.
With minimal setup using API and webhooks, you can automatically calculate a customer’s usage rate and integrate it into the billing process. You just have to create a subscription and indicate which resource to charge for and how often to send a bill.
You can completely automate your pay-as-you-go billing workflow, but that doesn’t mean you lose flexibility. You have the power to intervene and override charges at any point.
Reporting and analytics are essential for any pay-as-you-go tool. You need to be able to see how resource usage varies from month to month and how consumption patterns affect your monthly recurring revenue (MRR).
You should also be able to take your usage-based insights and apply them to decisions across the business.
Chargebee's RevenueStory gives you visibility into your subscription analytics. It helps you identify what factors are driving revenue, subscriptions, signups, activations, churn, and other metrics.
With over 150 ready-made reports, you have actionable insights into new sales, payments collected, MRR, activations, churn, and other metrics.
Pay-as-you-go is on its way to becoming the dominant SaaS pricing model. That’s not surprising considering that it provides a positive customer experience and allows businesses to grow rapidly. With pay-as-you-go, you can acquire customers at a low cost and scale to unlimited heights.
If you’re ready to be a part of the pay-as-you-go revolution, we can help you get started. You can try Chargebee for free.