Usage-Based Pricing (UBP)
What is Usage-Based Pricing?
Usage-based pricing (UBP) is a pricing model that allows customers to pay for products or services according to the amount they consume or use. This approach is replacing traditional subscription- and seat-based pricing models, especially for software as a service (SaaS) products.
Usage-based digital pricing models allow customers to start at a low price, attracting more customers to use the service while the business monetizes its customers’ product use over time. Usage-based pricing models are becoming more common as companies move to subscription models. This pricing type can benefit both the customer and the company.
- tiered pricing
- consumption-based pricing
- consumption-based billing
- metered services
Common Usage-Based Pricing Models
The Pay-as-you-Grow (or pay-as-you-go) pricing model allows businesses to only pay for the resources they use. This type of pricing can be beneficial for companies with fluctuating or unpredictable resource needs. Pay-as-you-Grow pricing typically includes a baseline level of service that is provided at a lower cost. Then, as a company’s needs increase, it can pay for additional resources. Business sectors such as Cloud computing, storage, and SaaS often use this pricing model.
Per-Unit pricing, also known as price-per-unit, is a form of pricing in which goods and services are sold based on their unit price, and customers are charged a fixed fee per unit of resource consumed.
Usage tiers involve charging different prices for different levels of usage. Usage tier pricing is becoming increasingly popular because it enables companies to tailor their pricing to different types of users. In addition, it allows customers to purchase a level of service and scale their use as needed.
The Trend Toward Usage-Based Pricing
There is a growing trend toward usage-based pricing. TechCrunch surveyed about 600 SaaS companies to learn how they priced their products in 2021. According to their State of Usage-Based Pricing Report, 45% of SaaS companies had a UBP model in 2021, up from 34% in 2020 and 30% in 2019.
Whether for utilities like water and electricity, or services like cloud storage and internet service, more and more companies are adopting this billing model. Usage-based pricing allows companies to offer flexible billing options without requiring long-term contracts. This flexibility makes it easier for customers to scale up and down as needed and enables them to make changes quickly based on market conditions.
Pricing agility is one of the best features of usage-based pricing. For start-ups or small and medium-sized businesses, the lowest tier of a product or service usually meets their needs. However, access to more products or services may be necessary as the business grows. This is where usage-based pricing comes into play. Instead of upgrading a product or service because it no longer meets a customer’s needs, a business can simply add usage tiers or pay for each additional unit used.
Usage-based pricing can make your product more affordable for your customers. By charging based on usage, you can offer a lower price point for customers who use your product less frequently. This can be a great way to attract new customers or keep existing customers happy.
Usage-based pricing requires less commitment from customers. This type of pricing is often used for services that are used infrequently or by businesses with uncertain usage patterns. As a result, customers can save money and avoid overpaying for services they may not use often.
Boost Revenue with Usage-based Pricing
A usage-based pricing strategy offers several advantages impacting revenue, including shorter buying cycles, increased customer satisfaction, reduced churn rates, and greater investor appeal.
Shorter Buying Cycles
A usage-based pricing model can create shorter buying cycles, as customers are more likely to purchase a product or service when they know they will only pay for what they use. On the other hand, UBP may discourage customers from using a product or service if they are unaware of the pricing structure, so it’s crucial to be transparent about pricing during the sales process.
Increased Customer Satisfaction
There are a few key reasons why usage-based pricing can benefit customers and increase customer satisfaction.
1. It’s flexible – customers only pay for what they use, so they don’t have to worry about overpaying for services they don’t need.
2. It encourages conservation – customers who know how much they’re using (and how much it costs) are more likely to be conscious of their consumption and cut back where possible. This can lead to long-term cost savings.
3. It’s transparent – customers always know how much they’re paying, and there are no hidden fees or surcharges. This can help build trust and confidence in a business.
4. It’s easy to understand – usage-based pricing can greatly increase customer satisfaction by offering a more flexible, transparent, and easy-to-understand pricing model. Higher customer satisfaction leads to lower churn rates.
Appealing to Investors
Usage-based pricing can be appealing to investors for several reasons. First, it can help increase customer lifetime value, as customers using a product more often will likely stick around for longer, which increases revenue over time.
Second, as mentioned above, usage-based pricing can help increase customer satisfaction and lower churn rates. Third, usage-based pricing can help to attract new customers, as it can be a more affordable option than other pricing models. Growth in the customer base can lead to increased revenue growth.
The Benefits of Usage-Based Pricing
A few benefits of usage-based pricing were discussed above. Let’s expand on some of these:
Expands Customer Base
For businesses, usage-based pricing can be a great way to attract new customers who may be hesitant to commit to a traditional subscription. By offering a usage-based option, businesses can show potential customers that they’re flexible and willing to meet their needs. In addition, usage-based pricing can help businesses expand their customer base by appealing to a wider range of customers.
Cost Scale with Users
Another core benefit of UBP is that it allows customers to test your product or service at a reduced cost. Customers can spend money when they have it or when their budget increases. The main advantage of this strategy is that the more money your customer makes with your product, the more they can invest back into it.
Higher Customer Retention
The element of flexibility is critical to this pricing model. Greater flexibility leads to higher customer retention because no customer wants to feel trapped in a long-term service or contract. In addition, providing customers the opportunity to spend according to their needs and consumption yields higher customer loyalty.
Which Products and Services are Best for Usage-Based Pricing
When deciding to offer UBP, the primary factor to look at is whether or not your products and services are scalable. Here are some examples of the types of products and services that are well-suited to UBP.
Some examples of products and services that work well with usage-based pricing are:
1. Software as a Service (SaaS) providers often charge for their services using usage-based pricing. This pricing type can benefit companies with high volume usage or the need to scale their usage up or down quickly. SaaS providers offering usage-based pricing include Zapier, Adobe Creative Cloud, and Slack.
2. Infrastructure as a Service (IaaS) providers also use a usage-based pricing model. Examples include Amazon Web Services, Google Cloud Platform, and IBM Cloud.
3. Telecommunications companies often use usage-based pricing. Examples are AT&T, Verizon, and Sprint.
4. Utility companies use this pricing model. Examples include electric, water, and gas companies.
5. Other products and services work well with usage-based pricing, including cloud storage, web hosting, and online backup services.
How Usage-based Pricing and CPQ Can Benefit Your Business
UBP can be difficult to manage and implement. However, there are software solutions that can help. One of those is Configure Price Quote (CPQ). A CPQ solution will help automate your sales quoting process. CPQ software enables your sales team to generate accurate quotes quickly and efficiently. Additionally, CPQ solutions can help you manage your pricing rules and ensure compliance with company policies.
DealHub CPQ software helps businesses manage their pricing more effectively. We offer features that support usage-based pricing models, including connection with your products and services price book, bidirectional synchronization within your CRM, and a recommendation engine that delivers upsells and cross-sells.
Usage-based pricing is a great way to manage your costs, and our CPQ and subscription management software can help you do just that. With DealHub, you can set up multiple pricing tiers based on usage and deliver accurate consumption-based billing.
People Also Ask
What is the difference between the subscription and the usage model?
A subscription-based pricing model is a payment structure that allows a customer or organization to purchase or subscribe to a vendor’s services for a specific time for a set price.
Usage-based pricing is a consumption-based pricing model in which customers are only charged when they use a product or service.
How do you sell usage-based pricing?
When selling a product or service that uses a usage-based pricing model, it’s important to be upfront about the pricing structure. This will help avoid any confusion or frustration later on. Explain how the pricing works and what customers can expect to pay. You should also provide examples of how the pricing would work in real-world scenarios.
What are the disadvantages of usage-based pricing?
Usage-based pricing can be a good option for some companies, but it is not without its disadvantages. Usage-based pricing can be challenging to implement and administer because you need to track usage data for each customer and determine the prices based on that usage. This can be time-consuming and difficult to do accurately.
Additionally, customers may be surprised and frustrated by their bills. Usage-based pricing can lead to lower product or service consumption if the customer is trying to keep costs to a minimum.