SaaS Usage-Based Pricing Models: 8 Best Examples

In the rapidly evolving SaaS landscape, usage-based pricing (UBP) has emerged as a dominant pricing strategy. Recent data shows that 45% of SaaS companies have implemented UBP in some form, with this number growing to 3 out of 5 SaaS businesses by 2023[1]. This shift aligns with Chargebee's findings that 63% of SaaS businesses now implement some form of usage-based pricing.

What Is Usage-Based Pricing?

Usage-based pricing (also called consumption-based pricing) charges customers based on their actual utilization of a product or service within a specific billing cycle—monthly, quarterly, or annually[2]. This model mirrors everyday transactions like paying for an Uber ride or your electricity bill, where you only pay for what you use.

When establishing an effective pricing structure for SaaS products, several factors come into play:

• Number of users
• Expected frequency of product usage
• User cost expectations

SaaS companies implementing usage-based pricing typically bill customers using predefined value metrics that are easily measurable, such as user headcount or data volume transferred[1]. The company tracks usage over a billing period, applies the unit price, and bills accordingly.

Where Usage-Based Pricing Is Making an Impact

Usage-based pricing has expanded beyond the infrastructure layer where companies like AWS and Azure pioneered it. Today, this pricing model spans the entire technology stack, including various types of applications.

Some business leaders worry that without subscription lock-ins, revenue might become unpredictable. However, the benefits of usage-based pricing have proven to outweigh these concerns for many successful SaaS companies.

Key Benefits of Usage-Based Pricing for SaaS

Usage-based pricing offers several advantages that make it particularly attractive for SaaS businesses:

• Improved customer retention: Users are more likely to continue with a product when they only pay for what they use rather than being locked into fixed-price contracts.
• Pricing flexibility: This model offers flexibility for both customers and companies. Customers can adjust usage based on their needs, while companies can modify pricing based on consumption patterns and other factors.
• Increased revenue potential: Companies using UBP typically maintain about 125% net dollar retention of their customers and generate additional revenue through upselling and add-on services.
• Automated billing: The system can automatically calculate charges and generate invoices by tracking product usage, saving time and reducing errors.
• Real-time business intelligence: By monitoring usage patterns in real-time, companies can identify opportunities to enhance customer satisfaction and optimize pricing strategies.
• Lower entry barriers: Customers can start with minimal usage and scale up as needed, which is often more appealing than significant upfront commitments.
• Enhanced customer engagement: Dynamic pricing reflects the product's value and encourages continued usage.
• Broader market appeal: Affordable entry points and flexible pricing typically attract more customers, particularly those hesitant about substantial initial investments.
• Increased company valuation: Businesses using this pricing model are often valued higher than competitors, enhancing company credibility.
• Alignment with Product-Led Growth: Many successful product-led companies rely on usage-based pricing, demonstrating its effectiveness and compatibility with this growth strategy.

8 Best Examples of SaaS Usage-Based Pricing Models

1. Amazon Web Services (AWS)

AWS has captured a massive market share largely due to its usage-based pricing strategy, which has been fundamental to its business model since inception. Amazon offers a Free Tier allowing businesses to use various services with certain limitations for the first year, plus an Always Free tier with a limited set of services.

All Amazon services feature on-demand pricing, with discounts available for:

• Reserving services for 1 or 3-year periods
• Utilizing spare computing capacity through the Spot Instance market
• Committing to purchase specific quantities of Amazon resources across an organization

AWS also provides a pricing calculator to help customers estimate their monthly expenses, making the pricing model transparent and predictable despite its usage-based nature.

2. Snowflake

Snowflake's cloud computing-based data warehousing platform offers data storage, processing, and analytic solutions with pricing based on two consumption metrics: compute usage and data storage.

Computing charges are calculated based on the number of credits used to run queries or perform services. The pricing rate for credits varies depending on the edition used (standard, enterprise, or business-critical). Similarly, storage charges are based on the number of bytes stored per month and the cost of moving data across regions, with the total compressed file size determining the storage bill.

This approach allows businesses of any size to scale their usage and costs according to their needs, making Snowflake an adaptable solution for data management.

3. Microsoft Azure

Azure has shown remarkable growth with its consumption-based pricing model for services like Azure Virtual Machines, Azure Backup, and Azure Logic Apps.

For Virtual Machines, Azure charges by the minute, with customers paying only for the time a VM instance is running. This pay-as-you-go model is ideal for workloads with unpredictable capacity requirements. Azure also offers:

• Reserved instances: Customers pay upfront for a predefined period of VM runtime
• Spot VMs: Customers purchase fixed computing capacity at deep discounts but cannot control when their VM runs

Azure Logic Apps uses a graduated tier system where the cost per unit decreases with increased consumption, rewarding higher usage with better rates.

4. Twilio

Twilio's web service APIs enable users to make and receive phone calls, send and receive text messages, and perform other communication functions. Customers can choose from several pricing options:

• Pay-as-you-go
• Volume discounts
• Committed use discounts
• A combination of these options

Twilio's SMS product pricing is "per SMS," directly capturing the value derived by customers. This straightforward approach has helped Twilio become a leader in the communications API space.

5. Stripe

Stripe provides payment infrastructure for businesses to accept payments and send payouts using flat-rate, transaction-based fees. Their value proposition comes from 'per-transaction' pricing that remains consistent regardless of transaction size, card type, or issuing network.

Each customer is charged a 'per successful card charge' fee, creating a simple and predictable pricing model. This transparency has contributed significantly to Stripe's widespread adoption among businesses of all sizes.

6. Clearbit

Clearbit offers an API-based real-time data enrichment platform that provides market intelligence about prospects. The product integrates with numerous tools including Salesforce, G Suite, Outlook, HubSpot, Marketo, Zapier, Segment, and Tray.

Pricing is typically determined by the number of API requests made, creating a direct correlation between usage and cost. This model allows customers to start small and scale their usage as they realize value from the service.

7. Zapier

Zapier is a productivity tool that enables easy workflows by automating repetitive tasks across applications. Their pricing strategy includes:

• A free tier with limitations (100 tasks per month and up to 5 active Zaps)
• A 14-day trial of premium features
• Team-based plans for larger professional organizations

For their premium account plans (Pro, Team, Company, or higher), Zapier implements usage-based pricing with overage charges when customers exceed their task limits. This approach has helped Zapier achieve $140 million in Annual Recurring Revenue in 2022.

8. Mailchimp

Mailchimp provides email marketing and automation software to help businesses manage customer communications. While offering various pricing structures, Mailchimp allows users to pay as they go—an excellent option for infrequent senders.

In this model, each email sent costs one credit, and users can purchase email credits as needed. Mailchimp also offers a free plan supporting up to 500 contacts and 2,500 monthly sends, creating an easy entry point for new users.

Implementing Usage-Based Pricing for Your SaaS Business

Implementing usage-based pricing requires careful planning and the right infrastructure. Here are key considerations:

1. Identify appropriate value metrics: Choose metrics that align with the value your customers receive from your product.
2. Set up reliable metering systems: Accurate usage tracking is essential for billing and customer trust.
3. Create transparent pricing tiers: Make your pricing structure easy to understand to avoid customer confusion.
4. Implement flexible billing systems: Your billing system must handle variable usage patterns and complex pricing rules.
5. Provide usage visibility to customers: Give customers tools to monitor their usage and understand their bills.

Modern billing platforms like Lago can help SaaS businesses implement and manage usage-based pricing models efficiently. With capabilities for real-time metering, flexible pricing configurations, and automated billing, such platforms eliminate many of the technical challenges associated with usage-based pricing.

Why Usage-Based Pricing Continues to Grow

The continued growth of usage-based pricing in SaaS is driven by several factors:

• Alignment with customer value: Customers pay based on the actual value they receive.
• Reduced friction in customer acquisition: Lower entry barriers make it easier to acquire new customers.
• Scalability for both parties: Businesses and customers can scale up or down as needed.
• Data-driven decision making: Usage data provides insights for product development and pricing optimization.
• Competitive advantage: Companies offering flexible pricing often outperform those with rigid subscription models.

According to industry research, 61% of SaaS companies are looking to launch consumption-based models, indicating that this trend will continue to strengthen in the coming years.

Conclusion

Usage-based pricing has transformed from a niche approach to a mainstream pricing strategy for SaaS companies across various sectors. The examples of AWS, Snowflake, Azure, Twilio, Stripe, Clearbit, Zapier, and Mailchimp demonstrate the versatility and effectiveness of this model in different contexts.

By charging customers based on their actual usage, SaaS companies can create pricing structures that align with the value they provide, lower barriers to adoption, and build stronger, more sustainable customer relationships. As more businesses recognize these benefits, usage-based pricing will likely become even more prevalent in the SaaS industry.

For SaaS businesses considering a shift to usage-based pricing, investing in robust billing infrastructure is crucial. Platforms that can handle complex pricing models, accurate usage tracking, and automated billing processes will be essential tools for successfully implementing and managing usage-based pricing strategies.

Citations

[1] https://openviewpartners.com/usage-based-pricing/

[2] https://userpilot.com/blog/usage-based-pricing/

‍