Why More SaaS Companies Are Shifting to Usage-Based Pricing + The Implications for Buyers & Sellers

In recent years, many SaaS companies have shifted to usage-based pricing models, also known as consumption-based pricing, metered billing, or pay-as-you-go billing. With consumption-based pricing, companies only pay for their actual usage of a product or service rather than paying a flat licensing fee. Each type of pricing model has advantages and disadvantages, as well as implications for both sellers and software buyers. 

Vendr helps companies identify opportunities and potential pitfalls when negotiating usage-based software contracts and helps negotiate more favorable terms for both parties. To help you better navigate the world of usage-based pricing, this guide will cover: 

• What is usage-based pricing? 
• Why more SaaS companies are adopting usage-based pricing 
• The implications of usage-based pricing for SaaS sales teams 
• How buyers can navigate the new usage-based ecosystem 
• The critical role of contract analysis in getting the best usage-based terms 
• Usage-based pricing FAQs. 

What is usage-based pricing? 

Usage-based pricing (UBP) is a pricing model in which customers pay for the actual usage of a product or service instead of paying a flat rate. Tiered, usage-based pricing models are often more cost-effective for organizations, requiring minimum commitment and lowering the risk of overage charges. 

This pricing model is often used in industries where the cost of providing the product or service is directly tied to usage, such as cloud computing, telecommunications, and utilities. For SaaS products, suppliers with usage-based pricing models typically charge customers based on the amount of data stored, the number of users, or the number of transactions processed. 

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Usage-based vs. per-seat subscription

Several key differences exist between usage-based SaaS pricing models and the more common per-seat subscription model. With a per-seat subscription, customers pay a flat fee for a certain number of user licenses, which doesn’t consider how much each user uses the product or service. 

With UBP, your organization only pays for the services and features you use, affording greater flexibility and cost control. 

Why more SaaS companies are adopting usage-based pricing 

Here are some of the primary reasons why more SaaS companies are embracing usage-based pricing. 

Capture more growth compared to per-seat pricing

One key advantage of SaaS software companies adopting UBP is that it provides a path for sales teams to leverage growth in their existing customer base. As the company grows and adds more users, usage-based consumption costs will increase, leading to higher revenue for the SaaS provider. 

Build retention into the contract

Another advantage of UBP over per-seat subscriptions is that it can increase customer retention. The more a company uses and relies on a product for daily operations, the harder it becomes to switch to a different software product or SaaS provider. 

Tie pricing to the value provided

Usage-based pricing helps tie pricing to the value provided by the product or service. By charging customers based on their actual usage, it’s clear to customers which services or features they’re getting the most usage out of.

The implications of usage-based pricing for SaaS sales teams 

One of the main advantages of UBP for SaaS sellers is that it can help align pricing with the value that customers receive from the product or service. This leads to a better customer experience and higher customer satisfaction and loyalty rates. Usage-based pricing can also help reduce the risk of overpaying for unused capacity, as customers only pay for what they use. A potential disadvantage of usage-based pricing for sellers is that it can be more difficult to predict revenue and manage cash flow, as usage can fluctuate over time. 

Here are some other implications of usage-based pricing for SaaS sales teams. 

Sales reps can be penalized for selling consumption that isn’t used

One key issue of consumption-based pricing is the discrepancy between contract value and actual usage. Sales reps can be penalized for selling consumption that the company doesn’t ultimately use. For example, if the customer is sold $80,000 worth of consumption but only consumes $60,000 or $70,000, they may want that extra money returned. In that case, the sales rep might be penalized because the customer didn’t use all of their consumption. 

Sales reps are incentivized to increase usage across the organization

Usage-based pricing can change sales reps' priorities if their commission is based on usage costs instead of contract costs. Their focus can shift from selling the highest contract value to increasing their client’s overall product usage. They may not be trained or well-equipped to do this. 

Sales teams are balancing focus between total contract value (TCV) and usage 

Some companies have found that they were rewarding sales reps too much on the TCV as a contract instead of actual usage. Net new sales are more focused on TCV, whereas renewals focus more heavily on the actual underlying service or product usage, as opposed to TCV profitability. 

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How buyers can navigate the new usage-based ecosystem 

One of the biggest advantages of usage-based pricing for software buyers is greater flexibility and cost control, as your organization only pays for the services you use. On the flip side, usage-based pricing can lead to higher-end costs for new customers if usage increases unexpectedly, making it more difficult to budget for these costs. 

Start with trailing three-month usage to project growth

One key strategy companies can implement when navigating the best usage-based contract for their business is assessing the historical usage of that product to predict future usage. This helps to ensure you’re not committing to the wrong usage-based contract. 

Conservatively estimate your growth and avoid over-committing

Another critical strategy for buyers navigating the UBP ecosystem is conservatively estimating growth and avoiding over-committing. Being slightly conservative on consumption-based contracts helps ensure your organization isn’t locked into an unnecessarily expensive contract. 

It’s a much better scenario to be in year two and need to renew early rather than getting to year three of your contract and still having 10% of the contract left to use. 

Negotiate rollover clauses if possible

There are many nuances to negotiating usage-based contracts. Negotiating rollover clauses whenever possible is a good way to help ensure your business doesn’t lose services they have already paid for. Any overage can be applied to your next service period.  

The critical role of contract analysis in getting the best usage-based terms 

Vendr’s contract analysis can help companies navigate the ins and outs of usage-based contract negotiation. By analyzing the terms and conditions of usage-based contracts, we help companies identify potential pitfalls and opportunities to negotiate more favorable terms for everyone involved. 

Usage-based pricing FAQs 

Here are some of the top questions that often arise from those thinking about usage-based pricing models. 

What are some examples of usage-based pricing models?

Some pay-as-you-go pricing examples of UBP models include pay-per-use, pay-per-transaction, and pay-per-gigabyte. These consumption-based pricing models are commonly used in industries such as cloud computing, telecommunications, and utilities. 

What are some potential downsides of UPB for SaaS companies?

Potential downsides of UBP for SaaS companies include unpredictable revenue streams, increased complexity in pricing and billing compared to subscription-based pricing models, and the possibility that customers will reduce their usage to save on costs. 

How can Vendr help companies negotiate usage-based contracts? 

Vendr helps companies negotiate usage-based contracts by providing expert advice and guidance on contract terms, pricing, and billing. By analyzing the terms and conditions of proposed usage-based contracts, Vendor helps companies identify valuable opportunities to get the most value out of their SaaS spend.

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