Software companies face an unprecedented challenge: After years of uninhibited growth, 84% have recently seen their valuations decrease. Not coincidentally, 97% of high-growth SaaS companies plan to revamp their pricing models and metrics in the coming years. It’s clear that pricing is top of mind for SaaS companies of all sizes.
New pricing strategies, such as pay-per-use pricing models, present an enticing alternative to traditional pricing models for the tech industry.
A pay-per-use model allows customers to pay only for their actual usage rather than purchasing extended licenses or agreements. Pay-per-use (PPU) also lets you, as a company, open your products up to a broader audience and elicit a greater sense of satisfaction from your customers.
Let’s unpack the mechanics of PPU pricing strategies, compare them with other popular models to understand their benefits, and explore some best practices for implementing PPU as your billing model.
The Mechanics of Pay-Per-Use Pricing
PPU pricing is an offshoot of consumption-based pricing—a model that seeks to align the real value customers receive from a solution with how much it actually costs them.
More specifically, PPU allows customers to pay for the exact resources they use rather than subscribing to pre-established usage packages. Customer usage, in these cases, may be measured in:
- Services rendered
- Product features accessed
- Storage capacity used
- Other similar factors
Ultimately, PPU allows customers and clients to access resources as needed without worrying about purchasing subscription plans, limiting their usage, or paying overage fees.
Advantages of Adopting a Pay-Per-Use Model
Implementing a PPU pricing strategy can benefit both your business and your customers. Some of the most notable upsides to such models include:
- Increased customer satisfaction: PPU boasts low to no-cost startup fees and the freedom for customers to utilize your solutions as much or as little as they need. Interestingly, nearly two-thirds of SaaS clients want more flexibility in their solutions, and PPU delivers this to an unparalleled degree.
- Reduced risk: Without upfront licensing agreements or other commitments, PPU customers can test-run a solution, see how it fits their technological infrastructure and business goals, and scale it at will.
- A wider customer base: Because companies face less risk from test-running your products, more will feel comfortable trying them. This can hook many on their usage, promote customer loyalty, and help you expand your base.
Telecommunications companies have been successfully using PPU models for decades. Making long-distance calls, using browsing bandwidth, and sending texts are all examples of resources that are generally billed on a PPU basis (without a subscription or pre-established plan).
Pay-Per-Use vs. Traditional Subscription Models
PPU isn’t necessarily the new kid on the block, but it changes how companies think about and implement pricing structures.
As an example, let’s compare PPU, a form of usage-based pricing, vs. subscription, a more traditional model. In subscription-based pricing models, customers:
- Are locked into fixed-term contracts
- Deal with variable cost structures in which the prices they pay may change based on the volumes they commit to
- Need to renegotiate license and fees if they want to scale their usage past the parameters of their current plan
Alternatively, PPU customers don’t have to commit long-term. They pay a set, transparent rate for their usage and can use as much or as little of a resource as they need without upgrading plans or renegotiating contracts.
Another PPU variation is the pay-as-you-go usage model. Pay-as-you-go business models allow customers to pay for access to services hourly or monthly, for example. Some pay-as-you-go model examples include:
- Cloud computing solutions that bill based on time spent on the platform
- Rideshare apps that charge based on distance and time spent on a ride
- Those telecommunications mentioned above providers when they bill by the minute or megabyte
Pay-as-you-go (PAYG) is similar to (often conflated with) PPU. PAYG, however, charges for specific services rendered and usage, while PPU bills customers based on which resources they access.
All in all, PPU is an effective pricing structure that suits:
- Cloud storage service providers who want to charge by the byte
- Cloud-based computing models (like SaaS tools) and digital suites that can uncouple their resources for individual access
- Communications platforms, online databases, and other digital service providers
Implementing Pay-Per-Use Pricing in Your Business
So, you’re sold on the benefits of PPU, but you still need to know how to effectively implement it into your business model. To get started, first consider:
- Usage metrics: You’ll need a metric to measure your customers’ service usage. Whether it’s services accessed, storage space utilized, or some other unit of measure, your metric must be reliable, trackable, and suited to your particular services.
- Technological infrastructure: Establish a billing and rating system to measure users’ usage against costs and send them invoices. You’ll also need to evaluate the rest of your tech stack for compatibility with potential new use cases. You may need to revise some tools or adopt new ones for your solution to function on a PPU basis.
- Customer communication: If you plan on transitioning to a new payment model, it’s important to communicate the change to your clientele as soon as possible. Small businesses or enterprise customers will need time to adjust budgets, systems, and workflows.
Overcoming Challenges With Pay-Per-Use Pricing
The main issue with PPU is unpredictable customer usage volumes and, thus, uncertain revenue. As customers can use as much or as little of your services as they need, it’s difficult to tell how much you may make during a given payment period. In fact, if customers scale back their operations, revenue could fall.
To mitigate this potential problem, consider offering discounts for higher usage volumes to entice customers to access your services more frequently.
A lack of long-term contracts can also make revenue difficult to predict in the long run. However, once your solutions work their way into your customers’ technological infrastructure, they’ll be necessary for day-to-day operations, and you should benefit from steady usage.
Success Stories: Businesses Thriving With PPU and Usage-Based Pricing
Many companies have begun implementing PPU and other similar usage-based pricing models. In fact, according to OpenView Partners, over 60% of SaaS businesses have switched to some variation of usage-based pricing models, including notable names like:
- Snowflake
- HubSpot
- Zapier
- DataDog
- Google Cloud
- Azure
- Amazon Warehouse Services
- Slack
- Eventbrite
- Mailchimp
- Toast
- Shopify
- Many, many more
PPU and usage-based billing simply presents an unbeatable value proposition to customers: They can test a product as much as they want without fear of commitment if it doesn’t fit their needs.
Thus, PPU opens your solutions to a broader market and drives customers to find new use cases for your products. The result is long-term client success and higher overall lifetime customer value.
The Future of Pay-Per-Use Pricing
As OpenView has shown, more and more companies are switching to PPU and similar consumption-based pricing models. PPU could likely expand into other industries as they make this transition. PPU models can already be used:
- In medical scenarios, to bill on a scan or services rendered basis
- In printing shops where you pay by the page
- Digital fax companies where customers pay per fax sent
- In construction, Information Technology, automation, and a variety of other sectors
As more services become digitized, more will eventually switch to PPU models. Just think: The first video rental stores surely made a disruptive market entry in the late 70s, but eventually, renting movies for single watches became the norm (and is still practiced to this day). In other words, there’s no telling what payment models that seem emerging or niche today may come to dominate the future markets.
Use RightRev to Simplify Your Usage-Based Accounting
PPU is an enticing payment model. It can broaden your base and lead to higher lifetime customer value. However, usage-based revenue recognition can be time-consuming and tedious to track and record.
With usage-based billing, revenue generation can be sporadic and spread unevenly across different pay periods.
With RightRev’s customizable usage-based revenue recognition rules, you can automatically attribute revenue to the right period without poring over spreadsheets or sifting through contracts.In fact, RightRev supports any revenue recognition use case, consumption or otherwise. Learn more about our powerful platform, then partner with us to simplify your accounting procedures.
