News & Editorial

5 Reasons Why SaaS is Turning to Consumption-Based Pricing over Subscription Models

Originally published on Cloud Computing & SaaS Awards

Over the last decade, subscription-based pricing has been widely adopted across SaaS businesses in response to customers demanding less upfront product cost ownership. However, the tide is turning as customers are increasingly seeking hyper-personalization and flexibility in how they engage with products and services.

This shift is driving a new wave of SaaS businesses offering consumption-based pricing. Furthermore, moving to this model is not just about keeping customers happy and riding out a new trend. There’s proof in the numbers that consumption-based pricing yields higher revenue growth.

According to Kyle Poyar, Partner at OpenView, companies using the consumption-based model have:

  • 38% faster revenue growth rate than their peers.
  • Stronger net dollar retention rates (seven of the nine most recent IPOs of cloud companies have shown this).
  • 50% higher revenue multiples versus the broader base of SaaS companies.

Let’s dive in to explore 5 reasons why SaaS businesses are turning to consumption-based pricing:

1. Taking seasonality into account

Every customer’s business has their own unique seasonal pattern with months where consumption of a product or service greatly increases due to their sales cycle hitting a peak and other months where usage decreases. Even within one specific industry, the cycle is never the same as each business has nuances due to varying customer bases, geographical regions and other external factors that contribute to fluctuating sales demand. Therefore subscription-based pricing is counterproductive, as it assumes a business is using a product or service the same way every month of the year. It ultimately contributes to resource waste and impacts the bottom line during the months where cost really matters.

Through consumption-based pricing, customers not only have the flexibility to pay as they use each month, but the SaaS provider ultimately has the opportunity to reap as much of the financial returns when their customers are riding through their peak sales cycle. Furthermore, new SaaS providers are also taking advantage of adopting a hybrid model that includes both subscription-based pricing, plus consumption-based pricing to capture additional usage.

This is an ideal strategy for businesses that have customers that incur significant ebbs and flows in usage from month-to-month. This way, SaaS providers can maintain a steady stream of subscription-based revenue throughout the year and leverage incremental dollars when customer usage hits a peak.

2. Enabling hyper-personalization

We are now in a paradigm where customers want the flexibility to hyper-personalize their products to suit their unique business needs and furthermore, have the agility to adapt those products as they journey through growth. Subscription-based pricing models assume that a business’s product needs are static from month-to-month.

Furthermore, bolting on other services on short notice can require a complete plan upgrade and issuing of completely new contracts. These upgrades ultimately end up impacting administrative time and detract from adding true product value to the end customer.

By adopting a consumption-based pricing model, SaaS businesses can have the agility to provide their products and services according to the unique usage needs of their customer’s at the time. They can also give customers the autonomy to personalize and add on services as usage fluctuates.

3. Enhancing data intelligence

Understanding customer’s usage patterns of a product or service can ultimately fuel data intelligence and provide valuable insights to inform future product innovation. These patterns reveal how customers also change their consumption over time and reveal opportunities to provide new products that might meet those emerging needs.

Furthermore, usage patterns can also be a reliable data input to model future revenue cycles for SaaS businesses, and also identify extenuating factors that impact usage. Whereas with a subscription-based model, it is difficult to understand how much a customer can truly ‘scale-up’ their usage as their consumption is capped within the framework of their current subscription plan.

Therefore a consumption-based pricing model gives SaaS businesses a much more granular picture of usage which could inform new opportunities to enhance products to meet customer’s emerging consumption needs.

4. Improving customer satisfaction

There is nothing worse than the feeling of paying for a subscription each month that you don’t necessarily use. The global pandemic has brought a lot of disillusionment and aversion to subscription plans, as many SaaS customers entered long subscription contracts pre-pandemic that they never ended up using, due to having to pivot and drive a different business model in the market.

This disillusionment impacts a customer’s perception of product value and ultimately leads to dissatisfaction and a cancelled subscription.

Contrary to this, if customers can be offered a pricing plan that is suited to their consumption needs at the time, they are going to feel a lot more satisfied that they are getting the most out of their product experience and that it is complementing their own unique business journey. Yes, this may mean that building revenue with this SaaS customer is a slower burn. However, in the long run, greater satisfaction will lead to increased customer retention and more sustainable revenue growth.

5. Driving product ROI

Not all customers need all of the bells and whistles that a SaaS business might have to offer in their subscription plans. Therefore a SaaS business might end up ‘giving away’ certain product benefits and features that ultimately never get used by the customer, leading to resource and overhead waste which can then negatively impact product return on investment.

Let’s say for example that a customer is given five hours of training support per month within a particular subscription plan. They may use that training for the first few months, but then appetite may decrease over time as their team becomes more savvy with their SaaS platform.

In this case, the business may still incur the cost of having to hire staff to cover those training hours which would go to waste. This then results in impacting the associated product cost for the SaaS provider. Through giving customers the autonomy to choose exactly what products and services they require and consuming as they go, supply is in sync with demand. It leads to less overhead and resource wastage and yields a greater product return on investment.

Getting started with consumption-based pricing

While we’ve discussed the factors of why a consumption-based pricing strategy is compelling for SaaS businesses, implementing the strategy requires robust operational business processes in order to ensure the strategy can be executed with precision.

Through using an advanced revenue management and billing software platform like OneBill, SaaS businesses can easily configure products attached to various usage metrics, ensure that customer usage is accurately rated, accurately calculate invoice amounts based on that usage and ensure the revenue from that usage is captured.

News & Editorial

4 Reasons Why Usage-Based Pricing Is Rapidly On The Rise

Originally published on CloudTweaks

We are now in an era where many businesses are flipping their business model and shifting from subscription-based pricing to usage-based models, to better cater to the modern ‘pay-as-you-consume’ buyer.

So What Exactly is Usage-Based Pricing?

Usage-based pricing, also known as consumption-based pricing, enables customers to pay for how much they actually consume a given product or service. According to OpenView Partners, 45% of SaaS businesses adopted usage-based pricing in 2021 (versus 34% in 2020) and it is predicted that 56% of companies will be using this strategy by 2023.

Image Credits: OpenView Partners

Therefore this trajectory indicates that usage-based pricing will eventually dominate the market and it’s something that SaaS businesses need to keep on their radar!

Let’s unpack the 4 reasons for why we are seeing this shift in pricing strategy.

1. Better aligns with modern consumption behavior

The desire for hyper personalization is driving customers to demand that they only pay for what they actually use. Subscription plans are more so being seen as ‘cookie cutter’ product offers containing features that customers don’t even really need. Furthemore, customers don’t want to have to pay for platform seats that aren’t being occupied.

It also comes down to providing superior satisfaction. There is nothing like when a customer can see the direct value they are receiving for their input (i.e. investment and engagement time with the product).

In order to deliver a flexible consumption-based pricing offer, it is essential that you have an intelligent billing system that can configure your various consumption-based rules so that your products can feel personalized to the customer, but rapidly and easily scaled.

2. Usage-based companies have stronger financial performance

The numbers don’t lie! According to OpenView Partners, “usage-based companies tend to have best-in-class net expansion or net dollar retention rates.”

Also let’s face it, you can only sell so many subscription upgrades, add-ons, seats and adjacent services before you maximize revenue potential with a particular customer. By having a usage-based pricing model, you grow with your customer’s volume, ultimately creating an avenue for compounding revenue growth.

However, offering usage-based priced products is not where it stops. It’s imperative that your back-end billing system is up to the task of accurately calculating usage to the very last decimal point, in order that potential revenue is not leaked.

3. Revenue can be maximized in peak usage seasons

Every business has their natural ebbs and flows in regards to sales revenue cycles. There can be seasons where there is more demand for usage of a product versus other times of the year.

Therefore businesses have the opportunity to ‘ride that wave’ during the peak seasons and maximize revenue from their customers when usage is at an all time high. Furthermore, that extra revenue beyond the baseline can bolster the revenue that is lost during periods where usage is much lower.

One critical element to have in place is accurate reporting where you can monitor future patterns in revenue. Therefore it is important to adopt an advanced billing solution that provides such intelligent analytical tools and dashboards so that seasonality can be comprehended.

4. Getting an insight into customer usage behavior

With the flexibility and transparency of consumption-based billing, customers are more likely to use the products and services which are billed based on their consumption rather than the fixed subscription charges. With this new trend, companies also have the huge advantage of understanding their customers’ usage behavior to come up with better solutions. So, this is why we are seeing a shift in many businesses moving from the simple subscription economy to the consumption-based economy, in order to capture additional returns.

However, there is complexity involved in this as you have to keep track of the entitlement. The subscription entitlement used in a given period of time can be minutes, number of pages, or any resource that you’re metering. Therefore it is imperative that you have an advanced billing solution to start charging for additional usage of services once they cross over the entitlement knot.


In order to harness a usage-based pricing strategy, it is essential to have an advanced billing platform that can accurately compute usage so that every dollar is captured. Learn more about OneBill’s advanced usage rating capability today.

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