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For today’s SaaS businesses, usage-based pricing is all the rage. Almost half of all software vendors, from the biggest players to the smallest startups, are now offering their customers pay-as-you-go options. That’s a one-third increase from just two years ago, a clear sign that pay-as-you-go (PAYG) plans are now mainstream SaaS.
At first glance, this makes sense. Customers love the idea of only paying for what they use and not being tied to large recurring contracts.
But there is a catch. As usage-based SaaS grows in popularity, vendors and customers are finding that the PAYG approach can be problematic. Whether it’s confusion around costs, higher churn, or a poorer customer experience, poorly implemented usage-based payment strategies can quickly fall apart.
The biggest problem is that usage-based pricing doesn’t always deliver on its core promise of keeping costs low for customers. Precisely because customers pay for what they use, users may find that a sudden surge in popularity — like when a small app goes viral — can land them a hefty bill.
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Online forums are full of horror story of startup developers being charged excessive cloud service fees following the immediate success of a new online tool. Variable monthly costs can also be a challenge for larger companies, given their need for stability and predictability when developing quarterly and annual budgets.
To ensure commercial success, it is essential that customers enjoy using their solutions and not feel held back by difficult-to-control costs. Sticker shock can easily end up eroding the customer experience, prompting customers to cut back on their use or, even worse, simply take their stuff elsewhere.
confusion for customers
Besides the possibility of sticker shock from high usage, PAYG software plans can also be confusing for users, as it’s not always clear how usage is measured.
Imagine a pay-as-you-go phone plan where your bill depends solely on the number of minutes you spend talking. Pretty clear, right? But now consider an energy bill: it is also based on usage, but it is much more difficult to determine the loads you are incurring at any given time. Few homeowners can confidently say how many kilowatt hours of energy it takes to microwave a meal, watch a movie, or wash a load of laundry, making it difficult to budget in advance.
Too often, SaaS vendors are equally opaque, confusing their customers. Take, for example, the experience of InfluxDB Cloud, which used query duration as a pricing metric. This proved too complex for the database provider’s customers, and the company was soon forced to adopt a simpler payment option.
Lack of lock
It’s important to remember that usage-based pricing usually means customers can easily abandon your SaaS product. There is no commitment: when a customer stops using a provider’s service, there are no more fees to pay.
From the customer’s perspective, that seems like a lot. But it can also pose challenges because it’s harder for customers and SaaS companies to function as true partners, and for companies to invest in innovation in response to their customers’ changing needs.
This is a big problem for SaaS vendors. Stable revenue streams are an essential part of the SaaS value exchange, and poorly managed usage-based pricing can threaten to disrupt the Apple shopping cart.
Clearly, SaaS vendors cannot afford to surprise, confuse, or risk losing their customers. Customer acquisition is tricky enough in the saturated SaaS market – vendors can’t afford to give customers a reason to be tempted by a competing offering.
One of the main ways to communicate this is to invest in your checkout experience. Give customers meaningful options on how and when they will pay for your services. Many customers might, upon reflection, realize that a stable monthly rate plan, or a Buy Now, Pay Later (BNPL) option, would be more likely to align with their current and future needs. For example, some customers may choose to defer their payment for 30, 60, 90 or more days to match their cash flow. Others may choose to adopt a subscription plan that more closely matches their cash flow (eg, lower monthly payments for X months and higher payments later).
SaaS providers should ensure they are always on the lookout for tools to help smooth their own cash flow, so they can continue to invest in their product, growth, and customer experience. Whether you bill your clients by the week or by the gigabyte, you need stable revenue and access to growth capital to keep your clients and your board happy.
A better way forward for pay-as-you-go pricing
Good for customers, good for business – that’s how usage-based SaaS pricing options are typically presented. Well done, they can be. Pay-as-you-go allows software vendors to offer their customers real flexibility, while streamlining their onboarding process.
However, don’t assume you can just implement usage-based pricing and call it a day. Providers need to anticipate the friction that usage-based pricing can cause and find smart and innovative ways to streamline the checkout process and retain customers.
Ashish Srimal is the founder and CEO of Report.
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