Your Guide to Usage Based Pricing

👋 Hi and welcome to PLG Monetized newsletter. Every week we explore how leading SaaS companies leverage monetization to drive growth through self-serve sales.

Let’s start with the definitions.…

Usage-based pricing is a consumption-based pricing model in which customers are charged only when they use a product or service.

There are two main types of usage based pricing - pay per use and drawdown.

Pay per use, as the name indicates, means that you pay as you go (think AWS).

Drawdown means that you start with pre-paid credits that you draw against every time you use the product (similar to prepaid phone cards).

The alternatives to usage based pricing are tiered based pricing and per-seat pricing models.

Some Examples …

Example 1 - Scraping Bee

Scraping Bee is a SaaS company that scrapes websites. You pass it a URL and it returns the HTML or a screenshot of that page.

This is an example of drawdown usage pricing. You start with X number of “API Credits” every month and then as you use them over time you are “drawing” from them that credit pool.

Since there is a limit to how many API credits you can use, it’s important to consider what happens when you hit that limit. Scraping Bee gives you two options (covered on their pricing page FAQ):

• Upgrade temporarily to the next tier (this works as all of their plans are month)

• Or renew your subscription early (i.e. reset your billing date)

On top of this, it’s a good practice to make it easy for the user to know how close they are to the limit. Scraping Bee has a neat widget right on the main dashboard.

Example 2 - Kobiton

Kobiton is a testing platform and they have drawdown usage pricing. You start with X number of minutes and then you “draw” from them every month as you use the product.

What’s interesting about this pricing implementation is what happens when you hit the limit. Unlike Scraping Bee, you don’t have to change or reset plans, you can purchase additional minutes with an add-on (as explained in their pricing FAQ):

Example 3 - Twilio SMS

Twilio provides developer communication tools. One of their products is SMS messaging. You pay per SMS sent. This is a true pay as you go usage model.

As you can see from all the footnotes, there are quite a few exceptions. On top of it, they have different prices for text vs. picture vs. local vs. toll-free numbers… so the complexity grows quickly.

If your pricing is this complex - you should likely consider a tool to management software (opposed to building a home grown solution).

Example 4 - Shopify

Shopify, the e-commerce giant, has pay-as-you go pricing with a twist. They charge a base subscription (e.g. $29 for Basic) and then you pay a % of amount spend.

This model ensures that as a SaaS business, you have a “guaranteed” MRR every month, even if the merchant does not run any transactions that month (unless they churn all together of course).

Choosing the Right Model for You

Ultimately, you need to determine if your product is a “consumption” based product. This will be dictated by the pricing metric that you select (see our guide to Pricing Metrics here).

If your pricing metric is Members, Users, Seats, Location, etc… then usage based pricing is not for you. You are doing Seat Based Pricing.

If your pricing metric however is Minutes, Gigabytes, Contacts, Site Visitors, Credits, etc… then you are effectively doing usage based pricing. Then it’s a matter of determining the Pay-As-You-Go or Drawdown approach.

“Drawdown” Usage Pricing

• Good when usage can be bucketed (think small, medium, large)

• More predictable revenue

• Requires an upgrade path when user hits a limit

“Pay-as-you-go” Usage Pricing

• Suitable for infrastructure products with direct underlying costs (e.g. cell network cost to send an SMS, credit card network to process a transaction)

• More fluctuations in revenue

• 3rd party usage billing software is a must (unless you are prepared to invest a ton of money building your own in-house solution)

Summary

• Usage based pricing is very closely tied to your pricing metric - i.e. you need something that can go up or down based on product consumption

• There are two main types of usage pricing: (1) pay-as-you go (2) drawdown

• The main consideration for pay-as-you-go is billing infrastructure software

• The main consideration for drawdown is what happens when user hits the limit

Additional Resources

• Check out pricingsaas.com where you can find 1000s of pricing examples, including a ton of usage based pricing

• If you need help with pricing or monetization, we offer advisory services at Buyerson Inc.

• We love connecting with people in the industry to generate interesting content - if you are up for a podcast or an interview, just connect with me on LinkedIn