Subscription based pricing models have been the foundation of SaaS for the past couple decades. Revenue growth has been about adding "users" and selling more "seats". However, while this subscription model has worked wonders for SaaS companies looking for consistent and predictable revenue growth, it has been less than desirable for many customers who often end up paying for users or seats they are not using.

Some companies go as far as removing certain customers from email alerts and notifications when they notice a paying customer is not using the product in hopes that they don't become aware of the unnecessary expense and cancel the unused service.

Consumers have become submerged in monthly subscription costs but this burden has been even more extreme for companies who need to buy services for their teams, which are constantly changing in size. The subscription pricing model is a complex and challenging aspect of managing your costs since it's not as simple as predicting how many users you'll have for a specific product, you also have to factor in the volume-based discounts that incentivize you to purchase more users or seats than you actually need. Additionally, when companies perform layoffs or downsize they are stuck paying for software services for employees who are no longer working at the company.

While this complexity may seem valuable from a sales perspective as it enables companies to find creative ways to generate more revenue, it also comes with many costs to the company selling the services, ranging from lengthy negotiations, extended sales cycles, complex renewal processes, and customers who are constantly evaluating their options in search of a better deal. It also creates a false illusion of success which becomes threatening to the sustainability of the business because renewal terms often entail significant changes in users and revenue as customers take the renewal opportunity to correct their over-spending.

Wouldn't it be nice if customers could just pay for what they use?

Well, it worked for Slack, who was one of the pioneers of usage-based pricing in the SaaS world. Slack was one of the first companies to provide an automated usage-based pricing model which measured how many users each customer had using the service each day of the month and automated monthly invoices based on their usage. So if you had 20 employees on vacation this month and they did not login to Slack, you did not get charged for the days they were not using the app.

This is a double-edged sword because on one hand you can make the argument that Slack is losing revenue by not charging users for the days they don't login to the app, but on the other hand you can acknowledge how efficient Slack's sales and renewal processes are because they don't have to entertain conversations about quantity of users. Instead they encourage you to invite as many people as possible to the Slack app and whenever they login you get billed for their usage. This encourages more usage of your app since companies are likely to invite more total users, even if they don't work or need it full-time.

Slack became wildly popular for their success in growing exponential revenue with no sales team and this accomplishment is greatly attributed to their automated usage-based billing model.

So why haven't many SaaS companies followed Slack's lead with usage-based pricing?

Mostly because it required a lot of engineering, but those days are now behind us as Stripe just launched usage-based pricing capabilities directly within their platform.

Setup is simple, you create a "meter" which is whatever metric you intend to base your usage pricing on. Then you connect that data to the Stripe platform and now you have the ability to charge your customers based on usage, rather than quantity of "users" who may or may not be actively using the platform.

This leads to the bigger question of whether or not your company should switch to usage-based pricing?

This depends largely on what you're selling, who you're selling it to, what your internal challenges are, and whether or not usage-based pricing can ultimately help you grow your business.

My suggestion is to take a very simple approach to this decision rather than over-complicating it and stressing yourself out over something that will inevitably be a difficult choice as there are many potential pros and cons on each side.

To simplify this decision I suggest turning to the most important people in your organization; your customers.

You may have been receiving requests from customers already for usage-based pricing. If this is the case I suggest making the change without hesitation because any time you can deliver something your customers want, it will be good for business.

More likely you're in a situation where you're not sure what your customers prefer and in this scenario I suggest surveying your customer base (or a segment of the base) to gather data and insights on what your customer's preferences are and what their reasoning would be.

You should also keep a close eye on your competition because if they make the change you may be forced to follow, which is why it's a good idea to get ahead of the decision and look to be the first-mover as you'll not only make your existing customers happier but you'll be creating a new value proposition to approach prospective customers who are currently using one of your competitor's products.

While usage-based pricing models can help you acquire additional customers and drive revenue growth, these are not the only benefits to implementing usage-based pricing models.

Additionally, and arguably most significantly, the bigger advantage to implementing usage-based pricing models is around shortening your sales cycles and simplifying your billing and renewal processes. This is where the big savings come into play and where your finance team needs to strongly consider the upside. As we currently live in a world where SaaS companies are transitioning away from excess human capital and more toward automating the marketing, sales, and delivery of their services this makes it a perfect time to consider a transition to usage-based pricing.

What are the downsides?

Aside from the obvious lost revenue from users or seats that your customers would typically pay for that they aren't using, you also have to consider the challenges this brings to your forecasting models. However, I can speak from first-hand experience at Aircall where we used a combination of subscription and usage-based pricing, that while forecasting may become challenging during your initial transition to usage-based pricing, it eventually evens out and things become predictable once again for the bulk of your customers as you'll begin to understand the patterns of their usage.

For example, at Aircall where we would charge customers a monthly rate for their users and a usage pricing model on top of that depending on how many minutes of phone time they used each month, we were able to eventually notice patterns where usage would decrease (like over holidays for example) and we were able to bake this into our forecasting models.

So if you're nervous about forecasting, just know that while the transition will present some challenges it all balances out eventually and your forecasts will return to a more predictable pattern at some point after the transition.

The best advice I can give you is to strongly consider the impact this change is going to have on your competitive landscape and do your best to be a first-mover. Usage-based pricing is going to play a tremendous role in the future of all goods and services and can significantly contribute to sustainable revenue growth and increased customer satisfaction scores.

If you're considering a change but aren't sure how to approach the decision or how to structure your usage-based pricing model book a coaching session and I'll be glad to help.

Happy Selling,