Top 5 things to know about usage-based pricing

Flat subscription rates? Nah man that’s for your grandparents. Usage-based pricing is where it’s at. Some squares call it metered service but it means you only use what you pay for.

Usage-based pricing is definitely having a resurgence, and there are some big advantages to offering it and using it as a customer.

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Here are five things to know about UBP, a.k.a. usage-based pricing.

1. Usage-based pricing makes trying a service less risky. If you don’t have to commit to a flat monthly payment, it’s easier to justify trying a service for a small number of people or a small sector of your business, as a test.
2. Usage-based pricing can be more efficient. Rather than subscribing to a cloud service that will always cost the same no matter what behavior your developers exhibit, usage-based pricing lets you adjust and use tools like activity-based costing. You might move to serverless computing as part of this.
3. Pricing models vary. Some are per unit. Like Twilio charging you per API call for example. Some are pay-as-you-grow, meaning you license capacity and as soon as you hit the max you add more capacity.
4. Usage-based pricing can complicate budgeting. The advantage to a flat rate is you always know what it will cost you. But with usage-based pricing you may run into cost overruns because of unexpected usage. So, it may not be right for every service in every company. That’s true if you’re a provider, too. If all your customers suddenly use a lot less, your income can plummet.
5. There’s no lock-in. Good for customers; bad for providers. Flat rates often come with annual contracts. Usage-based means switching can mean you just stop using the product and you don’t have to pay. Providers can make switching less attractive with a good product and customer service of course, and with discounts, especially discounts at usage thresholds.

Whatever you think of UBP, it’s on the rise. OpenView Partners estimated 30% of Software as a Service companies had a UBP model in 2019 by 2021 that was up to 45%. So, there are certainly plenty of options out there.

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