Why usage-based pricing (UBP) is a winning model for SaaS business and how to implement it

Marek Rubasinski from Paddle’s newest partner, m³ter, takes us through why the usage-based model is crucial to the future of SaaS, its key challenges, and how Paddle+m³ter can help.

Usage-based pricing (UBP) is nothing new; it’s been fundamental to verticals like utilities, telecommunications, and logistics for decades. What's new is its application to software.

What is user-based pricing?

With user-based pricing, the cost of a service is based on the customer’s consumption. Rather than paying for expected need (e.g. capacity, per seat) the customer pays only for what they actually consume (usage) - and it’s easy to mix fixed and variable pricing elements.

What’s driving the adoption of user-based pricing in software?

• Automation, APIs, & AI - It’s increasingly common for your users to be machines rather than people. Services need to scale their value based on consumption and impact, rather than a count of humans. 
• Product-Led Growth (PLG) - PLG is a low-friction, self-service approach to adoption, where the buyer is the end-user. UBP works well as it helps minimize barriers to initial adoption and provides an automated scaling path.

Why does user-based pricing work?

UBP works because it enables value-based pricing that scales easily with a customer’s success.

• Easier adoption -  Barriers to UBP adoption are low.  It’s easy to try services without large commitments, which encourages evaluation and experimentation and broadens your addressable market.
• Costless upsell - Grow revenues from customers without sales effort; as your customer uses more, they pay more, with no sales intervention required.
• Customer satisfaction - Customers don’t have to worry about shelfware, wastage, or failing to get full value from a commitment. 

But more importantly, applying the right pricing metric aligns usage and spend with the customer’s target outcomes - they’ll only pay more if they are successful themselves. 

UBP is helping drive outstanding performance. SaaS businesses with usage-based offerings are experiencing >30% year-on-year growth compared to the ~20% of the broader SaaS space, and net revenue retention (NRR) of 120% compared to the rest of the industry’s 110%. 7 out of the 9 SaaS IPOs that had the best NRR in the last few years – the likes of Snowflake and Datadog – operated UBP models.

How to implement user-based pricing

There are two common challenges in implementing UBP - automating billing operations and delivering a great customer experience. What they have in common is your need to capture and process data in the right way and use it to power your consumption-based pricing strategy.

Automating billing operations - UBP presents a new challenge for your business operations, as your team needs to bring together metering of your customers’ usage with pricing to rate usage and produce accurate bills.

This can be incredibly painful if done manually. Spreadsheets are used by many companies, but this is error-prone, doesn’t scale, consumes valuable resources, and can't cope with complexity.

Bringing automation into billing operations for UBP can help you eliminate errors, reduce costs, and free up valuable people.

Delivering great customer experience - Implementing UBP should also include a great customer experience, with accurate, transparent billing crucial to build trust over time.

With UBP, pricing is a part of the product experience. Because your payment amount depends on how much you use, customers expect visibility on what they are consuming and how that will translate to their bill at the end of the month.

This means you need real-time information, presenting a customer with the running total of their bill today, and even the ability to forecast how much it will be for the full month.

m³ter + Paddle: An easy, flexible and powerful solution to UBP challenges

m³ter has been designed from the ground up to solve key user-based pricing challenges:

• Flexible, powerful, and elegant easy-to-use solution.
• Cloud scale and developer-first with full API access.
• Works with your existing tooling ecosystem and can integrate with anything, meaning you don’t have to change any of your other systems.

As per Paddle’s recent announcement, m³ter can now come bundled with your Paddle service and comes pre-integrated with more features and capabilities being developed to follow.

Get in touch to learn more about how Paddle and m³ter can help your business scale your revenue growth through user-base-pricing.