Subscription vs Usage-Based Pricing: Choosing the Perfect Pricing Model for SaaS Success
mins to read
In general, SaaS companies spend only six hours to decide on pricing. And as research by OpenView shows, 4 in 5 have to change their pricing at least once yearly. Choosing the right pricing model becomes a significant challenge for many SaaS companies, starting from finding the balance between customer affordability and profitability for the company to adapting their pricing models as they scale and introduce new features or services, and more.
When looking at stats, 98% of SaaS companies attribute their success to the choice of their pricing models. From our experience of working with SaaS businesses, most companies choose between two models: subscription-based or usage-based. By the way, we at Eleken use a subscription-based model ourselves and will cover it in more detail later.
Below, we will compare subscription and usage-based pricing models to help you determine which one fits your business needs better. And when you’d like to learn more about ways to price your SaaS, consider watching our video below.
What is usage-based pricing?
The usage-based pricing, also known as “pay as you go”, is a model when customers pay only for their actual usage, like the number of requests, scheduled posts, transactions, data used, issued invoices, and so on. According to the report, 46% of SaaS businesses adopted a usage-based pricing model in 2022, and the index is expected to reach 61% by the end of 2023. Businesses that chose usage-based pricing experienced an average of 137% net dollar retention.
SaaS businesses choose this model for many reasons. One of them is slightly lower prices compared to the monthly payments or prices that enterprises pay. Thus, there is no commitment to start using a product, such as a requirement to pay in advance, which motivates potential customers to select the SaaS service.
For example, our client TextMagic, an all-in-one text messaging service for mobile marketing, operates using the usage-based pricing model. TextMagic customers can create a free account and use all the features, including email campaigns, live chats, and reports, and only pay for the number of SMS text messages at the end of the billing period. Inbound messages are free. Such a transparent pricing model allowed our clients to avoid miscommunication with users, as the latter were liable for all charges.
What is subscription-based pricing?
Despite the growing popularity of usage-based pricing, many companies still opt for subscription-based model because it provides a higher degree of predictability to the revenue stream and ensures better business stability. The idea behind this model is very simple: users pay a regular fixed amount monthly or annually to use the service. By the way, that’s why we chose it as our own pricing model.
For example, Eleken is a UI/UX design agency, but not a typical one. Our clients pay a monthly fee (time-based retainer model) for product design done by experienced UI/UX designers. We can help design from scratch, redesign existing applications, or create a responsive design for any type of product. Cooperating with us is easy. It’s like hiring an in-house designer remotely but without the operational burden and overhead costs. Here are some benefits of buying a subscription at Eleken:
- No need to educate new employees.
- Getting the best talent without spending time on hiring with an option to change the number of designers you hire whenever you need.
- No payments for sick/vacation leaves or any other overheads. It’s on Eleken’s side.
- Full commitment to your project as a responsible designer works only on one project at a time.
- A three-day free trial period to help you test how we work and make an informed decision without any payment information upfront.
- The subscription can be canceled anytime.
Our model has shown great results in many SaaS companies. Check out our case studies to learn more.
Subscription vs. usage-based pricing: A comparison matrix
Now, let’s compare subscription and usage-based pricing in terms of characteristics and advantages for specific business sectors and industries.
Subscription + usage-based pricing. Benefits of the hybrid approach
Both pricing models have their pros and cons and can be suitable for various scenarios. Very often, SaaS companies even adopt a hybrid approach, when both models are combined to address different needs and enhance revenue potential. Based on the OpenView study, 46% of companies use a hybrid approach, offering their customers usage-based plans alongside traditional subscriptions.
For example, let’s consider our client Astraea, an AI platform that allows to acquire, discover, and analyze satellite data at scale, offers flexible pricing, catered to users’ specific needs. It is subscription-based pricing with an additional Pay-as-you-grow imagery ordering option. The company has benefited from hybrid pricing as flexible contracts allowed it to attract almost all types of businesses across various industries and sizes, including Fortune 500 companies, NGOs, and early-stage startups.
So, how to choose the right pricing model for SaaS?
While the choice of the pricing model is completely up to you, as you have to consider many nuances we tried to cover in this article, there are still some steps you can take when deciding on the pricing model for your SaaS company:
- Do thorough market research to identify the prevailing pricing models in your industry and assess their effectiveness.
- Analyze competitors, why they choose this or that model, as well as try to answer how effective it is for them.
- Understand the target users' needs, preferences, purchasing behaviors, and pain points.
- Identify what customers value more, such as predictability, flexibility, customization, or other specific pricing attributes.
- Assess the cost structure and your pricing strategy, whether it should have fixed costs, reward and incentivize loyal and existing customers, or generate profits.
- Think about your SaaS pricing page design and learn more about SaaS pricing page design principles.
And if you need help in designing an effective and appealing pricing strategy for your SaaS business, Eleken is ready to become your design partner.