Metered Usage: How to increase your SaaS revenue

While metered usage has been around for a while, it's gaining significant traction in the SaaS industry. 

This model offers advantages like fairness, transparency, and scalability for businesses looking to maximize their revenue growth. 

However, it’s crucial to remember that metered usage isn't a one-size-fits-all solution and requires careful consideration for successful implementation.

That’s why today, we’re diving into metered usage.

In this article we’ll explore:

• What is metered usage and how is it different from other pricing models?
• Examples of SaaS companies that implement metered usage
• Benefits of adopting this model
• Challenges in metered usage implementation and their respective solutions
• How to implement metered usage in your SaaS business
• A quick list of best practices for metered usage pricing

Let’s get started. 

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What is metered usage?

Metered usage (also known as metered utilization or metered pricing) is a pricing model where the customer pays for the exact amount of a software service they consume. This differs from models in which customers pay a fixed price regardless of their usage levels.

In the SaaS world, metered usage means the customer's bill might be based on factors like:

• Data storage: The amount of data they store on the service.
• Bandwidth: Data transferred to and from the software.
• Feature usage: The number of times they access specific features.
• Compute power: The processing power they consume via the service.

Metered usage vs. other pricing models

Aside from metered usage, other common SaaS pricing models include:

• Flat-rate pricing: With this classic subscription model, customers pay a fixed monthly or annual fee, regardless of how much they use the software.
• Tiered pricing: Here, customers choose a subscription tier with predefined limits on features or usage. If they exceed those limits, they either upgrade to a higher tier or pay extra fees.
• Freemium model: The basic version of the software is free, while the customer pays for additional features, storage, or advanced options.

Why is metered usage different?

The key distinction with metered usage is its direct alignment with the value the customer gets from the software. If their usage is light in a given month, they pay less. If they use the software heavily and drive significant results, their subscription costs increase, but that also reflects the value they're receiving.

Metered usage SaaS examples

Let's look at some real-world examples of SaaS companies that successfully leverage metered pricing in their solutions:

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• Cloud computing giants: Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform are known for metered pricing. Customers pay for precisely the computing power, storage, bandwidth, and other services they use.
• AI-powered platforms: Companies like CopyAI offer tiered plans for written content generation. These tiers provide a certain amount of credits users spend every time they create AI prompts. If users go over the credit limit, they enter a metered pricing model, where they pay extra the more prompts they create. 
• API-driven platforms: Businesses like Stripe (payments) or SendGrid (email delivery) frequently employ metered pricing models. Customers might pay a small fee per successful transaction or per thousand emails sent.
• Data-intensive applications: Snowflake, a cloud data warehouse solution, charges customers based on their storage and compute usage. This allows businesses to pay in proportion to their data needs.

Tip: It’s common to see metered usage combined with other pricing models. For instance, Midjourney charges users a monthly fee. If they go over their membership’s “GPU minutes” they get charged $4 per extra hour, turning Midjourney into a metered service.

Benefits of adopting a metered usage model

Metered usage offers compelling advantages for both SaaS businesses and their customers:

• Customer-focused flexibility: Customers only pay for what they use. They can easily increase or decrease their usage without the hassle of changing plans or contracts.

• Scalability for growth: Your income grows along with your customers. The more they use your service, the more you earn. This avoids the cost mismatches sometimes seen with subscription plans.

• Enhanced customer satisfaction and retention: Clear billing, where customers know exactly what they're paying for, builds trust. Customers who feel they're getting good value are more likely to stick around.

Challenges and solutions

While offering many benefits, metered usage does come with some potential challenges that SaaS companies need to carefully consider:

• Billing complexity: Implementing a metered usage model requires systems that can accurately track various usage metrics, link them to individual customer accounts, calculate charges based on fluctuating usage patterns, and handle more frequent billing cycles than traditional monthly models.some text
  • Solution: Invest in a billing platform designed to handle metered usage. This will automate calculations, reduce errors, and integrate with your existing usage tracking systems.
• Customer usage unpredictability: Fluctuations in customer usage can make revenue forecasting more difficult compared to fixed subscription models.some text
  • Solution: Consider tools and strategies that promote predictability, such as usage caps, tiered pricing, and providing customers with tools that project potential costs based on their current usage patterns.
• Understanding the model: Some customers might find metered models less intuitive than straightforward flat-rate subscriptions.some text
  • Solution: Focus on clear communication and easy-to-understand billing statements. Offer resources to help customers grasp how the pricing model works and how to monitor their usage.

How to implement metered usage in your SaaS business

Successfully transitioning to a metered usage model involves careful consideration of several key elements:

Identify key metrics

• What to measure: Choose metrics that directly reflect the value your customers derive from your service. This could be data storage, API calls, feature usage, transactions processed, or other relevant factors.
• How to track usage: Establish reliable systems to accurately track these metrics and link them to individual customer accounts. 
  
  Consider options such as integrating your service with metering APIs, developing and distributing an SDK for customer integration, or implementing server-side monitoring tools to capture data directly within your application.

Technology considerations

• Billing platform: Investing in a billing platform designed for metered usage is often necessary. It will automate calculations, handle variable pricing structures, and may integrate with your chosen usage tracking systems.
• Scalable infrastructure: Make sure your systems can handle the extra work that comes with metered billing. This might mean using cloud-based solutions that can grow and shrink as needed to match how much your customers are using your product. You'll also need a way to reliably store and process all that usage data.

Communication strategy 

• Customer education: Proactively explain the benefits of metered pricing to your customers, highlighting its fairness and potential for cost savings with lighter usage.
• Clear and transparent billing: Provide easy-to-understand invoices that clearly show how usage translates into costs.
• Usage visibility: Consider tools that allow customers to track their usage in real-time, helping them understand and manage their spending.

Best practices for metered usage pricing

To make the most of a metered usage model, consider these best practices:

• Competitive research: Thoroughly analyze how your competitors are employing metered pricing and the rates they charge. This will help you benchmark your pricing and ensure you're offering fair value to customers.

• Analyze your costs: It's vital to have a clear understanding of your own costs associated with delivering your service. Metered pricing should align with these costs to maintain a sustainable and profitable business model.

• Start with simplicity: Initially, avoid intricate pricing structures. Begin with a clear, straightforward approach that resonates with customers, such as a simple per-unit cost (i.e., charged per GB of data stored). As you gain more data, you can refine your model.

• Make decisions based on data: Regularly monitor usage data, customer feedback, and market trends. This information is essential for adjusting your pricing strategies over time and guaranteeing continued alignment with your business goals and customer expectations.

• Communication remains key: Transparency is paramount. Proactively communicate any pricing changes to your customers, clearly explaining the rationale and benefits to avoid any surprises.

Next steps 

Is the metered usage billing model a good match for your SaaS? If so, your next step is to start the journey of actually implementing it in a way that doesn’t cause headaches.

Orb is a metered-usage billing management platform specifically designed for SaaS companies embracing metered usage.

Here's how it empowers you to execute a seamless metered billing system:

• Set custom metrics: Orb gives you the flexibility to define the usage metrics that matter most for your business, whether that's API calls, data storage, transactions processed, and more. Tailor your billing model precisely to how your customers derive value.

• Transparency for trust: Orb prioritizes transparent billing. Customers have access to dedicated dashboards, providing real-time insights into their usage and how it translates into costs.

• Frictionless integrations: Get up and running quickly with Orb's powerful APIs and integrations with common platforms like S3, Segment, and Orb's own SDKs. Easily connect your existing systems to start tracking usage data effortlessly.

• Evolve with ease: Market conditions change, and so can your pricing. Orb's agility lets you quickly modify pricing plans in response to data, customer feedback, or shifting business goals.

• Pricing plan flexibility: Orb's Plan Builder empowers you to design a range of pricing options, from simple per-unit charges to complex tiered structures. This allows you to cater to the diverse needs of your customer base.

• Automated billing workflow: Orb automates your entire billing process, including usage tracking, granular invoicing, fee calculations, discounts, and any necessary adjustments. This makes manual billing calculations seem like a relic from the past. 

• Insights from cold hard data: Orb provides exhaustive reports and analytics. Gain a deeper understanding of usage patterns, revenue streams, and billing health to make informed, data-backed decisions about your pricing strategy.

Learn how Orb can help you implement a metered usage billing model with ease.