Pay-as-you-go model for SaaS startups - does it work?

Shifting your SaaS from a basic subscription model to a pay-as-you-go pricing strategy can feel daunting. The reason is simple:

You’ve had success with subscription pricing so far and you don’t want to compromise your monetization strategy by switching lanes now. 

In truth, as your company scales, adapting your pricing strategy to better align with user consumption can unlock new growth avenues both in terms of number of customers and revenue.  

In this deep dive, we’ll show you how this pricing strategy could be a great fit for your business.

We’ll cover: 

• What is a pay-as-you-go business model?
• The different types of pay-as-you-go plans
• Real-life examples of businesses using pay-as-you-go models today
• The pros and cons of using pay-as-you-go
• Handy implementation tips 
• The best way to get started with a pay-as-you-go model

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What is the pay-as-you-go business model?

The pay-as-you-go model is known by many names, including:

• PAYG model
• Pay-per-use model
• Usage-based pricing
• On-demand pricing
• Consumption-based pricing
• Metered billing
• Incremental billing

In simple terms, pay-as-you-go is a pricing model where customers pay for a product or service based on how much they actually use it. 

Rather than paying a flat monthly fee, users are billed incrementally based on usage.

This model gives customers unparalleled flexibility, allowing them to scale their usage up or down according to their needs. For businesses, it helps attract a broader customer base by lowering the SaaS product’s barrier to entry.

It’s a billing structure that balances scalability and transparency to put the customer in the driver’s seat. This often leads to increased loyalty as users appreciate the fairness of only being charged for the value they derive from your SaaS product. 

Types of pay-as-you-go plans

Here’s a quick look at three of the most popular pay-as-you-go plans: 

Consumption-based plan

In this plan, customers are only charged based on the amount of the service they actually consume, such as storage space or AI tokens. 

This model is ideal for cloud storage or services with fluctuating usage.  

This makes it super budget-friendly for users — perfect for startups that don't consistently need many resources. 

The downside? Close monitoring is key to avoid surprise charges, especially for businesses that might overshoot their usage.

Credit-based plan

In the credit-based model, customers purchase a set amount of credits upfront to access your SaaS product. 

Think of calling cards, where you prepay for a set number of minutes to use for calls. 

In the same way unused minutes sometimes roll over on a calling card, unused credits in your SaaS product might also carry over to your customer’s next billing cycle for some flexibility. 

This works well for users with consistent usage patterns but can be less than ideal for those whose usage patterns fluctuate constantly. To circumvent this issue, many SaaS businesses offer bulk discounts to incentivize buying larger credit bundles.

Hybrid plan

The hybrid model combines the best of both worlds. Customers prepay a base amount for a set service level but get charged extra fees if they exceed a usage limit. 

This gives you a predictable base income while capturing extra revenue from heavy users.  

For users, this means more flexibility for occasional spikes in usage without breaking the bank. A hybrid plan is perfect for customers with moderate overall usage who might need a buffer for busier seasons. 

Pay-as-you-go business examples

The case of AWS’s pay-as-you-go model

How does their model work?  

Amazon Web Services (AWS) is a cloud computing platform offering a wide range of services. Their pay-as-you-go services charge users based on the actual resources they consume, like storage, compute power, and bandwidth used. 

How did it benefit their business?

The flexibility of AWS's pay-as-you-go model has attracted — and continues to attract — a vast array of customers.  

Startups can experiment and grow without worrying about fixed costs while established businesses benefit from cost-efficiency, only paying for the resources they actively use. This has cemented AWS as one of the leading players in the cloud computing market.

The case of Mailchimp’s pay-as-you-go model

How does their model work?  

Mailchimp, the popular email marketing platform, offers a credit-based pay-as-you-go plan alongside its monthly subscriptions. In their plan, each credit represents sending an email to a single contact. Users purchase credit bundles upfront, and their balance is deducted from each email sent.

How did it benefit their business?

This strategy has helped Mailchimp increase its user base substantially. Since this model caters to businesses or individuals who may only send emails occasionally — like quarterly newsletters or seasonal promotions — Mailchimp is offering a cost-effective option for users who might not find value in full-subscription features. 

The case of Microsoft’s Azure Blob storage pay-as-you-go model

How does their model work?  

Unlike traditional file servers with fixed costs, Azure Blob storage offers a pay-as-you-go model for unstructured data. This means businesses can store data — documents, photos, videos, backups — in the cloud and only pay for the storage they use (per gigabyte) and the number of actions they perform (retrievals, deletions).

How did it benefit their business?

By eliminating fixed costs associated with traditional storage solutions, Azure simplified their own infrastructure needs. This freed up resources to focus on service innovation and scalability — which has led to them becoming giants of the cloud computing market — just like AWS.

The case of Twilio's pay-as-you-go communication APIs

How does their model work?  

Twilio, a cloud communications platform, took the industry by storm with its pay-as-you-go model for communication APIs. 

Developers can integrate features like voice calls, text messages, SMS verification, and video chat into their applications without upfront commitments or complex infrastructure setups. They simply pay per unit of communication used — per call minute, text message sent, or API request.

How did it benefit their business?

Twilio's pay-as-you-go approach democratized access to communication functionalities.  Startups and small businesses — previously priced out of these features — could now easily incorporate them into their applications.

This wider user base fueled rapid growth for Twilio, solidifying its position as a leader in cloud communications.

Pay-as-you-go model pros and cons

Bear in mind that pay-as-you-go models aren’t as idyllic as they might sound. You need to weigh out the pros and cons before you commit to such a model:

Pros

• Flexible above all: The pay-as-you-go model grants users the freedom to scale their usage up or down depending on their needs. Customers with fluctuating usage patterns benefit greatly from this, as their costs directly reflect their activity.
• Low barrier to entry: By eliminating upfront costs, the pay-as-you-go model reduces the barrier to entry for new customers. This is particularly attractive to budget-conscious users or those unsure about their long-term commitment to a service.
• Scalable revenue model: The pay-as-you-go model allows your revenue to automatically scale alongside your customer usage. This eliminates the risk of offering a flat fee that undervalues high-usage customers or overcharges low-usage ones. Every customer contributes directly to your bottom line, creating a sustainable revenue stream.

Cons

• Potentially complex pricing structure: Implementing a pay-as-you-go model requires constant monitoring of usage and the creation of billing events. Determining a fair and cost-covering pricing structure based on usage can be challenging.
• Unpredictable costs: While offering control over spending, the pay-as-you-go model can also lead to unforeseen costs, especially if usage isn't diligently monitored.  Customers with irregular usage patterns may find it difficult to budget accurately.
• Perception of lower value: Some customers might associate pay-as-you-go pricing with an inferior product. Showcase your solution so that users of all sizes can see the benefits your SaaS provides to their companies regardless of your pricing model.

Is pay-as-you-go right for your SaaS business?

Pay-as-you-go could be a good fit if:

• Your product has variable usage. If customers use more of your service some months and less other times, pay-as-you-go allows them to use your software without getting locked into a long-term contract.
• You want to attract customers seeking flexibility. Some users prefer pay-as-you-go because they might use your SaaS for some months more than others. Keep in mind this also counts for your business too — as the next point explains.
• Your costs are also variable. If your own costs go up and down based on usage — like with AI tokens and API calls — pay-as-you-go lets you pass those costs onto customers in a fair way. You’ll be able to keep your profit margins steady without sacrificing service quality.

Pay-as-you-go may not be the best choice if:

• Your product has consistent usage. If customers generally use the same amount of your service each month, a standard subscription plan could make more sense. In such cases, pay-as-you-go adds extra complexity without much benefit.
• You want more predictable revenue. The pay-as-you-go model can lead to oscillations in your monthly recurring revenue, making financial forecasting difficult. Fixed-price plans will likely provide more stability.
• Your service is highly complex. Monitoring usage and billing customers accurately requires sophisticated software. For high-complexity SaaS products, investing in these systems can be pricey and not worth the while — or it might be with the right partner.
• Your costs are fixed. If your costs remain the same no matter how much customers use your service, pay-as-you-go could reduce your profit margins. You may be better off with a standard pricing plan if this is your case. 

5 tips for implementing the pay-as-you-go model

In the interest of saving you valuable time, here are five tips if you’re feeling ready to start your pay-as-you-go implementation journey:

• Pick the right pricing: Choose a usage-based, credits-based, or hybrid model that aligns with your product's value proposition and how customers will use it. Strike the right balance between flexibility and predictability.
• Invest in billing software: Tame the intricacies of pay-as-you-go billing with a robust system. Track usage, trigger invoices, and manage everything in one place. Seek a solution that integrates with your product and plays nicely with your stack.
• Empower customers with knowledge: Equip customers with resources like pricing calculators, cost estimators, and usage monitoring tools. Transparency empowers them to control costs and make informed usage decisions.
• Monitor and optimize for success: Keep an eye on customer engagement. Analyze usage patterns to identify opportunities for scaling or cost reduction while maintaining value. Make strategic adjustments and monitor the impact to fine-tune your model.
• Make customer support part of your value pop: Exceptional service translates to loyal users who become your biggest advocates. Resolve issues swiftly, offer guidance on optimizing spend, and build strong relationships. Clear documentation and onboarding are also a big plus!

Pay-as-you-go model FAQs

What is the pay-as-you-go model of cloud computing?

The pay-as-you-go model means you only pay for the cloud computing resources you use. Rather than paying a fixed monthly fee, your bill is based on factors like processing, storage, and bandwidth.

What is an example of a pay-as-you-go company?

Major cloud providers like AWS, Azure, and Google Cloud Platform all offer pay-as-you-go pricing for their services. You can also find this model with SaaS tools such as Mailchimp for transactional emails or Zapier for workflow automation.

What is the difference between consumption-based and pay-as-you-go?

These terms are often used interchangeably. However, consumption-based is the broader term for any usage-dependent pricing, while pay-as-you-go is a specific type with direct billing for each unit consumed.

Next steps 

Now that you’ve learned everything you need to know about pay-as-you-go pricing models, you’re ready to start implementing one that fits your SaaS product. 

The good news: You don’t need to make it happen alone.
Orb is your go-to choice for solving your usage-based billing needs. We offer a wide array of highly flexible tools that fit your customers, teams, and stack. 

Orb’s extensive billing features can help you implement your pay-as-you-go model in no time. Here’s how: 

• Event-based billing precision: Orb excels in capturing every event that occurs, ensuring accurate billing for pay-as-you-go models. This means customers are billed accurately every single time. 

• Flexible pricing configurations: With plan versioning, Orb simplifies the management of different pricing tiers and changes, allowing businesses to adapt their pay-as-you-go models as their services evolve without needing to migrate pricing data.

• Advanced usage-tracking: Orb's usage-tracking capability is designed to turn complex usage data into crystal-clear invoices. This is ideal for businesses offering services that charge based on consumption at a granular level — think API calls and AI credits. 

• Integration with your stack: Orb's platform is built to seamlessly integrate with data warehouses (Snowflake, RedQuery, etc.) and accounting systems (Netsuite and QuickBooks). Thus, the implementation process doesn’t disrupt ongoing operations.

• Granular-level reporting: By providing detailed reports on usage and billing, Orb assists businesses in financial analysis and forecasting. Orb is committed to providing actionable insights to understand customer behavior and predict future revenue streams.

• Customizable billing metrics: Orb’s drag-and-drop UI for billing metrics and its custom SQL editor allow businesses to customize how they measure and bill usage, providing the flexibility needed to create fair and transparent pay-as-you-go pricing plans.

• Support for hybrid billing models: Recognizing the trend towards hybrid models that combine usage with seat-based pricing, Orb's platform is well-equipped to handle these complexities, making it the most versatile choice in the market. 

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Learn how Orb can help you execute a successful, hassle-free consumption billing solution.