What is metered pricing? | Easy guide

The right pricing model separates the SaaS products that fail from those that succeed and become a household name. 

While fixed fees and subscription models have worked for some SaaS businesses, those days appear to be over. 

If you’re looking for a pricing model that captures the value you provide to your users, allows them to scale easily, and feels fair, you should consider metered pricing.

In this primer, we’ll explain the metered pricing model and how to implement it properly. 

Here’s what we’ll go over:

• What is metered pricing?
• How does metered pricing work?
• Examples of industries that use metered pricing
• Advantages and challenges of using metered pricing
• Best practices for metered pricing implementation
• Frequently asked questions about metered pricing

Let’s get started. 

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What is metered pricing?

Metered pricing (also known as pay-as-you-go, consumption-based, or metered utilization pricing) is a model where customers pay for the exact amount of a product or service they use. 

Think of it like utility bills — you pay for the electricity or water you consume, not a flat monthly fee.

How metered pricing works

Here's a breakdown of the key components of metered pricing implementation:

• Measuring usage: The first step is establishing how you'll measure the customer's use of your service. This involves identifying a measurable metric that reflects the value your customers gain from your product. 
  
  Some examples include data storage, bandwidth usage, API calls, compute power, or the number of users currently using your SaaS.

• Setting rates: Once you have your metric, you'll determine the price per unit. This could be a simple fixed price (e.g., $0.10 per gigabyte of storage) or a tiered structure where the price changes based on usage volume. 
  
  For instance, the first 500 API calls might be $0.01 each, and any additional calls cost $0.005 each.

• Billing: A metered billing system tracks customer usage throughout the billing cycle, and then calculates the final invoice. This might be done in real-time or aggregated and billed monthly — the level of detail often depends on the type of service offered.

Which industries use metered pricing?

Metered pricing has become prevalent across industries where usage patterns can vary significantly between customers and throughout different time periods. Here's a snapshot of some key sectors:

• API-driven platforms: Businesses like Stripe (payments), Twilio (communications), or SendGrid (email delivery) frequently employ metered pricing models. Customers usually pay a small fee per successful transaction, SMS sent, or email delivered.
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• AI-powered services: As artificial intelligence becomes more integrated into software solutions, metered pricing is an attractive model. For instance, a company offering image generation via AI might charge based on the number of images created, or a language processing tool might bill per word analyzed.

• Mobile + Internet (Telecomms): Many mobile phone plans and internet service providers bill customers based on data usage. This allows those with lighter needs to pay less than heavy users.

• Cloud computing: Giants like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform offer extensive metered pricing. Users pay for computing power, storage, bandwidth, and the various other services they consume. 

Specific company examples

• Digital Ocean: This cloud hosting provider built its reputation on user-friendly hourly metered billing, making it ideal for developers and small businesses needing affordable testing environments.

• Mailgun: This transactional email service combines metered pricing for overage with subscription tiers, providing options for both startups and established businesses.

• Twilio: This provider of SMS, voice, and messaging services for developers offers pay-as-you-go pricing based on usage metrics like minutes of voice calls or the number of SMS messages sent.

Why do SaaS companies use metered pricing?

Metered pricing brings many advantages for both SaaS providers and consumers. Let’s start by looking at some advantages it brings for businesses: 

• Happier customers: With metered pricing, customers feel they're getting a fair deal. They pay for what they consume, which builds trust and encourages long-term loyalty.
  
  If you couple this with a transparent billing management system, then satisfaction could grow even more. 

• Better use of your resources: Metered pricing gives businesses a clearer view of how customers utilize their services. This data allows them to make informed decisions about resource allocation, identify areas for improvement, and target their offerings more effectively. 
  
  This is especially true for AI-based businesses that must pay other companies like OpenAI for each API call made by their users. By having more control over how they charge their customers, the cost of these API calls can be balanced more efficiently. 

• More revenue potential: While metered billing often starts as less expensive for customers, it aligns pricing with value. As customers use more of the service and derive more value from it, revenue potential increases.

Additionally, metered billing can open up new revenue streams alongside traditional subscriptions. These could be add-on features for heavy users or tiers for users who use the SaaS for highly specific tasks.

Now let’s look at some advantages that metered pricing can bring to your customers:

• Pay only for what you use: Perhaps the most direct advantage for users. This is especially appealing for occasional users or businesses with varying needs. They aren't locked into paying for unused resources or features.

• Better control over spending: Metered pricing offers transparency. Customers can see exactly how their usage translates into costs, allowing them to manage their budgets more effectively and avoid unexpected charges.

• Aligns with growth: Metered pricing models are inherently scalable. As a business grows and uses more resources, the price naturally increases along with the value it receives. This avoids the need for frequent upgrades and renegotiations that come with traditional tiered pricing.

What are the challenges of implementing metered pricing?

While metered pricing offers many benefits, companies considering it should be aware of these potential challenges:

• Technical considerations: Implementing a metered billing system often requires specialized systems and potentially additional personnel. You need to ensure accurate usage tracking, automated billing processes that reflect usage data, and a system capable of handling large amounts of data. 
  
  Consider a dedicated metered billing tool to help with this challenge. 

• Customer perspective: While many find metered pricing fair, there are potential concerns. Costs can fluctuate from month to month, making budgeting more challenging, especially if usage is variable. 
  
  Clear communication about how your pricing model works and offering tools for customers to track their usage can help ease these concerns.

• Aligning pricing with costs: It's important to analyze your cost structure when implementing metered billing. If your costs don't scale proportionally with customer usage, your profitability might suffer. 

Best practices for implementing metered pricing

To help you start your metered pricing implementation journey, here are some best practices you should follow:

• Transparency is key: Your usage metrics and pricing structure should be straightforward and easy for customers to understand. Avoid hidden fees or complex calculations that leave them in the dark about how their bill is generated.

• Offer tools for visibility: Give customers a way to monitor their usage in real time. This could be a dashboard within your service or regular usage reports. Alerts for when customers approach certain usage thresholds can also help them manage costs.

• Consider usage estimates: If possible, provide customers with estimated costs based on their current usage patterns. This helps with budgeting and avoids unpleasant surprises at the end of the billing cycle.

• Choose the right billing system: Invest in a metered billing solution that integrates seamlessly with your existing systems. 

Look for billing solutions like Orb, which features automated billing, accurate usage data tracking, and the ability to handle different pricing structures.

Frequently Asked Questions

What is an example of metered pricing?

Cloud storage services often charge per gigabyte of storage used each month. For instance, you might pay $0.10 per month per GB.

What is the difference between flat pricing and metered pricing?

Flat pricing charges a fixed fee per billing period, while metered pricing charges based on the customer's exact usage level.

What is a metered fee?

A metered fee is a charge based on a specific usage measurement within metered pricing. For example, a cloud service might charge $0.05 per megabyte of data transferred.

While the pricing model itself is metered, this individual fee is one component that contributes to the overall metered pricing bill.

What is the difference between metered pricing and usage-based pricing?

Metered pricing calculates charges based on a predefined quantity of usage (think: the number of seats used on a SaaS), while usage-based pricing derives costs from analyzing actual user activity events individually (think: the composition of all calls, texts, MMS, roaming charges, data usage and other phone events monitored and billed by a mobile phone company for a specific customer).

Next steps

After reading our primer, you should have a much clearer idea of how metered pricing works. Perhaps you’ve decided it’s the model you’ll use for your SaaS product from here on out. 

But now, an important question pops up: How can I implement metered pricing easily across my entire customer base?

That’s where Orb comes into the picture. 

Orb is a billing management platform specially designed for metered billing. Our full suite of features is tailored to the needs of SaaS companies who need help with billing complexities. Here’s how:

• Setting up integrations: Getting started with Orb is simplified through its powerful APIs and seamless integrations, enabling quick ingestion of usage data from your app or data warehouse. With integrations to S3, Segment, and Orb's REST API, your system can be fully integrated and operational in no time.

• Defining custom metrics: Orb excels in offering the flexibility to define a broad spectrum of usage metrics, from the number of API calls to the amount of storage utilized. Orb simplifies the process of tracking and billing for these metrics, making it efficient and direct.

• Creating pricing plans: Orb supports a variety of pricing models, from detailed per-unit charges to complex tiered pricing that responds to usage levels. Its Plan Builder allows for the easy setup of detailed pricing models that cater to diverse customer behaviors, all without a single line of code.

• Facilitating the billing cycle: The entire billing workflow is automated by Orb, encompassing usage tracking, invoice creation, fee calculations, discount applications, and billing adjustments. 

• Transparency above all: Orb's approach to metered billing includes providing customers with dedicated dashboards. These tools offer immediate insights into usage and costs, fostering clarity and trust.

• Advanced reporting and analytics: You have access to detailed reports and analytics on usage patterns, billing integrity, and revenue streams. These insights allow fast and informed decision-making.

• Updating and adjusting plans: Responding to changes in market conditions, customer input, or strategic direction is effortless with Orb. The platform's agility ensures that pricing plans can be modified quickly, maintaining seamless billing operations without interruption.

Learn how Orb can help you execute a successful, hassle-free metered billing implementation.