How do you pay for your SaaS tools? Is it via subscription-based or consumption-based pricing plans?
In years gone by, the answer would be the same for everyone: You pay monthly and use all the features that your package offers. But like everything related to business tech, times and technology changes. And so do payment plans.
The new trend is consumption-based SaaS pricing, which is when customers pay only for what they use. This can work a lot better for some larger companies but it isn’t the best choice for every company and there’s a few considerations you need to make before jumping feet-first into a consumption-based plan.
This shift is significant because it aligns costs with actual usage, increasing flexibility, value, and customer satisfaction in SaaS. As long as you pick an SaaS that aligns with your needs and doesn’t include high prices or hidden fees.
This article begins by supporting your understanding of subscription-based pricing, the rise of consumption-based pricing, business benefits, and online global payments. By the end, you’ll know if a consumption-based pricing plan is best for your software as a service tool.
Understanding Subscription-Based Pricing
So, let’s understand what subscription-based pricing really means. It includes a fixed price that vendors based on tiers of features and data usage or time, such as monthly or annual use.
This pricing plan is convenient for organizations as it provides predictable costs. You know what you’re getting upfront without hidden fees, so it’s easy to budget for each month or year because costs remain the same. Simple, right?
Well, yes and no.Even though a subscription-based pricing plan has benefits, you might also face a few challenges and difficulties. For instance, we all know what happens when you find yourself paying for services you don’t use. However, it is too late; you have already paid for the whole year subscription plan. Equally, if you get a smooth-talking salesperson, you might find yourself with the wrong package which will lead you to mismatched value.
Despite its pros, subscription-based pricing also has serious drawbacks and disadvantages to consider before taking the plunge. But is consumption-based pricing way more better?
The Rise of Consumption-Based Pricing
It is the time to understand the basics of consumption-based pricing as well. It is a drastic departure from subscriptions because it includes only paying for what you use, like pay-as-you-go cell phone services that require you to pay for services that you engage with.
The main benefits of consumption-based SaaS pricing are:
- Cost Efficiency: It allows customers to pay only for what they use, avoiding overpaying for unused services or underutilized resources.
- Scalability: Consumption-based pricing gives the opportunity to the businesses to increase or decrease costs based on usage amount, providing flexibility in budget management.
- Better Value Alignment: Costs are directly connected to the actual value consumed, increasing customer satisfaction levels and ensuring they pay only for what they need.
- Predictable Growth: As businesses grow, their SaaS costs increase proportionally to usage, creating a link between growth and expense.
- Improved Customer Retention: Customers are more likely to stay with SaaS providers when costs directly align with their needs, fostering long-term relationships.
Due to the rise of SaaS vendors offering pricing based on consumption, some of the largest organizations in the world have adopted cloud computing. Some examples of cloud computing include AWS (Amazon Web Services), Microsoft Azure, and data storage providers.
Challenges and Considerations with Consumption-Based Pricing
On the surface, paying for a SaaS based on how much you use it seems great as there are no wasted usage or unused features. But, like the subscription-based model, it is not perfect, obviously.
Challenges and considerations of consumption-based SaaS pricing include:
- Unpredictable Costs: Consumption-based pricing can lead to inconsistent costs, making it harder for customers to predict and control their expenses accurately.
- Complex Billing: Tracking and understanding usage can become complex, requiring customers to monitor consumption closely to avoid unexpected charges.
- Usage Overestimations: Customers may overestimate their usage, leading to higher costs than expected, especially when scaling services or features.
- Difficult Comparison: Comparing consumption-based pricing models across different SaaS providers can be challenging, as each may have different metering systems and pricing structures.
- Lack of Control: Customers may feel less control over costs when usage spikes unexpectedly, especially during high-demand or activity periods.
Consider these challenges before committing to a consumption-based pricing plan for a new SaaS tool.
Factors Leading to the Move from Subscription-Based SaaS Pricing to Consumption-Based Pricing
While reading about the distinctions between these two SaaS pricing models, you might be wondering why this shift happened and why things changed. The demand for more flexible, value-driven pricing is one of the main driving forces behind the shift. However, there are many more factors beyond changing customer expectations.
Changing Customer Expectations
Customer expectations in all areas of the business world have changed a lot over the last decade. Employees expect to receive generous benefits packages and have the choice to work at home for a portion of the week, and organizations want more flexibility too: They only want to pay for what they use and how they pay for each feature of a tool.
They want these options so they can save money to invest elsewhere, for innovation and growth. Markets shift, too, along with internal organizational growth. Both these factors fit more closely with a consumption model than a subscription.
Technological Advancements
Technology changes every year, even every month, and advancements like cloud computing and advanced data analytics enable organizations to track their usage more precisely than ever before. These technologies allow them to manage their spending at a macro level and significantly reduce waste.
SaaS providers can also now monitor usage in real time, making consumption-based billing feasible across any industry.
Scalability and Flexibility
Another important factor behind the popularity of consumption-based pricing is that it gives the opportunity to companies to scale up or down based on their needs and demands.
SaaS vendors have responded to the needs of smaller startups and larger, established enterprises by offering scalable pricing that organizations of any size can adapt to their needs. This approach allows vendors to attract the broadest range of customers.
Changing customer expectations, technological advancements, and the need for scalability and flexibility for vendors and customers have shifted from subscriptions to a consumption model.
Global Online Payments and the Shift to Consumption-Based Pricing
Global online payments align perfectly with the consumption-based pricing model for SaaS technologies. They make it easy to transfer money quickly to maintain your subscription by paying your vendors on time, despite how far from your HQ they may be.
Payments that take place online using global financial services are made for subscription-based pricing models due to their smart use of IBAN (international bank account numbers).
These numbers are not tied to banks or other financial institutions in one country and can be used to pay for products and services in any country. But they don’t work with all online services. IBANs are perfect if you need smooth international transactions and accuracy when you pay cross-border bills.
Using an IBAN number makes billing seamless because fee deductions can occur at any time in a streamlined way, irrespective of borders and time zones. This system improves vendor relationships and keeps organizations connected to their SaaS products.
Conclusion
Consumption-based models are the new kid on the block, and subscription models are slowly phasing out.
The benefits of consumption models are scalability, affordability, and predictable growth. But there are also challenges, like overestimation, unpredictability, and cost complexity, so it’s always essential to check the small print and read reviews of every SaaS product before investing.
The certainty is that customers have driven this change toward pay-as-you-go models for SaaS products, and this will persevere for the foreseeable future or until the next model replaces it.
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