Traditionally, the software industry has operated on a perpetual license model, where clients paid once and had lifetime access. But in recent years, the shift to SaaS models has taken the industry by storm, converting those perpetual licenses into recurring subscriptions.

The move makes sense for both clients and vendors. On the client end, the subscription rate lowers the barrier to entry. It’s easier to justify taking a risk on a new software when you can pay a lower price, try it out for six months or a year, and cancel if it’s not worth the investment. On the vendor end, this lower barrier to entry yields a bigger customer pool, and the recurring payment model leads to more revenue predictability and higher profits as clients invest more over several years to maintain their subscription than they would have to purchase the license outright.

These advantages, and more, have led to widespread adoption of SaaS models among software vendors. In fact, Gartner predicts that by 2020, all new entrants to the field and 80 percent of existing software vendors will offer subscription-based models. It makes sense. After all, there’s a lot to love about the simple subscription model.

But subscription models have their limitations, too. We wrote recently about TechCrunch’s Danny Chrichton’s tirade against the “subscription hell” of the digital media landscape. His main complaint was that subscriptions are always positioned as all-or-nothing access. While he’s particularly referring to digital media paywalls, this gripe reflects the primary challenge of the SaaS simple subscription model as well.

When each customer pays one lump sum for full access to a software, two big things happen:

• The vendor’s earning potential is capped at that particular sum.
• The customer may not feel as though the value of the software is worth the subscription price, particularly if there are features he or she is paying for but not using.

When a vendor’s revenue is maxed out and customers are unconvinced of the value of the product, growth is likely to slow and stagnate. The solution? Increase your revenue potential and improve customer engagement through usage-based billing.

What Is Usage-Based Billing?

Also known as consumption-based billing, usage-based billing models couple basic subscription services with additional, pay-as-you-go offerings, and they can take on a variety of structures, from simple usage fees, where it’s a flat rate per use, to more sophisticated rating models, where the variable rate can be dependent on factors like location, group usage, and company negotiated rates.

Forward-thinking B2B SaaS companies have been doing this for years. They have a subscription for the commonly used packages and allow the company to use other software packages at usage-based rates, enabling the company to try new software packages without having to pay a subscription rate. Forrester reports that 84 percent of companies are currently leveraging usage-based pricing or plan to within the next two years.

So why make the switch?

3 Advantages to Usage-Based Billing

There are many reasons for SaaS companies to add usage-based offerings to their traditional subscription models, with advantages for both vendors and customers. Here are three key benefits:

Increase Revenue Opportunities

With simple subscription models, the revenue growth chart looks more or less like a straight line, with every new customer adding the same amount of revenue per month. Offering usage-based add-ons, however, allows companies to take advantage of that predictability while still taking advantage of additional earnings opportunities. When customers can “pay as they go” for additional features and functions on top of the base subscription, the vendor can bring in more revenue, and that growth chart becomes much more exciting.

Attract and Retain Customers

“If you have a customer that has specific needs, why would you want to turn away their business by saying ‘sorry, this is the only way we can sell?”

• Jim Gearhart, Senior Director of Sales and Marketing IT, Zendesk

On the customer side, usage-based models offer two key benefits. First, they further lower the cost of entry, allowing potential customers to “test drive” key features and components of a vendor’s software—paying for only what they use—before they commit to a full subscription. This allows SaaS vendors to attract companies that may be more risk averse by letting them try before they buy.

Second, usage-based billing gives customers the flexibility to choose packages and pricing models that match their needs and allow them to see exactly what they’re paying for in any given period. Recent research from Key Bank finds that less than 30 percent of SaaS companies are meeting their customer retention goals, but usage-based billing could be the advantage they need to increase those numbers.

Gain Detailed Insights to Maintain a Competitive Edge

Finally, usage-based models give vendors much deeper access to customer usage insights. Whether a vendor is market testing out a potential new feature or planning to repackage existing capabilities, usage data paints a clear picture of how much customers value each product feature, which ones they might be willing to pay a premium for and which ones aren’t worth the vendor’s further investment in time or resources.

This level of transparency allows businesses to respond faster to customer needs and market shifts, releasing new features and repackaging existing ones to more effectively serve customers and stay ahead of the competition.

For SaaS companies, usage-based billing offers a huge competitive advantage. If your organization is ready to adapt its simple subscription models to improve revenue potential and customer engagement, take a tour of the Gotransverse platform today, and call us to schedule your complimentary, personalized demo.