We’ve watched as software companies have made the switch in droves from traditional licensing to subscription-based SaaS billing models, adding usage-based components to SaaS billing models in order to disrupt markets and increase revenue shares. In fact, Gartner predicts that by 2022, 30% of enterprise software companies will be competing with SaaS businesses, offering comparable solutions with elastic, pay-as-you-go payment models.
What is Usage-Based Billing?
Also known as consumption-based billing, usage-based billing models blend the two traditional models of fixed charges and simple subscriptions. Usage-based 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 to more sophisticated rating models, based on a business’ specific needs.
Cell phone companies have been using this model for years, charging a base subscription rate and allowing customers to purchase extra data, messaging or minutes. Now, other industries are catching on, and companies like Amazon, General Electric and Progressive Insurance are making the shift to “the billing model of the future.”
Why the Move?
Recent research has identified three primary reasons SaaS companies are adapting their SaaS billing models to a usage-based billing model.
1. Attract Customers
According to the Gartner research cited above, 41% of enterprise procurement professionals list cost containment as their top priority in their efforts to attract new customers. Usage-based add-ons are an effective way to help potential customers get a foot in the door before they’re willing to commit to annual subscriptions or expensive licenses. By offering these prospects the low-risk opportunity to “test drive” certain components of their software while paying only for what they use, companies can lower the barrier of entry and grow their pool of customers.
2. Increase Retention
Less than 30% of SaaS companies are meeting their customer retention goals, according to research from Key Bank, and one of the biggest roadblocks is the misalignment of cost and perceived value. But usage-based billing models give customers the flexibility to choose packages and pricing models that match their needs. What’s more, the increased transparency allows them to see exactly what they’re paying for and why. When customers believe the value they’re getting from their SaaS merits the cost, they’re more likely to continue working with that provider. That’s why usage as the foundation of SaaS billing models is becoming the industry standard.
3. Drive Revenue
Finally, usage-based models pair a predictable subscription with add-on revenue from additional products, services and features. What’s more, these add-on options help businesses track exactly what customers are using most so they can test new features, invest in what’s working and cut loose what’s not. By giving customers more ways to buy and helping business focus on what’s really selling, these usage-based models drive substantial revenue increases.
Usage-based billing is a critical competitive advantage in today’s landscape, but only 20% of SaaS companies have the right systems in place to implement a new SaaS billing model based on usage and consumption. goTransverse has the preeminent intelligent billing platform to support these businesses in their efforts to drive revenue and improve customer relationships through usage-based billing.
For more information about how we can help your organization gain a competitive advantage by making the shift, contact us at firstname.lastname@example.org today.
Allison Dancy is the Vice President of Marketing at goTransverse. A proven marketing leader with over 20 years experience across multiple industries, Allison is responsible for the strategic direction and execution of all aspects of marketing.