The problem with pay-as-you-go software

For today’s SaaS businesses, usage-based pricing is all the rage. almost half of all software vendors – from the biggest players to the smallest startups – now offer customers payment options on a per-use basis. That’s a third more than two years ago, a clear sign that pay-as-you-go (PAYG) payment plans are now part of the SaaS mainstream.

At first glance, that makes sense. Customers like the idea of ​​paying only for what they use, not committing to large-scale recurring contracts.

But there is a catch. As usage-based SaaS gains popularity, both suppliers and customers are finding that the PAYG approach can be problematic. Whether it’s confusion over fees, higher churn rates, or a poorer customer experience, poorly implemented usage-based payment strategies can quickly go south.

Sticker shock

The biggest problem is that usage-based pricing doesn’t always deliver on the core promise of keeping costs low for customers. Precisely because customers pay for what they use, users may find that a sudden surge in popularity — such as when a small app goes viral — can leave them with a huge bill.

Online forums galore with horror stories of startup developers being slammed with outrageous cloud service costs after the success of a new online tool. Variable monthly expenses can also be a challenge for large companies, given their need for stability and predictability when preparing quarterly and annual budgets.

To ensure commercial success, it is essential that customers enjoy using their solutions and are not hindered by difficult-to-control costs. Sticker shocks can easily erode the customer experience, forcing customers to lower usage — or worse, just take their business elsewhere.

Confusion for customers

In addition to the potential for sticker shock from high usage, PAYG software plans can also be confusing to users – because the way usage is measured isn’t always clear.

Imagine a telephone plan where your bill depends solely on the number of minutes you are talking. Clear enough, right? But now consider a utility bill: It’s also usage-based, but it’s much harder to figure out what costs you’re incurring at any given time. Few homeowners can say with certainty how many kilowatt-hours of energy it takes to heat up a microwaved meal, watch a movie, or do laundry, making it difficult to budget ahead of time.

All too often, SaaS vendors are equally opaque, leading to confusion among their customers. Take, for example, the experience of InfluxDB Cloud, which used to be duration of searches as a price statistic. That turned out to be too complex for the database provider’s customers and the company was soon forced to use a simpler payment option.

Lack of lock-in

It’s important to remember that usage-based pricing typically means customers can easily walk away from your SaaS product. There is no obligation: when a customer stops using a provider’s service, there are no more fees to pay.

From the customer’s point of view, that sounds like a lot. But it can also pose problems, as it makes it more difficult for customers and SaaS companies to operate as true partners, and for companies to invest in innovation to meet the changing needs of their customers.

That’s a big problem for SaaS vendors. Stable revenue streams are an essential part of the SaaS value exchange, and poorly managed usage-based pricing can upset the Apple Cart.

Explore solutions

It is clear that SaaS vendors cannot afford to surprise, confuse or risk losing their customers. Customer acquisition is tricky enough in the crowded SaaS marketplace – vendors can’t afford to give customers any reason to be tempted by a competitive offering.

An important way to communicate this is by investing in your payment experience. Give customers meaningful options about how and when they pay for your services. Many customers may realize that a stable monthly rate plan, or a Buy Now, Pay Later (BNPL) option, is more likely to suit their current and future needs. For example, some customers may choose to delay their payment by 30, 60, 90 or more days to match their cash flow. Others may choose to take a plan that better suits their cash flow (e.g. lower monthly payments during X months and higher payments later).

SaaS vendors must ensure that they are always looking for tools to facilitate their own cash flow so that they can continue to invest in their product, growth and customer experience. Whether you charge customers by the week or by the gigabyte, you need stable revenue and access to growth capital to keep your customers — and your board of directors — happy.

A better way forward for pay-as-you-go pricing

Good for customers, good for businesses – that’s how usage-based SaaS pricing options are usually presented. And if you do it right, they can be. Pay-as-you-go allows software vendors to offer real flexibility to their customers, while also streamlining their onboarding process.

However, don’t assume you can simply implement usage-based pricing and call it a day. Vendors need to anticipate the friction that usage-based pricing can bring — and find smart, innovative ways to streamline the checkout process and keep customers coming back for more.

Ashish Srimal is the founder and CEO of Ratio.