Why Usage-Based Subscription Models Are the Way of the Future

Why Usage-Based Subscription Models Are the Way of the Future

By Carter Severns November 17, 2022 at 3:31 pm

In recent years, some businesses have shown a preference for providing services using subscription models. This is particularly true in the software space due to the nature of the product being offered. As software use becomes ubiquitous and more SMBs engage the services of SaaS companies, scalability and flexibility have become critical. 

The American software market is highly competitive and saturated, hosting more than 8 times as many SaaS companies as any other country. As a result of increased competition and differing customer preferences, multiple SaaS subscription models have emerged. SaaS companies can also deploy pricing models that go beyond a single payment due to the continuous nature of product delivery. Here are the most common subscription models that SaaS companies have on offer right now. 

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What Subscription Models Can SaaS Businesses Offer to Customers?

License-Based Pricing

Most businesses are familiar with license-based pricing as the default payment model for software or servers that are stored on-premise. Once a license is paid for and procured, the business can use the product indefinitely. However, since SaaS companies offer access to products and services through a subscription, their license and access to the service are only valid as long as the customer remains a paying subscriber. This pricing model can give SaaS businesses the ability to project potential revenue and control customer usage. Customers, on the other hand, can manage their expenses and add performance capabilities as needed. 

Usage-Based Pricing

While license-based pricing models can be highly profitable for the vendor, users can sometimes find themselves holding the short end of the stick. Prices are determined based on the number of licenses given out and paid for even if the service is not used. However, the highly competitive nature of the market and a more customer-centric approach has led to the increasing adoption of a new pricing model. 

Usage-based pricing among SaaS companies has been on the rise for the past few years and is expected to become the most common pricing model for software businesses in the future. Under this model, customers only pay for what they have consumed. Usage-based pricing allows users to remain assured of a service that can scale with them as they grow—but they don’t pay high prices for capabilities not used within the payment period. 

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3 Ways SaaS Businesses Can Choose Between Usage-Based and License-Based Subscription Models

1. Choose a Preferred Profit Maximization Strategy

SaaS businesses, like any other organization, must have an effective business continuity and profit maximization strategy. Companies that choose to offer their products using a license-based pricing model must continually develop and sell new products to new and existing customers in order to ensure a continuously-growing revenue stream in the long term. Each new product must have a compelling value proposition for current and new customers to increase their investments. While this can be highly profitable when done well, it requires significant marketing and upselling efforts from the software company. 

Software companies that choose a usage-based subscription model are usually free of this pressure. They, however, still must offer upgrades and additional features to keep their customers happy as paying subscribers and growing their usage levels. This can be much easier than attempting to convince a customer to pay for an entirely new software license.

2. Collect and Analyze Industry Information to Keep Up With Offerings Provided by Your Competitors

The software industry is extremely competitive and saturated. For businesses to remain competitive and profitable in the long term, they must be fully aware of the options available to their customers—in terms of both product offerings and payment models. 

Companies that offer products with mass market appeal often have even more competition and might choose to give their customers multiple payment models to choose from. This can make billing and revenue management complicated unless a specialized solution is deployed to simplify these processes. SaaS businesses with a niche product offering might have more freedom to choose a pricing model that works best for their needs. 

3. Understand the Needs and Wants of Your Target Clientele

While competitors and operational needs can drastically change business plans and pricing models, customers are the foundation on which successful businesses are built. Businesses that perform well in the long term are often perfectly aware of and aligned with the needs of their target customers. As the software industry becomes more saturated, customers have a virtually unlimited number of options to choose from. The right pricing model can not only give customers what they want, but it can provide new customers with an easy and commitment-free way of trying a new product or service for a longer period of time than a trial period would allow. 

SaaS companies can get overwhelmed by the numerous pricing model options. However, choosing the right subscription model is crucial for maintaining customer satisfaction, managing finances, and ensuring profitability. Usage-based subscriptions allow SaaS companies to do this in a way that scales at the same rate as the business and is quickly becoming the preferred pricing model chosen by software businesses. 

On the other hand, license-based subscriptions allow businesses to project key financial and operational metrics easily with fixed payment commitments and usage limits. 

Each of these pricing models offers software companies a unique set of benefits and presents a different set of challenges. SaaS companies must find the best way to monitor their income, measure financial health, and manage key financial processes effectively, and their chosen subscription model is a critical component. 

If you would like to find out how Place can help SaaS businesses manage financial processes for usage-based and license-based subscription customers, schedule a demo with us today.