The Rise of Usage Based Billing for SaaS

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If you asked someone ten years ago to name examples of usage based recurring billing, they’d probably only be able to list utilities.

And sure, taxis have charged based on mileage for decades, but of course, those charges represent per-use fees.

Over time, however, usage based internet provision joined the ranks of water and electricity. Data storage and streaming services eventually adopted the model as well. This change happened alongside the rise of the cloud and software as a service (SaaS) solutions, setting the stage for where we are today.

So where are we?

We’re at an intersection of SaaS, usage based billing, and quite a bit of the Internet of Things (IoT). Technological advances have fueled an increasing appetite for a subscription-led marketplace in which many customers prefer smaller, regular payments for product usage rather than one large sum for ownership.

Usage based recurring billing supports a natural evolution of this trend.

Usage based billing by the numbers

SaaS businesses use usage based billing models to charge for everything from megabytes to miles and leads to subscribers. While it was once used by less than 1 in 4 SaaS businesses, it’s increasing in popularity.

A 2014 survey found that:

  • 37% of SaaS businesses used seat-based pricing, while
  • only 23% leveraged usage based pricing.

As of 2021, those numbers are up. Now:

  • 39% of SaaS businesses charge based on usage—a 16% increase in 7 years—according to a survey by OpenView Partners.

So what explains this steady increase in usage based recurring billing?

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Usage-tracking technology is readily available

In the last decade, the IoT has exploded. An estimated 31 billion IoT devices were in use by the end of 2020. Estimates for their use in 2025 range between about 41 to 75 billion.

IoT devices power usage based billing models for SaaS products in a number of industries, including:

  • agriculture
  • healthcare
  • transportation
  • utilities, and
  • retail as just a few of the largest IoT players.

Businesses and organizations use IoT devices to track everything from distance traveled to restock-items ordered, and then bill accordingly.

Of course, not every SaaS business is involved in the IoT market.

While the IoT is a major contributor to the rise in usage based pricing and billing, there are plenty of other reasons, too.

For some SaaS business models, it just makes sense

For some scalable services like marketing automation and customer relationship management, usage based recurring billing is a logical approach.

Your customers want to grow, and they want to know the tools that help them do so will be there to handle increased capacity. Offering them usage based pricing enables them to scale their costs gradually until they’re ready to make the jump to an entirely new plan.

For example, if your MarTech product targets startups and rapid growth businesses, those businesses need to be able to grow with your product as quickly as they’re growing. They don’t want to have to worry about hitting a usage wall or being hit with heavy overage charges. Service limitations can mean growth limitations.

Other SaaS models like seasonal or intermittent services are also a great fit for usage based pricing. Since customers only need to be able to turn service on when they need it, it makes sense for them to pay only for what the use.

For example, a trucking and fleet management business may have more vehicles with GPS tracking devices on the road at certain times of the year. The business may need to increase the size of its fleet—along with GPS devices and their associated services—during the holidays to fulfill an increase in demand. After the holidays, it may scale back on vehicles, and thus wish to turn off devices and service and not pay for what it isn’t using.

Customers prefer lower, recurring usage costs over owning

As business leaders shop for tools to add to their tech stacks, ensuring a low barrier to entry can help your SaaS business close sales.

By offering a usage based pricing option, you give customers complete control over exactly how much they spend while testing out your SaaS product.

Your customers know their budget and can stop using the product when they’ve hit their limit. This provides them an optimized user experience at a price they control.

And while some of your customers may be scaling businesses strapped for cash now, that doesn’t mean they won’t be successful—perhaps sooner than you think. Usage based billing makes it possible for these businesses to affordably implement your SaaS solution early on and then leverage it for growth.

So as they grow, your SaaS product scales with them. And those scaling customers can become big sources of revenue for you as they experience success and their usage increases.

Customer success means expansion MRR

Many big players in the SaaS space have introduced usage based pricing and billing as an option for subscribers. And it’s been working to their benefit!

Back in 2011, HubSpot made this move, adding a usage based pricing option alongside its offering of subscription packages. By 2014 when the business went public, its net retention revenue had increased to nearly 100%. Before it added the usage based options, its net revenue retention was around 70%.

And others like Twilio, Datadog, and Snowflake have also found success with usage based offerings. This model offers an excellent way to land and expand with customers, building expansion MRR without having to actively engage in an upsell process.

Addressing challenges in usage based recurring billing

When a SaaS business has hundreds or even thousands of customer accounts, potentially each with multiple users, tracking usage gets pretty complex.

Aggregating, organizing, and rating this usage data for billing can require multiple tools and processes to get right. This creates opportunity for costly errors.

SaaS business leaders need to leverage the latest technology to automate these processes and reduce error. Recurring billing platforms like Fusebill meet this need.

Using API, Fusebill communicates with a business's usage meter on each individual subscription. The platform then takes the metered usage data and calculates billing based on the pricing parameters of that subscription. This data is sent to Fusebill either each time usage is recorded, or on a daily or monthly schedule.

Automated billing software makes usage based billing simple

Thanks to customer preferences and advances in technology, usage based billing is on the rise. Customers appreciate the low barrier to entry of smaller recurring payments over a large purchase to own a solution.

The natural evolution of this affordability and convenience is paying only for what they use, and the IoT among other things makes this possible.

With the right automated billing solution, SaaS businesses can leverage a usage based billing model with relative ease.

Tags: SaaS Subscription Billing Recurring Billing SaaS Billing

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