The problem with pay-as-you-go software

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For today's SaaS businesses, usage-based pricing is all the rage. Nearly half of all software vendors – from the biggest players to the smallest startups – now offer customers pay-as-you-go options. This is up from one-third just two years ago, a clear sign that pay-as-you-go (PAYG) plans are now mainstream SaaS.

On the face of it, this makes sense. Customers love the idea of ​​only paying for what they use and not being tied down to large, rolling contracts.

But there is a catch. As usage-based SaaS grows in popularity, vendors and customers are finding that the PAYG approach can be problematic. Whether it's confusion around costs, higher churn, or a poorer customer experience, poorly implemented usage-based payment strategies can quickly fall apart.

shock sticker

The biggest problem is that usage-based pricing doesn't always deliver on its 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 land them a hefty bill.

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Online forums are full of horror stories of startup developers facing excessive cloud service fees following the immediate success of a new online tool. Variable monthly costs can also be a challenge for larger companies, given their need for stability and predictability when developing quarterly and annual budgets.

To ensure commercial success, it is essential that customers enjoy using their solutions and not feel held back by difficult-to-control costs. Sticker shock can easily end up eroding the customer experience, prompting customers to cut back on their use or, even worse, simply take their stuff elsewhere.

confusion for customers

Besides the possibility of sticker shock due to high usage, PAYG software plans can also be confusing to users because it's not always clear how usage is measured.

Imagine a pay-as-you-go phone plan where your bill depends solely on the number of minutes you spend talking. Pretty clear, right? But now let's consider an energy bill: it's also based on usage, but it's much harder to determine the loads you're incurring at any given time. Few homeowners can confidently say how many kilowatt hours of energy it takes to microwave a meal, watch a movie, or wash a load of laundry, making it difficult to budget in advance.

Too often, SaaS vendors are equally opaque, confusing their customers. Take, for example, the experience of InfluxDB Cloud, which used query duration as a pricing metric. This proved too complex for the database provider's customers, and the company was soon forced to adopt a simpler payment option.

Lack of lock

It's important to remember that usage-based pricing usually means...