Quantity-Based vs Usage-Based Pricing: Knowing the Contrasts
Have you ever felt stuck in managing subscriptions for your business? Well, here is where you need to underline the term - subscription-based pricing models. In the digital era, pricing models have no longer stayed as mere trends but have become a vital part of the subscription journey of businesses. The proper usage of these models has paved the way for better revenue predictions. However, selecting the right pricing model is crucial. There are two main pricing models: quantity-based pricing and usage-based pricing. Both models might seem the same but are very much distinct. As a SaaS business, you should know when to use one model or the other.
The underlying blog is an in-depth exploration into defining these models, knowing their contrasts, and how to pick the right model for your business.
What is a Quantity-Based Pricing Model?
The Quantity-Based Pricing model is a strategic pricing tool that determines the price according to the quantity of the purchase made. In this model, a single unit price might change according to the total number of units that are being purchased by the consumer. This, in turn, means that with the rise in the number of purchased units, the cost per unit will be lower.
This model is rewarding for both merchants and customers, encouraging larger purchases. Major industries, including manufacturing, software licensing, and retail, use the model as their go-to strategy in subscription management. The model benefits in achieving long-term customer relationships while meeting bigger sales opportunities.
What is a Usage-Based Pricing Model?
The Usage-Based Pricing model tracks the actual usage, and based on this, the customer is charged. This kind of pricing model offers more scalability and flexibility to businesses because cost is directly aligned with customer usage. Here, the need for fixed pricing is removed and your customers can scale their use accordingly.
Usage-based pricing models are usually opted by businesses falling into sectors with seasonal or unpredictable demand. Many businesses give priority to measurable outcomes rather than flat rates, and the model fits well into these requirements. For instance, internet service providers, mobile companies, and cloud services cannot base their businesses on one-time sales and purchases.
ISPS and mobile service providers charge based on usage by providing data caps or tiered plans whereby the customer is charged extra if they surpass their limits. Mobile carriers often give a pay-as-you-go choice for calls, texts, and data where users are charged as per how far they stretch into the usage.
How Quantity-Based and Usage-Based Pricing Models Differ?
The difference between these two pricing models should be carefully understood. Here are some key contrasts to look at:
1. Pricing Transparency and Communication
In quantity-based pricing, customer interaction mostly includes buying predefined units or packages. In this model, the customers are quite aware of what they have purchased for a fixed price and period, thereby making billing and other communications less complex. Well, the usage-based pricing models demand rather more dynamic communication between merchants and their customers because the cost incurred can vary with actual usage. This business model requires businesses to maintain transparency and provide explicit reports to help in building continued relationships with customers.
2. Optimal Industry Applications
The quantity-based pricing model is well-suited when the products/services can easily be segmented into units, like software licenses or physical goods. This model is very effective in a predictable, low-variance environment. The usage-based pricing model is sensible, though, when demand is very volatile for customers. Internet/cloud computing, telecommunications, and utilities are some of the examples. Flexibility is the very essence of this model because it simply means that companies would only bill based on actual usage, better matched with fluctuating needs.
3. Effect on Consumption Patterns
Having the price tagged on quantity, customers will purchase based on their perceptions of value. This helps them pick packages that best fit their usage predictions. However, the process can sometimes lead to under or over-utilization of units. Conversely, usage-based pricing encourages the use of quantities more efficiently as the customers pay just for their consumption. This model can influence customer behavior, allowing customers to monitor their consumption more closely and make value-driven decisions.
When to Choose One Over the Other?
Both quantity-based and usage-based billing models are useful in their own ways.
The former is useful when businesses are required to balance their need to keep costs predictable while still scaling based on demand for their products and services. Quantity-based pricing is an excellent means of incentivizing subscribers to order more since they'll receive a discount on a per-item basis.
“According to Gartner, pricing models that use metrics such as number of users or transaction volumes rarely have the kind of flexibility customers require to manage usage spikes.”
Usage-based billing is yet another great way for companies to charge only for what subscribers use. Perhaps it's the most straightforward way companies can directly link revenue to cost and therefore predict profits. You will also be better placed to upsell subscribers into the higher plans if you provide your subscribers with more clarity into how they're using it.
Bringing Flexibility by Integrating These Pricing Models
Both quantity-based pricing and usage-based billing have their merits, and using both together unlocks a lot of flexibility for your business. There are two ways you can use these billing models at the same time.
The first way is charging subscribers a definite amount at the beginning of a billing cycle and then adjusting those charges based on actual usage. This offers predictability with added flexibility.
The second type is a hybrid subscription model with a fixed monthly fee and one-time charges for extra services. It ensures stable revenue and provides customers with the chance to only make one-time payments for services they require.
Regardless of your choice, the best approach will be combining quantity-based billing and usage-based billing into one system.
Let Saaslogic Billing Help Your Business
Saaslogic Billing eases the subscription process for businesses with automated billing, recurring payments, flexible pricing, reporting and analytics, and invoice management. This allows organizations to charge fees from consumers either at inception or later and charge only for what was consumed or combine fixed costs with ad-hoc charges. With features like revenue reporting, account reconciliation, and custom billing processes, Saaslogic Billing helps simplify complex billing processes. As a result, businesses can focus more on growth while maintaining customer satisfaction. Being one of the best subscription management software, Saaslogic Billing experts can help you effortlessly overcome your subscription challenges.
Summing Up
The right selection of the pricing strategy becomes critical for effective revenue management. This article has covered some key differences between quantity-based and usage-based pricing, which would help you understand what strategy fits your business requirements. Having these options under your belt, you can now decide on those pieces of action that draw out profitability and customer satisfaction.
To streamline billing processes and gain flexibility in pricing, you can make use of dependable subscription management software like Saaslogic Billing.