How consumption pricing will unlock the next level of growth for SaaS companies

The answer: They are all utilizing AI!  

These users are experiencing game-changing productivity improvements driven by AI’s transformative impact on critical business processes and customer intelligence. As data and AI-enabled use cases proliferate across the market, it might be time for SaaS companies to modernize their pricing models—with flexible options like usage or KPI-based pricing—to match the value that customers are generating from their software.  

Traditional subscription pricing models no longer keep up with the SaaS value proposition 

The software industry has evolved from perpetual-licensing models to subscriptions-based pricing and SaaS offerings, all to create sustainable, recurring revenue streams. But subscription revenues, typically underpinned by standard seat-based pricing models, are coming under pressure as customers are getting more out of fewer licenses. As AI performs more background tasks, businesses can cut back seats to reduce costs without sacrificing the value and productivity they derive from SaaS products. 

As such, consumption pricing is poised to take off. SaaS companies that proactively switch to consumption pricing models are likely to increase the ROI they drive from their data and AI investments while growing their market share.   

Traditional consumption pricing models—used by cloud vendors like AWS, Azure, and GCP—work best when software applications are the end users of the resources. These models measure consumption based on conventional metrics like API calls and graphics processing units, though SaaS customers have been hesitant about this pricing structure due to its complexity and the risks of uncapped spend and unexpected expenses from overages.  

Instead, modern SaaS consumption pricing models need to align with how customers generate value. SaaS product usage incorporates multiple elements including active users, data ingestion, API calls, and more. Pricing models designed to simplify the user experience by packaging these elements for specific use cases provide buyers with more clarity on costs and more visibility into the return on their investment. 

 
A closer look into modern consumption pricing models ​ 

“Derivative” metrics such as units, tokens, and credits are accelerating the adoption of consumption pricing 

Modern SaaS consumption metrics are different from traditional basic consumption units. Think of them as “derivatives” of such basic units. Examples include tokens and credits that serve as a virtual currency or a pre-paid unit that customers can use to access various services as they go.  

By paying this way, customers don’t need to determine how much of a service—or which services they need—far ahead of time for a given use case. More advanced pricing metrics don’t even rely on underlying usage, and are instead linked to business KPIs like sales, productivity, or cost savings. These models directly tie SaaS pricing to realized business benefits.​ 

Successful SaaS providers leverage a range of models from usage tiers to pre-paid bundles to pay-as-you-go pricing. The latter (pay-as-you go) tends to introduce the most unpredictability for revenues, but SaaS companies can address this risk through contracts that guarantee an upfront buyer commitment. Such contracts also help to pre-define customer usage needs for each service, ensuring they better understand their ROI.  

To manage further uncertainty around usage, SaaS providers can offer incentives for customers to not under-consume their committed use of a given product—i.e., through volume discounts—while also not overly punishing customers that exceed pre-defined limits—i.e., through true-forward pricing. True-forward pricing is a model that uses a customer's actual usage in a specific period to determine future volume commitments, instead of imposing penalties for the current period. This lowers customer risk while offering unprecedented flexibility. 

Embark on the consumption pricing journey today 

To start, SaaS leaders need to lay the groundwork for a major adjustment to their pricing model. They must first identify the right offerings, consumption pricing metrics, and target segments. Then, they can build the necessary capabilities into their sales organization (i.e., training, value proposition education, and incentives) to convert existing customers and attract new ones, while also bringing along product and engineering teams to enable the adoption of high-value consumption-based offerings. 

Standing up a POC team and launching ROI calculators are also critical steps to entice customers by demonstrating the value your new model provides. To make the most of this shift, SaaS companies should obtain metering capabilities to generate data on customer usage they can then utilize for business insights. This helps the FP&A team forecast revenue with a higher degree of precision.  

Once the organization is prepped for the new model, it’s time to test the waters and iterate. It may take several iterations of consumption strategies before companies find the right model—start with pilots for AI-driven use cases, and then build on the successful pilots. It’s beneficial to first pay attention to customer segments that will benefit the most from the new model. For segments lower in the adoption curve, companies can leverage entry-level consumption pricing to cater to their needs. 

The payoff for those that shift and scale efficiently will be immense. SaaS companies yet to look into consumption pricing models must start now, or risk losing out to competitors that far better align their offerings with true customer value.