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Why most SAAS products aren't offering "pay per use" pricing options?


#1

Wouldn’t it be more profitable to offer more flexible pricing options?

I’m asking about this because I’m exploring a business idea around this topic.

My hypothesis is that solopreneurs, bootstrappers and small companies in general, sometimes need to use certain SAAS products only for a few days or weeks.

The problem is that these products are only available to be purchased for a whole month.

The idea I’m exploring would let these people save some money by paying only for daily or weekly passes to the mentioned SAAS products.

What do you think?

Thanks a lot for your insights!


#2

I really like the idea of pay per use. The trick is finding the right product/service for that type of pricing model. With some of the different payment services out there like Stripe building out such a platform would not be that difficult. For the right market it could be very effective and a big differentiator from competitors.


#3

Thanks for your feedback @dgrigg.

Have you personally suffered this for a certain SAAS product or service?


#4

I can’t think of a specific SAAS I have used where I thought “I wish this was pay as you go”. I do use http://postmarkapp.com/ with my SAAS and it has a credit/use based system which works perfect for their service.

I toyed around with the idea of something similar with my SAAS, http://www.pageproofer.com where I would only charge customers in the month(s) where they actually had usage on the service but I didn’t implement the idea after looking at the market and watching customer usage patterns. Many customers may use the service heavily for a few months and then have periods of little or no use and then ramp up again. During those off months it would have a negative impact on revenue. I’m assuming many SAAS’s have similar situations where a decent percentage of their customers fall into the ‘little to no use’ category but still pay each month. Taking that revenue out of the pipeline would really hurt the bottom line.


#5

Good luck building a business with hit-and-run customers.

The per-use is not for customers that use the app once and then are gone – you may not want those at all, because their cost of acquisition may be higher than the revenue from them – but, quite opposite, to allow for crazy spending without need to cross the tiers.

For the mentioned Postmark, per-use is not to allow someone to send 10 emails and then be gone. It is to allow someone to send 10M emails in 1 day when they need to.

Aside from that, it was said multiple times already that per-use pricing is more confusing (and more frustrating) for the customers than a clear tiered one.


#6

www.campaignmonitor.com charge per email campaign, rather than per month. It seems to work well for them. But it is only appropriate for some types of product.


#7

I have a side business, LiberWriter, that requires users to pay for processing one book. It’s tough though, because revenue bounces around a lot from week to week.

In the future, I think I’d aim for something with recurring revenue.


#8

Got it, thanks a lot.

The thing is that, as a customer, I don’t feel good about paying for something I don’t use.

Sometimes (not often, that’s true) I haven’t paid for a product because the product forced me to pay for a whole month while I only wanted to use a tool for a few days.

This happened to me with Animoto, for example. I wanted to use the PRO plan (because of its specific features) but I only needed it for one single video. The monthly cost was $39. I would have payed $15 to use the product for 7 days for example (that would correspond to $60 dollars/month).

Do you use any tool to create content (in other words, something you don’t need to use permanently) that you haven’t paid for because of this reason?


#9

Yes, I think that’s the key.

I suffered the problem myself with Animoto, a SAAS product to create professional looking videos from pictures.

Maybe “pay per day or week” idea only makes sense for content creation tools that are sold via a monthly subscription?

I assume that most of their actual customers might be professionals that need to use these tools constantly, but some other customers could be people that need them only once or from time to time.


#10

Pay-per-use makes sense when usage will be highly variable. Consider a hypothetical backup service where:

  • You charge per backup
  • The frequency of each backup will vary (hourly, daily, weekly)
  • The size will vary (1KB, 10MB, 1GB)
  • Storage space will vary (depending on size and frequency)

Yes, you run the risk of bringing in one-off customers, but if they only need your service once then chances are they won’t subscribe anyway (or they would simply churn). At least you were able to give them what they needed this time around—maybe they’ll tell their friends or come back later.

If your service has similar variables and you can’t seem to fit things into plans sensibly, pay-per-use might be the way to go.

I particularly like how Postmark runs off credits. This lets them signup new users with ### of free credits to try things out. It removes the credit card wall and free trail barrier. It also gives users a sense of how often they’ll need to replenish them.


#11

I actually don’t have a product of my own that I want to sell.

I was thinking more about a platform in which customers can purchase daily or weekly passes to a variety of SAAS products.

What I’m discovering is that only a really small % of SAAS products could fit with this pricing model.


#12

patio11 had a good teardown of the backup service that runs on usage model.

I personally do not use the per-use backups. I select the plan that can store all my current data times N, and pay for it. This is just simpler for me as a customer.

Why I do not agree with Patrick that Tarsnap should be run like that (for the owner’s personal reasons), I agree it makes financial sense.

The Patrick’s article is very long is not only dealing with pricing, so I’m quoting the relevant part here:

Colin, like many technologists, is of the opinion that metered pricing is predictable, transparent, and fair.  Metered pricing is none of predictable, transparent, or fair.

Quick question for you, dear reader: What would you pay for using Tarsnap to back up your most important data?

You don’t know.  That’s not a question, it’s a bloody fact.

It is flatly impossible for any human being to mentally predict
compression and data duplication.  Even without compression and data
duplication, very few people have a good understanding of how much data
they have at any given time, because machines measure data in bytes but people measure data in abstractions.

My abstraction for how much data I have is “One MySQL database and
one Redis database containing records on tens of thousands of people on
behalf of hundreds of customers.  That data is worth hundreds of
thousands of dollars to me.”  I have no bloody clue how large it is in
bytes, and — accordingly — had to both measure that and then do Excel modeling (factoring
in expected rate of growth, compression ratios, deduplication, etc etc)
to guess what Tarsnap would cost me in the first year.  (Why not just
say “It’s a lot less than $1,000 so I’ll give Colin $1,000 and revisit
later?”  Because I have two countries’ tax agencies to deal with and my
life gets really complicated if I pre-pay for services for more than a
year.)

I screwed up the Excel modeling because, while I correctly modeled
the effect of increasing data requirements due to the growth of my
service in the year, I overestimated how much data
compressed/deduplication would happen because I was storing both plain
text files and also their compressed formats and compressed files do not
re-compress anywhere near as efficiently as non-compressed files.
 Whoopsie!  Simple error in assumptions in my Excel modeling, Tarsnap
actually cost 4X what I thought it would.

By which I mean that instead of costing me $0.60 a month it actually costs me $2.40 a month.

This error is symptomatic of what Tarsnap forces every single
customer to go through when looking at their pricing.  It is virtually
impossible to know what it actually costs.  That’s a showstopper
for many customers.  For example, at many businesses, you need to get
pre-approval for recurring costs.  The form/software/business process
requires that you know the exact cost in advance.  “I don’t know but
we’ll get billed later.  It probably won’t be a lot of money.” can
result in those requests not getting approved, even if
the actual expense would be far, far under the business’ floor where it
cared about expenses.  It is far easier for many businesses to pay $100
every month (or even better, $1,500 a year — that saves them valuable
brain-sweat having to type things into their computer 11 times, which
might cost more than $300) than to pay a number chosen from a normal
distribution with mean $5 and a standard deviation of $2.

So the pricing isn’t clear/transparent, but is it fair?  “Fair” is a
seriously deep issue and there are all sorts of takes on it.  As happy
as I would be to discuss the intersection of Catholic teaching on social
justice and SaaS pricing grids, let’s boil it down to a simple
intuition: people getting more value out of Tarsnap should pay more for
it.  That quickly aligns Tarsnap’s success with the customer’s success.

Everybody should be happy at that arrangement.

So why price it based on bytes?  Metering on the byte destroys any
but the most tenuous connection of value, because different bytes have
sharply different values associated with them, depending on what the
bytes represent, who owns the bytes, and various assorted trivialities
like file format.

Here’s a concrete example: I run two SaaS products, Bingo Card
Creator and Appointment Reminder.  Bingo Card Creator makes bingo cards,
sells to $29.95 to elementary schoolteachers, is deeply non-critical,
and is worth tens of thousands of dollars to me.  Appointment Reminder
is core infrastructure for customers’ businesses,  sells for hundreds to
tens of thousands per year per customer, is deeply critical, and is
worth substantially more than tens of thousands of dollars.
So the fair result would be that BCC pays substantially less than
Tarsnap for AR, right?  But that doesn’t actually happen.  My best
guesstimate based on Excel modeling (because BCC never bothered
implementing Tarsnap, because I’m not mortally terrified that I could
wake up one morning and Mrs. Martin’s 8th grade science bingo cards
created in 2007 could have vanished if my backups failed) is that BCC
would pay at least five times as much as Appointment Reminder.
What other intuitions might we have about fairness?  Well, let’s see,
my company is engaged in arms length dealings with Tarsnap and with
many other vendors.  I think it sounds fair if my company pays
relatively less money for non-critical things, like say the cup of
coffee I am currently drinking ($5), and relatively more money for
critical things, like say not having all of my customer data vanish
(Tarsnap).


#13

From my experience of working with SaaS companies I came to a conclusion that SaaS companies want to have a more predictable cash flow over a long period of time.

At PayPro Global we support pay-per-use, but many of our SaaS partners prefer to implement it for add-ons and upgrades of a lower grade subscription (some clients usually use an entry-level package and occasionally need advanced features, for which they pay-per-use)

In any case, a good survey idea, thanks for the inspiration :smile:


#14

My idea was not to make SAAS companies change their pricing strategy but to let them add a possible new revenue stream.

The hypothesis is that some customers that haven’t purchase because of the monthly subscription, would purchase weekly or daily passes.

Let us know if you get interesting insights from the survey :slight_smile:


#15

That’s what I mean too. I became curious why wouldn’t they supplement their existing cash flow with pay-per-use plans.


#16

I guess it basically depends on:

  1. If these customers interested in purchasing day or week passes do really exist.
  2. How much they (SAAS product companies) would have to invest to allow this type of usage.
  3. If they (SAAS product companies) feel that this model can cannibalize some of the sales they now do with subscriptions.

#17

If those customers can be acquired for free, then it may make sense. But the cost of acquisition, if we look at AdWords, may be some $50-100/user – i.e. $0.5-1 per click, 1% conversion rate.

Now you have to charge that person $50 or $100 for a weekly or even daily pass.


#18

Well… SaaS company profitability is expressed in such KPI’s as MRR and ARR.

Pay-per-use payers cannot be predicted, therefore they hardly contribute to MRR or ARR. But the CAC for these users is generally the same, add to that the cost to serve these users and we have a loss right there (unless the CAC and cost to serve are low or zero, which is not the case with SaaS companies). There’s just probably no payback from these users, when to recover these costs, a user has to stay a customer for around 12 months…

I think SaaS companies do not adopt this model because it can hurt company profitability and investors wouldn’t like it of course.

Another issue, most SaaS products also have a trial option and they would accommodate these occasional users for free. Companies cannot give up the free trials, as a prospect needs to understand the value before taking his wallet out. In this equation, would you pay-per-use if you can just go with a free trial from time to time? I wouldn’t

it’s probably just not profitable to have a lot of episodic users and companies just concentrate their efforts on building long term relationships with the customers.


#19

That’s the idea. Offering, in a single website, daily/weekly passes to several SAAS products.

Ideally, if customers are interested in this pricing option for a certain product, they would go to this website looking for it.


#20

This is still not free - there is the cost of implementation to support this type of access on the SAAS side. The expected number of users should be large enough to justify it. On the other hand, the number of users on the side won’t be large until enough SAAS sites is signed up. Sounds somewhat like a marketplace idea to me, and those are notoriously hard.

Then there is a question how much it differs from any of the discount coupon sites. If I’m a SAAS owner, and want to capture one-night-standers, wouldn’t it be most practical to issue a coupon for Groupon instead?

Ultimately, I do not feel this service solves anyone’s real problem.