On average, organizations manage more than 650 SaaS applications at once. Such a mind-boggling number makes you wonder how much spend is wasted on unnecessary subscriptions — and whether the subscription-based pricing model still makes sense.
Gartner Inc. predicts global spending on SaaS will reach $122.6 billion in 2021, a $19.8 billion increase from last year. With the rise of remote and hybrid work, many organizations have come to depend on SaaS to remain productive without a physical office space. While the additional cost of these services has clear benefits, these organizations risk unnecessary spend if they’re not properly monitoring their SaaS subscriptions and licenses. Underused or duplicate SaaS licences, missed opportunities for negotiations and reduced purchasing power can all result in extraneous costs.
Consumption-based pricing — rates calculated by usage rather than users — may offer a solution. In Bessemer’s State of the Cloud 2021, the venture capital firm outlined the rise of usage-based pricing and how the model can help companies reclaim their SaaS spend. With this model, vendors make it easy for customers to start small and increase their usage, and costs, over time. Consumption-based pricing creates alignment between vendors and their customers and enables SaaS providers to share in their customers’ growth.
Many SaaS vendors offer a tiered subscription model that can range from a free version to an enterprise subscription, often dependent on the number of users, type of functionality needed and other factors. Although a subscription-based pricing model may make sense for some SaaS applications — for example, if you have a low number of users but a high rate of usage — it can also lead to wasted IT spend.
Most companies will sign annual contracts for a number of seats based on a projected headcount. Accurately forecasting your business’s needs for the entire year, however, can be difficult. And while you can always go to a vendor mid-contract and buy more licenses, it's not nearly as common — or contractually possible — to ask your vendor to reduce the amount of licenses when you've over-purchased. In fact, 38% of all SaaS licenses go unused in a typical month, meaning you could be wasting more than a third of your SaaS spend at any given time.
A Fairer Model
Consumers have been using consumption-based pricing for decades. It’s how we pay for things like utilities and mobile plans. By transitioning to a consumption-based model, SaaS providers adopt a pricing strategy that is already familiar to their buyers.
Since this model is based on the resources your organization actually uses — for example, how much data is consumed or how many APIs you run — it sets up a virtuous dynamic between the provider and buyer. As SaaS customers see more value, they use more resources and spend more money on the service at their own pace, rather than spending a fixed amount upfront and wasting money on inactive users. With consumption-based pricing, companies no longer have to gamble on paying for SaaS they hope will be used.
We’ve already seen some successful examples of consumption-based pricing and how it can work for both customers and vendors. Slack Technologies Inc., for example, has a "fair billing policy," which charges only for members who actively use the platform. If a previously paid-for member becomes inactive, the organization receives a prorated credit.
By positioning itself as a fair partner, Slack says they have created more positive relationships with their customers, which has helped the company become one of the most recognizable enterprise messaging solutions. Fair billing practices and consumption-based pricing will continue to rise in popularity, as it enables customers and vendors to align on value while creating stronger relationships.
Admittedly, there are a few challenges with this pricing model. With consumption-based pricing, usage can be hard to predict, which can cause budget surprises. Because many people are used to subscription-based services, they may also use a product more often than they need to, because they’re accustomed to unlimited usage. With consumption-based pricing, companies need to be mindful of usage and educate their workforce to avoid unplanned costs.
Subscription-based pricing isn’t going away. But as remote and hybrid work become the new normal, the future of SaaS will need to shift to a usage-based model to optimize the value an organization receives from the application. In many instances, consumption-based pricing can create a win-win scenario for both the business and its technology partners. As more companies realize these benefits, SaaS vendors across the board will leverage this strategy, creating better solutions for everyone.
Eric Christopher is co-founder and CEO of Zylo.
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