Would it not be great if all products were priced in exact relation to how much value we receive? The usage-based pricing model for software products works just like that!
Read this blog to learn the basics of the usage-based pricing model and see if your next software product can use it to get more customers. Alternatively, you can watch the video we created on this topic:
The usage-based pricing model example
Let’s start off with an example to really illustrate the benefits of usage-based pricing. Say that a company sells a product that automatically edits images based on user input. The one-time price would be high because the product took a long time to develop and has a lot of advanced features. With such a high price, the company can really only attract real photo enthusiasts.
By instead implementing subscriptions, the company gets a much larger addressable market. They can get more customers because subscriptions lower the entry barriers for customers! They could sell a limited version of the product to allow hobby photographers to try out the product at a much lower price. We have already covered subscriptions in this blog.
Now, what would happen if the company began charging the customer a fixed price for every photo that the application edits? Hobby developers would still be able to try the product at a low price since they would not edit that many photos. Real photo enthusiasts would edit a lot more and pay a higher price, but they also receive much more value from the product.
So how is that different from subscriptions? Well, with subscriptions, you have to mess around with pricing plans and feature fits. You simply have to figure out how to motivate advanced users to upgrade pricing plans, and that is not always easy. With the usage-based approach, customers automatically pay more the more they use the product!
Considerations before implementation
Doesn’t that sound great? Well, the issue is actually that not all software products can use the usage-based pricing approach. The pricing model works for photo editing software because the value metric is very clear, the more images you edit, the more value the product generates and the higher the price can be. Not all types of software have such a clear value metric, and I suggest researching how your product is or will be used to figure out if you can implement the usage-based approach.
If you struggle to find a clear value metric, you might want to combine the pricing model with other pricing models for a more effective pricing strategy. You can implement subscriptions and charge extra each month for the use of certain features, or even give a customer a limited number of credit points that are reduced each time the feature is used. If they run out of credits, they have to pay to get more!
Implementing the usage-based pricing model in code
The usage-based pricing model can be a game-changer for some software products, but only if customers think it works fairly. That is why the first step is to investigate your value metric. Then, the second step is to implement the pricing model in code. For that, you need a software licensing system that tracks the feature usage. It also makes sure only people who pay have access to the feature.
We have already made a blog on how to implement such a system for free, within minutes.