Hi, I'm Martijn, a technology enthusiast with a background in VC / growth equity investing at Fortino Capital, HPE Growth and Allianz X as well as operational experience at N26, Adyen, and Mondu. My articles explore emerging fintech trends in the European tech ecosystem. Today, I am sharing a piece on usage-based billing platforms space in Europe🇪🇺
The revenue of any business is driven by two fundamental factors namely, pricing and quantity. For software companies, identifying and implementing the right pricing model is especially critical, as it can significantly influence the success of their go-to-market strategy. For example, over-pricing can lead to a lack of demand from the market. Whereas, under-pricing the product can be detrimental, as it leaves significant revenue potential untapped. As a result, this forgoes potential cash that could have been reinvested into the business.
In the B2B software landscape, there are four main pricing models which are used independently or in combination with each other. These are listed below.
Flat / tiered pricing
In this pricing model, each tier gives access to a set of features available to a customer. As the customer upgrades to a more advanced tier / plan, more features of “higher” value are available. As an example, see the business pricing plans of Bunq.
User-based pricing
Under this pricing structure, the price rises as the number of users of company utilizing the product grows (i.e., more users, higher pricing plan).
Usage-based pricing
In this model, as the name suggests, pricing scales with usage (i.e., higher volume leads to higher pricing). A key advantage of this approach is that upselling becomes automatic as customers consume more of the product. This is especially common in industries like AI, where companies leverage costly LLMs and GPUs to develop their products.
Transaction-based pricing
With this approach, pricing is set for each transaction. This can be seen as a revenue-sharing model, where your revenues grow alongside your customer as they increase their transaction volume.
As outlined earlier, usage-based pricing charges customers based on their usage of a product or service. If customers use your product more, the higher the billing. You might be wondering, how is "usage" actually measured? Is it simply the time spent in minutes? Well, there are actually several methods, depending on the product. These include (1) the time customers spend using the product, (2) data storage, (3) data transfer, which refers to the movement of data between systems, devices, or servers, (4) feature usage, (5) API requests, which are calls made to an API to perform specific actions, retrieve data, or send information, and (6) model computation time (inference). The choice of measure, used either independently or in combination with others, depends entirely on the business. For example, OpenAI measures usage via API calls, whereas Mistral relies on inference time.
It's important to recognize that usage-based pricing is not always utilized as a standalone model. Instead, it is frequently combined with other pricing models. For instance, companies may charge a fixed fee for a predetermined level of usage, regardless of whether customers fully utilize it. If additional usage is required, customers can purchase more on demand. This approach provides companies with more stable recurring revenue compared to relying entirely on usage-based pricing.
In recent years, the usage-based pricing structure has gained significant popularity. Specifically, the adoption among B2B SaaS companies within the general SaaS index has more than doubled, increasing from 27% in 2018 to 61% in 2023 (source).
Source: OpenView Partners
The drivers behind the adoption can be categorized into two parts namely (1) benefits of the pricing model and (2) industry trends. To start with the former, the benefits of the pricing model are outlined below.
Cost alignment with customer value
Customers pay solely for what they use, ensuring costs reflect the actual value derived, rather than being tied to a fixed fee regardless of usage.
Enhanced transparency
A clear breakdown of service costs fosters trust and builds a stronger relationship between providers and customers.
Increased flexibility
Customers can adjust their usage of the platform or product according to their business needs, scaling up or down as required.
Minimal Upfront Costs
By allowing customers to start at a low cost, this model offers them the opportunity to explore the product before committing to increased usage, ensuring satisfaction.
Expense Control
Customers only pay for what they utilize, avoiding overpayment or spending on unused services.