(Almost) All Billing Should be Usage-Based

I recently came across an interesting SaaS product I wanted to try out. I always go to the pricing page first though; I don't want to try out something that I'm not going to be able to stick with. Pricing was broken into a typical tier system; Free, Starter, and Professional.

I immediately closed the tab knowing I wouldn't stick with the product.

The Problem with Tiers

Fundamentally pricing tiers force you to think about the product's worth to you at all times.

Am I getting $10/month worth of value out of INSERT_SERVICE_HERE? I have no idea.

Usage-based is Superior

With usage-based pricing I don't need to think about the value all that much. I pay for what I use. If I use the service a lot I'll pay more. If I use it not that much I'll pay little (or none).

You would think that this model would be ideal for SaaS. People literally just use your product and don't worry about how much they are spending! Of course, you do want things like caps in usage-based pricing. I don't want to accidentally spend thousands of dollars.

But this model works extremely well with the few places where it's used. AWS is (mostly) usage based and I don't blink an eye when I get my bill. Occasionally, when it's higher than expected, I'll look at the cost explorer and think about whether that EC2 instance I rarely use is worth continuing to pay for. But the fact that I can make that decision, without having to think about any of the other things I'm using, makes me a happy customer.

Why Companies Choose Tiers

It's easy to assume malice; that companies design their pricing so that they will get the most out of the least amount of usage. But I think the reason is simpler than this; companies are fundamentally conservative about what they attempt to innovate on. It's hard enough to build a business. Having a non-mainstream take on pricing is adding risk. So they just follow everyone else and do tiers.

There's probably a lot more to it than this; tiers are easier to create charts for to show investors, etc.

Maybe more fundamentally is the fact that it's fairly easy to create a tier subscription system, just using Stripe or whatever else, than it is to create usage-based systems. We need more billing providers to support usage-based pricing.

Where's the Competition?

What always gets me about the SaaS space is how little (real) competition there seems to be. Maybe there are multiple products in a segment. But the differentiation between them is always so tiny. Differentiating on minor product differences, but almost never on things as important as how pricing works.

I think this just means that there's a lot more room for innovation in the space.