Introduction: Is Usage-Based Pricing Better Than Tiered Pricing in SaaS?
As SaaS companies evolve their go-to-market strategies, one of the most critical choices they face is how to price their product. Two of the most common models—usage-based pricing (UBP) and tiered pricing—each offer unique advantages and tradeoffs. But is usage-based pricing better than tiered pricing in SaaS environments? The answer depends on your product, customer behavior, and business objectives.
What is Tiered Pricing vs. Usage-Based Pricing?
Definition of Tiered Pricing in SaaS
Tiered pricing refers to offering multiple product plans with predefined features and resource limits. Each tier is aimed at a specific customer segment (e.g., individual, team, enterprise). This model allows for upfront pricing clarity and easy comparison between options.
Definition and Mechanics of Usage-Based Pricing
Usage-Based Pricing (also known as pay-as-you-go) charges customers based on how much they actually use a service. Pricing may be linked to API calls, data usage, active users, or compute time. It’s common among infrastructure and API-based SaaS products like Twilio or Snowflake.
Advantages of Usage-Based Pricing
Aligns Customer Cost with Value
UBP ensures customers only pay for what they consume. This aligns cost with perceived value, making it appealing to startups and cost-conscious enterprises alike.
Improves Retention and Expansion Revenue
According to McKinsey, UBP models can boost net revenue retention by 10–20%, especially when usage is correlated with customer growth or product ROI.
Adaptable to Modern PLG Strategies
In product-led growth (PLG) environments, UBP lowers barriers to entry and enables organic expansion as users adopt more features or scale their usage over time.
Advantages of Tiered Pricing
Predictable Revenue Forecasting
Tiered pricing delivers stable monthly recurring revenue (MRR), simplifying financial forecasting and performance visibility for SaaS operators.
Simplified Buying Experience
Simple tiers make purchasing decisions easier, especially for non-technical buyers. Predefined bundles reduce purchase friction and speed up sales cycles.
Easier Packaging and Positioning
It allows teams to design value anchors based on feature sets or user roles, enabling effective upsell and cross-sell strategies without pricing complexity.
When to Choose Usage-Based or Tiered Pricing
Ideal Use Cases for Usage-Based
- Infrastructure services (e.g., AWS, Twilio)
- Data platforms with variable consumption
- APIs where usage scales dynamically
Scenarios Where Tiered Pricing Works Better
- Products with feature-driven differentiation
- SaaS targeting SMBs or traditional sectors
- Solutions requiring budget predictability
Hybrid Pricing: The Best of Both?
Many SaaS businesses now combine both models—offering base tiers with usage-based add-ons. This gives customers predictability plus flexibility as they grow.
FAQs About SaaS Pricing Models
Which pricing model is more common in SaaS?
Tiered pricing still dominates across SaaS verticals, especially for B2B and productivity software, but UBP is rapidly growing—especially for infrastructure SaaS.
Does usage-based pricing hurt revenue predictability?
It can—unless paired with historical usage analytics and predictive modeling. Hybrid models often mitigate this challenge.
Can I transition from tiered to usage-based pricing?
Yes, but doing so requires transparent communication with customers, a clear metering system, and often, live usage dashboards to help manage expectations.
Focus Keyword: usage-based pricing
