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Usage-based pricing


Usage-based pricing is a consumption-based pricing model in which customers are only charged when they use a product or service. Usage-based pricing may also be referred to as pay-per-use pricing or metered services.

In a flat, subscription pricing model, the user is charged a fee regardless of how often they use the service. In contrast, a usage-based charge fluctuates according to what the customer actually consumes. Usage-based billing is not a new concept; most people are already familiar with this pricing model if they purchase metered services from public utilities such as electricity or water.
Today, many software as a service (SaaS) and infrastructure as a service (IaaS) cloud providers are adding usage-based pricing options to their subscription billing models to help retain customers. Having a pay-per-use option allows customers to explore how to use cloud services in a natural manner, without spending money up-front.

Common usage-based pricing models include:

Advantages

Usage-based pricing allows for an activity-based management (ABM) strategy in which business processes are evaluated and adjusted for their cost efficiency by using activity-based costing. In serverless software development, for example, this means moving from a subscription-based cloud service to a very granular function-as-as-service (FaaS) pricing model.
Perhaps the biggest advantage to purchasing products or services through a usage-based delivery model is that the model's transparency makes it easy for the business side to directly align costs with consumption.

Disadvantages

A major disadvantage, however, is that variable use translates into variable OPEX expenditures, which can play havoc with budgets and make financial forecasts difficult.

On the provider side, it's critical that businesses balance usage-based pricing balance with sustainable, recurring revenue. Because too much or too little usage-based pricing can compromise a business' long-term growth, many experts recommend that no more than 50% revenue should be usage-based.

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