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Introduction

We have covered both subscription licensing (customers paying a flat fee on e.g. a monthly basis.) and usage-based licensing (customers paying for the actual usage) in the previous articles, and one question that may arise is which one to choose. We will share some of our insights on which model tends to be better depending on how you sell your application.

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When to choose Usage based pricing

As a rule of thumb it can be said that for usage-based pricing, there needs to be a strong correlation between the value that is created for a customer and the “unit” you charge for. For example, if your software helps photographers to edit photos, this is a clear example of where you could apply the usage-based model. Another reason to consider implementing usage-based pricing is if you develop a tool where your customer is not the direct end user. SDK is one such example. In such cases, it’s easier to motivate usage-based pricing since each end user your customer sells to is presumably going to create value for them.

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When to choose Subscription pricing

If your customer is the direct end user of your software, then a flat subscription fee may be better. For example, if you offer a SaaS application, charging for each new teammate that your customer adds to their account might not be a good idea. That’s because it could encourage your client to keep the number of teammates down, since each time they plan to add a new teammate is a new “buy” decision for them. Smaller firms could potentially share login details to the same account, which is bad from a security standpoint. Moreover, it tends to be better to increase product adoption within the company.

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Summary

If the “unit” you want to charge extra for creates “direct” value to your client and if your client is not the final end-user of your product, then usage-based licensing may work better. In other cases, subscription-based licensing would be better. It might also be a good idea to select a hybrid approach, where pricing includes a flat monthly fee and some usage is charged on top of that.