Now, if we talk about the benefit of using pay as you go pricing model, the number one benefit is
that you will have a low upfront cost to attract user because in subscription those people have to commit
a specific amount like a subscription plan.
But in pay as you go, they don't really have to commit.
So let's say if they are sending 5000 email in one month, they can pay for these 5000 emails and in
the next month, if they are not sending any email, they don't really have to pay anything.
So it is very flexible and they have a very less commitment in pay as you go pricing model.
The second thing is that if their consumption is increasing, you can charge a higher amount.
So in flat rate system, if their consumption is increasing, you still have to.
Except the flat fees that they are paying.
But in pay as you go pricing, well, you can charge a higher amount and this will increase your net
retention rate and logo retention.
Now, I don't really want to go deep into net retention rate and logo retention because I have explained
both of these topic in my SAS course.
But in simple language, if you are using more of a service and if the company is using pay as you go
pricing, they end up selling some additional product or add ons and that will increase your net revenue
retention.
Now, the third benefit that you will get from pay as you go pricing is that your revenue will increase
exponentially if the usage of your user is increasing.
Now, there are a couple of benchmarks in SAS in case of revenue growth, companies using a usage based
pricing will have a revenue growth of around 29.9% and the broader SAS index is 21%.
The net dollar retention for usage based pricing is one 20% for other, that is one one 10%.
And you can look into the rule of 40, the gross margin.
And I've explained all these topic in my SAS course, but this is a business model course, so I don't
really want to go deep into that.
But pay as you go.
Pricing is super important, especially if you have a cloud computing platform now with multiple benefits,
You also have some disadvantage in pay as you go pricing.
The number one disadvantage is retention because these users are not committing you anything.
They can cancel their subscription any time they want and that's why you have a retention problem with
pay as you go pricing.
Second thing is the revenue is unpredictable and it is also volatile.
And you can understand that with the help of this diagram in subscription, you will convince customer
to take your subscription for, let's say, next two year or three year or five year.
It depends on your annual contract value or ACB, and you will have a low volatility in case of subscription.
But in you go you they have not committed you anything and that's why they can leave your product any
time they want.
So they have no commitment at all.
And that's why the revenue is unpredictable, especially in case of be as you go.
Or third disadvantage is that people normally find pay as you go pricing a little complex.
This is a video streaming platform so they have a developed plan, launch plan and scale plan.
In developed plan, you have to pay $29 every single month.
So in this $29, you will get 200 minutes of video transcoding, 3000 minutes of video hosting and 25000
minutes of video delivery.
And if you exceed that limit, then you have to pay this amount.
So you have to pay $6 for every additional minute, $0.5 for every additional 100 minutes in hosting
and $0.2 for every hundred minute in delivery or streaming.
And that's why you will see that P as you go.
Pricing is a little complex.
Now in order to reduce the disadvantage, you sometime have to mix your pay as you go pricing with the
flat rate subscription.
And that's what these guys are doing right now.
Now, the most important part of this video, how will you decide whether you have to use pay as you
go pricing in your business or not?
Now, you first have to look into the diverse user base you have in your business.
So if you are not able to cover all the different types of users you have in three or four different
tiers.
In that case, you may consider using a pay as you go pricing, because if you're not able to cover
all of your user into three or four different tiered pricing, then you have a large variation in terms
of usage and price.
So let's say if someone is using one GB of your service and another guy is using one TB of service.
So the dynamic range is so high that you have a very large variation and in that case you have to have
at least 2 to 3 tiers and you charge a flat subscription fees in those tiers and then you put pay as
you go at the top.
Now the second thing you need to understand in your business is that are you preparing for a higher
short term usage?
So in a project management tool that use our flat subscription pricing, you will see that the usage
is almost the same.
I mean, majority of people who use a project management tool, they might be having two or three project
and let's say maybe 50 to 100 different tasks in those project.
So their usage is almost the same.
But if you look at cloud computing service or storage platform, you will realize that one person is
using the platform ten times more than another customer.
And that's why you will see a large variation or a sudden spike in the usage of your product by some
user if your product is solving their core problem.
And in that case, you should consider pay as you go as your primary strategy, Then you need to ask
yourself, is your customer moving between these different plans frequently and if they are doing it,
in that case, they are suddenly exceeding the plan limit and then they go from plan number one to plan
number two and maybe plan number three within a few days.
And that's why you need to use pay as you go pricing.
And you need to make sure that they stick to a single tier and you charge them based on the extra usage
they have.