Pay as you go, the pricing model to adopt in cloud computing?

What is pay as you go? Is it an advantageous pricing model for users and software publishers?

In the world of cloud computing, while subscription pricing is very popular, other applicable payment schemes exist, such as per storage pricing, feature based pricing, freemium, etc.

This is why pay as you go, a pricing model, already used in other areas and well established in the minds of consumers, is becoming an increasingly popular alternative.

But what exactly is it? What are its advantages & disadvantages?

The answers can be found below.

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Definition of pay as you go in cloud computing

How does pay as you go work?

Well, to begin, the name is pretty self-explanatory because you simply pay as you go.

☝️Noting that it can also be found under the following names: "PAYG", "pay per use" or "pay as you use".

Nothing is actually new here, as this pricing system has already been noticed in daily life tasks, especially in the fields of energy and telecommunications. Recently, the pay as you go, that has been progressively gaining momentum and being applied to cloud computing, including both resource hosting services and software offers.

While it may be the platforms and tools dedicated to infrastructures that have developed this pricing, one can’t help but clearly realize that SaaS is interested in pay as you go.

PAYG can take two different forms:

• Pay as you go based on usage: The user selects all the options (functionalities, number of accounts, resources, etc.) he needs over a given time.
  • Pay as you go based on credit (also called credit based model): A certain amount of money is paid in advance, giving the right to a specific number of credits. These credits are debited when they are used. This scheme is particularly used for certain emailing or SMS marketing solutions.

☝️ Note that the credit based sometimes includes a limited time of usage.

Here are a few examples of how it works

Beginning with SaaS (Software as a Service)

For software programs available in SaaS mode, the rates can be calculated on the basis of :

• the duration of use,
• the number of users,
• the number of activated features,
• credits :
  • ​​number of invoices for an invoicing software,
  • number of publications for a social media software,
  • number of videos processed for a video processing software, etc.

👉 For example: if an emailing software offers subscriptions, just like many SaaS products, it is possible to use a pay-per-use formula. The user buys the number of credits he needs, with each email sending costing one credit.

For IaaS (Infrastructure as a Service)

The PAYG pricing system for IaaS is based on actual resource consumption (storage capacity on servers, virtual machines, etc.).

👉 Here is another example: with the AWS cloud service platform (for Amazon Web Service), users choose their formula by selecting:

• their resource requirements (memory, processor, storage, etc.),
• their operating system,
• access controls, etc.

For PaaS (Platform as a Service)

PaaS solutions allowing pay as you go take into account :

• the number of applications developed,
• the number of users,
• the amount of memory consumed, etc.

👉 For example: Microsoft Azure offers pay-as-you-go pricing, and even provides a price calculator on its site. Users have to simply select their options (operations, virtual computer and virtual machine settings, support, etc.) to get a cost estimate for their solution.

PAYG’s advantages

Benefits for users

• 👍 price: It obviously depends on the company's configuration. But it is quite easy to imagine the advantage of only paying for what is actually used. Pay as you go is therefore perfectly suited to companies with fluctuating needs, linked to peaks in activities, seasonality, etc.
• 👍 flexibility: with PAYG, professionals have the freedom to use the solution's services only when necessary, for a particular operation or project for example.
• 👍 scalability: the pay as you go system smoothly accompanies the growth of organizations. In fact, for a startup that is just starting out, it is practical to get a tool that is adapted in terms of pricing and functionalities, and then make it grow according to the company's evolution and ambitions.

Benefits for software vendors

There are:

• 👍 customer acquisition: the flexibility of the pay-as-you-go model attracts a number of customers, who are sometimes a bit wary of committing to a subscription-based formula.
• 👍 additional sales: a number of publishers offer hybrid formulas, based on a monthly subscription to which additional options are added (number of licences, storage capacity, number of contacts in the customer base, etc.). This configuration allows the generation of additional revenues by conforming to different company structures, while offering a low enough price to remain competitive.

Disadvantages of PAYG

Disadvantages for the users

The pay as you go scheme can generate unpleasant surprises at the end of the month, when it comes to paying the bill (higher costs than expected).

In addition, unlike a subscription formula, it does not allow users to anticipate their expenses and the budget to foresee for their software needs.

Disadvantages for software vendors

Building customer loyalty and ensuring recurring revenues becomes more complex with the pay as you go business model.

It is also difficult to predict the revenues that will come in, unlike companies that deploy a subscription-based pricing system (for example: the calculation of MRR and ARR).

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In the end, which model to choose?

In short, there is no one fits all, whether you are a customer or a software publisher. Each formula has its advantages and disadvantages.

👉 On the customer side, it all depends on the need and usage. It involves a calculation to be made, before opting for such or such solution.

💡 It is however possible to start with a tool available in pay as you go, to test it in particular. Then you move towards a subscription, sometimes more advantageous (especially in terms of price) when the needs increase with the growth of the company.

👉 On the software publishers' side, it's the same thing. It's an issue to think about when establishing a pricing strategy.

On the other hand, other software offer a subscription, to which additional fees are added if a certain service threshold is exceeded. With Hub Marketing, for example, users adjust their monthly subscription fee based on the number of contacts in their database.

Isn't a hybrid model, offering both subscription and pay as you go, the best option for both the user and the publisher? Tell us what you think in the comments.