The world of credit models in SaaS pricing

This guide, crafted by James Wood, Marek Rubasinski, and Hrishi Rajadhyaksha, demystifies usage credit models for SaaS and tech businesses. It covers which companies should use them, the different types, the benefits, and go-to-market applications, all based on our extensive customer conversations.

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Editorial letter

In the four years since we started building m3ter, we’ve received countless requests from customers seeking advice on their usage-based pricing (UBP) models. The world of UBP is complex and highly dependent on individual situations, but we’ve done our best to offer guidance that speaks to the most common challenges and questions, such as:

I’ve taken part in hundreds of customer conversations since joining m3ter, with companies ranging from zero to more than $1 billion in ARR.

Marek Rubasinski, VP, Strategic Business Development & Partnerships

While there is no one-size-fits-all pricing model, one model stands out amongst all the others as perhaps the most powerful and interesting to explore – for all SaaS and tech businesses at all stages: credits.

Marek Rubasinski, VP, Strategic Business Development & Partnerships

It’s also one of the most misunderstood models, and possibly most challenging to implement, but more on that later.

This guide – written together with James Wood (m3ter Head of Product) and in partnership with Hrishi Rajadhyaksha of Simon-Kucher – is a distillation of our many conversations about usage credit models: which companies should use them, the different types, benefits of each, and the go-to-market (GTM) applications.

We hope you’ll find this useful in your pricing journey. If you’d like to talk more, feel free to reach out to James , Hrishi or myself directly.

- Marek Rubasinski, VP, Strategic Business Development & Partnerships

Who should use a credit-based pricing model?

Which companies are well suited to credit models?

At their heart, credit models allow companies to simplify the complex webs of pricing that occur in places where vendor companies have many products, usage metrics, and services which all could be bought by a single buyer. Pricing, selling and contracting each of these separately would be a very time-consuming process, and in many cases it’s impossible to predict how usage of these products will evolve over the customer journey. So, selling ahead of time is not an option. 

Credit models give these companies an option to pre-sell their product and service to customers without having to prescribe how and when customers use them

James Wood, Head of Product at m3ter

– it’s essentially handing the keys to your customers to flexibly draw down this credit as they choose.

James Wood, Head of Product at m3ter

You don’t need to sell complex contracts with endless terms of service describing limits and pricing for each service, and you don’t need to follow up with customers on their usage of individual products and services to ensure they’re getting value from your relationship. 

Credits also create a route to more clearly cover your costs in low-margin environments, as you can:

  1. Add in coverage for elements that cost you money, and 
  2. Adapt the pricing of credits as your cost-to-serve changes, without having to break renewal cycles or redo customer contracts.

(Note: You still need to be clear and communicative regarding any pricing changes!

While this guide focuses on how software companies can use credits, it’s worth mentioning that the pricing model is not unique to software – I’ve seen credits used by gyms, car rental companies and even coffee suppliers – and one of the earlier versions of credit-based pricing is in fact the postage stamp, all the way back in 1840!

Which companies are not well suited to credit-based pricing?

The design principle “Keep it simple, stupid!” definitely applies here: The advantages of credit models can very easily become a disadvantage if they’re used in the wrong place. 

Credit models offer companies the ability to abstract and remove complexity when there are many different variables in pricing. However, if there aren’t many variables or products that need to be priced, it will tend to do the opposite. 

The abstraction of a simple pricing model into a credit system will often lead prospective buyers to wonder where the “gotcha” is, as the abstraction of value doesn’t seem natural. As a result, it will likely lead customers to have more questions, fear, uncertainty, and doubt in the purchase process – all for very little gain.

Here is a quick graphic you can use to help understand whether your company is well suited to credit-based pricing:

What do credit models look like in practice?

There are 2 main types of credit models: “Committed spend” and “Credits as currency”. In this section we’ll explain the distinction between the two.

1) Committed spend

When consumption of a product or service (or part of one) is complex, it can be streamlined by allowing customers to make a commitment to the services they know they’re going to consume in a given time period. Usage is classed as “credits”, but balances, and the price of the usage credits, are often shown in fiat currency (i.e. government-backed currency like USD or GBP). Typically, the software vendor will provide a discount on the price of “pay-as-you-go” usage (if it’s offered) in return for this commitment to spend. It’s important to note that commitments are most often paid upfront, but do not have to be.

An example of usage credit models would be the performance of AI/ML functions or database infrastructure, which bring together compute, memory, storage, transfer, etc. Some or all of these could be expressed as a unit, and the unit would have a sticker price. This is what the customer sees on this usage statement and invoice against this product.

Examples of committed spend in the market:

  • ClickHouse
  • Elastic
  • Snowflake
  • New Relic

Without offering a balance arrangement in credits, such as this, usage-based pricing for complex systems can cause customer bills to be hundreds of pages long, itemizing all components and losing all meaning of what the products and services were used for. This means the context of why that usage was valued – one of the key benefits of UBP in the first place – gets lost in the sea of details.

Find out about "Seamless Implementation of Commitments With m3ter"

2) Credits as currency

This approach extends the model: Product and service SKUs are priced, in “credits”, as a form of proprietary currency (e.g. a credit, token, coin, etc). Both the customer's usage of the products and services and their cost is expressed in the number of these units that are consumed per use. Similar to the last model, customers also purchase a balance of these “credits” upfront, but instead of the balance being shown in fiat currency, it is shown to the customer as “credits remaining”.

This model can be either hybrid or universal:

Hybrid applications – The vendor typically has only one part of their offering that is paid for with credits. This is common in limited product catalog models where there is a fixed/recurring subscription charge for access to the platform, supplemented by an amount of credits to perform a specific function that has value/cost.

Universal applications – “Credits as universal currency” is probably the most powerful model, whereby all or nearly all of a vendor's offerings are purchased with credits. The product can vary almost infinitely, as can the billable usage event, because the definition is entirely flexible and adaptable to the customer’s product, service delivery, and data model. For example:

  • 100 API calls cost 1 Credit Unit
  • 10 GB of storage per month costs 10 Credit Units
  • 1 month of Enhanced Service Level costs 100 Credit Units
  • API call with Standard Service Level costs 1 Credit Unit; API call with Enhanced Service Level costs 2 Credit Units

Examples of credits as currency in the market:

  • Alchemy
  • Clearbit
  • Mobile phone companies

Why would you use a credit-based pricing model?

Ultimately, the success of a pricing model comes down to pricing agility – and the usage credits model offers unique flexibility when building your pricing and go-to-market strategy.

Structural benefits of credit pricing models

Implementing usage credits creates strategic and operational options for the business:

1) Value abstraction

Credits allow separation between the relative value of products and services as presented to users – e.g. Product 1 is X credit units per Y pricing vector, Product 2 is 5X credit units per Y pricing vector – and the price of these for any particular customer, because how much you charge each customer for credit units can be independent.

This can dramatically simplify otherwise very complex price books: Nobody wants Sales taking days to produce quotes, and those quotes extending to tens or hundreds of pages. In this model, customer pricing is dependent on the amount they pay for credit units, not a bespoke product catalog and price book. That way, the price book (in credits) can remain the same and even be more “safely” published publicly than would otherwise be the case. Price changes for individual products due to cost or market pressures are unilateral, requiring no changes to individual customer deals.

2) Flexibility and eliminating license swaps/cancellations/new product conversations with Sales

Customers can simply stop using one product and start using another, all with the same committed credit spend or allowance and without making any new contractual arrangements. When it comes to trials, you can easily shift credits around and experiment with expiry conditions.

At the same time, the vendor is able to easily launch new products, modules or usage metrics by adding them to the credit model – without needing to enter into new contracts or sales agreements.

3) Pricing cohesion across unified but disparate product catalogs

Credit models allow for many different and complex products and services to all be consumed by a commonly understood “currency” or “value per unit”, regardless of the complexity of the pricing vectors. For example:

  • API use could be charged “1 Credit Unit per 100 calls”
  • Storage could be charged by “10 Credit Units per GB stored per day”
  • Collaboration forum hosting could be charged by “100 Credit Units per 10k daily active users avg. per month”

This also means a single overall model for each product can apply to the smallest Pay-As-You-Go (PAYG) customer as well as the largest Enterprise: For example, PAYG customers might pay 1 Credit per use, and a large Enterprise might buy 1M Credits for pooled use across all its users.

4) Simplified accounting and billing processes

The relative simplicity of the pricing and contracting process in credit models means that you can create more easily readable bills for customers. In an ideal world, this is helped by accessible usage reporting (in your product or on-demand), as well as well-structured and transparent terms, documentation, and credit model explanations. 

At the same time, this will simplify your internal processes around billing, with easier accounting and reconciliation around a single metric rather than multiple.

Behavioral benefits of credit-based pricing

Since “$X.99” pricing became commonplace, the discussions around behavioral pricing have extended beyond the economists and psychology researchers. Business leaders understand some pricing models come with psychological upsides. On the behavioral side, credit models can: 

  • Improve trials: Because granting credits can become more creative and flexible than months of usage or fiat cash, you can now direct trial use more easily on specific products, manage expiry, and direct spend more effectively.
  • Encourage experimentation and procurement innovation: For example, by pooling credits across a buying business. Spending credits does not quite feel the same as spending money.
  • Encourage prepayment: Businesses like to have “credit in the bank”, know what they are going to spend, and also know it’s going to be spent on the products and services they designate. This is especially powerful when combined with volume discounts for bulk credit unit purchases.
  • Simplify offering incentives or refunds: Refunds, coupons, and credits are easier to give in credit units – and at higher values – since they will further encourage spending on services. They are also easier to administer, because you don’t have to back out specific product spend.
  • Align Sales goals with consumption: Sales approaches, ethos, compensation, and teams can be evolved and streamlined to focus on overall consumption – not just new logos.

Implementing credit-based pricing 

The great thing about the usage credit model is that it remains compatible with all the popular GTM approaches, as well as the pricing and commercial terms that typically accompany them. The sections below are not meant to be hard rules, but rather general patterns and approaches that can help you shape your implementation of credits.

B2B Sales: Commitments and prepayments

Customers can purchase bundles of credit units that get drawn down against for long periods. This is usually best for buyers who need to fix budgets. They will care about having top-up options for a good value if they use up their bundles. Other businesses with different cash flow strategies may want to commit to a usage amount to get better pricing, but will want to be billed in arrears based on actual usage. They will care about true-up rules, but typically they won’t receive as good of an overage rate for usage past commitment versus those making a prepayment. 

In both cases, careful monitoring is required to track actual usage and avoid shock at billing time or downgrades at renewal.

There are a few decisions that need to be made around which commitment/prepayment models to offer:

  • Monthly/annual balance: Does the customer get a set amount of usage per month, or do they have a larger bucket to use across the year? Monthly limits can help with quick upsells and give customers impetus to use and implement quickly. As a result, it’s the most common default. Annual limits are great when usage is unpredictable and/or seasonal, and for some larger enterprise deals you can even get a multi-year allowance of usage. It’s possible to offer monthly to some customers and annual to others, as long as your quote-to-cash systems allow it.
  • How much to “over-sell”: As a general rule of thumb, in cases where usage is less predictable and should grow fast, sell less “buffer” on their credit balance (“pay only for what you use”) and ensure you can upsell frequently as customers’ usage patterns evolve. In other cases, I’d recommend you structure the pricing and sales model so that customers are likely to buy 30-50% more than they’re likely to use in a given period, to allow some flexibility and encourage additional usage.
  • Whether to allow rollovers: Rolling over balances between periods is fairly rare, because it disincentivizes using credits within the subscription period and can cause revenue recognition headaches. Some companies like Snowflake use it effectively as a reason for the customer to trust their pricing model, and in a world where most customers are likely to over-use, it’s an effective strategy. In those cases, it’s often best for the rollover to be conditional (e.g. CS can grant rollover at discretion, or customers can only rollover if their contract is the same or higher value as last time).

Customer-specific pricing

There is an additional layer of complexity on how to implement either credits as usage or credits as currency, in respect to the customer-facing prices offered. Vendors must make two key choices:

  1. Decide whether to fix the “price” of their products and services in credit units for all customers, i.e. have one credit unit price that applies to everyone; or allow the credit unit cost for products and services to vary by customer.
  2. Decide whether to charge all customers the same for the same number of credits, or to charge each customer a different amount for the same number of credits.

The most common model for companies going all in on usage credits is to have everyone on the same “pricing” for products and services – remember, you can still have tiers and discounts – but to allow the go-to-market function to adapt the pricing and charging model for those credits to each channel and customer segment as needed.

These choices will have important implications for how you configure these models in your systems, and what level of operational flexibility Sales, Product, or Finance teams have. 

You also need to account for absorbing a certain amount of fiat forex volatility if you bill in multiple currencies. A credit purchased in one currency six months ago may no longer be “worth” the same as one purchased today or in another currency. (Note that one popular way to alleviate this is to to peg the credit exchange rate to a home currency like the USD.) 

Data infrastructure and technical implementation

Credit models have a lot of advantages, so you might be wondering why more companies don’t use them. The reality is that they are challenging to implement and operate, especially with legacy or build-your-own billing infrastructure. Your billing system needs to be able to:

  • Effectively track (or meter) the events that drive credits from your system and convert (or aggregate) the events into credits, often of differing value.
  • For each customer, understand how many credits a customer has consumed and use it to generate invoices and bills, as well as understand which customer balances or commitments are active and automatically apply this to billing.
  • Adapt this model based on changes made to the pricing.
  • Add new product usage events, conversions and credit pricing into your system as you develop and charge for new functionality.
  • Audit and reconcile the stream of events to credits to pricing, across all of your customers.
  • Be able to go back and amend credit usage (and therefore bills) after the fact in cases of false product events, outages, implementation issues, etc.

All of these things combined meant that until recently, there was often a lot of manual billing and accounting input to effectively run a credit model. Fortunately, solutions such as m3ter have been created to automate this whole process at scale and simplify the billing and pricing headaches.

Discover more on our m3ter product page!

Harnessing the power of credits in SaaS pricing

Out of the countless varieties of pricing models in SaaS, credit models stand apart as a powerful option to simplify the most complex pricing and billing, empower your customers, and more clearly cover costs in low-margin environments. Whether through committed spend or credits as currency, we are seeing companies of all sizes and stages adopt credit models to great success. 

But while usage credit models are compatible with all the most popular GTM approaches, there’s no denying that they are not suitable in all cases; if used in the wrong cases they can over-complicate the customer experience. They are also possibly the most challenging pricing model to implement, particularly with traditional billing solutions and customer-built billing architecture.

We hope the insights and practical tips in this guide have been helpful as you explore the potential upsides of credit-based pricing for your own business.

Afterward

In the marketplace of pricing ideas, credit-based pricing models are gaining serious currency. Usage-based credit models offer conceptual elegance. Vendors can present clients with commercial simplicity plus radical flexibility of use, while ensuring predictability of revenues for themselves. They also make internal (e.g. inter-department/-function) cost allocation easier for customers with diverse use cases while encouraging product discovery.

Hrishi Rajadhyaksha,  Simon-Kucher

Credit models can incubate monetization-alchemy – the possibility of converting re-occurring revenue into recurring revenue. 

Hrishi Rajadhyaksha, Simon-Kucher

They are also difficult to implement, and success of the models hinges on implementation, not conceptual elegance. There is another important consideration – will your buyers understand and accept the model? Tech buyers are increasingly becoming familiar with credit models and it is important to know whether your buyers are (or will soon be) part of that cohort.

Tech firms should invest in understanding whether their customers have the ability and willingness to commit budget and simultaneously value the flexibility of product usage. It is equally important to invest in the ability to precisely track, report, and bill on usage metrics.

Emerging technologies will beget frontier use cases and credit-based pricing models will be an important tool for tech vendors in their monetization journeys. These are exciting times in the world of SaaS pricing.

Hrishi Rajadhyaksha, Simon-Kucher

Interested in learning more? Check out other article on the Simon-Kucher website, "Usage-based Pricing: A Win-Win for Fintech Buyers and Vendors." Read it here.

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