Does Usage-Based Pricing work for Your SaaS? -
Based on the findings of an OpenView survey, by 2023 more than half of SaaS companies will be using or plan to implement price-based usage, which they describe as "a pricing system that allows customers to purchase a product according to the extent to which they utilize it."
Utilization-based pricing (UBP) -- or consumption pricing -- is based on the amount of utilization of a certain measure, for example, gigabytes of storage used or the number of API calls made -- over a period of time.
This method of pricing SaaS products is super current, but that doesn't mean it's necessarily the best fit for most companies.
Here's what I think in a nutshell:
The emergence of UBP is being touted as the solution to an older problem price must accurately reflect value -- for both parties. UBP helps to better align the value of a deal so both buyers and sellers perceive the transaction as reasonable.
But that doesn't mean that UBP is right for everybody -- and in fact you might already be deploying a Version of UBP.
Seat-based pricing (SBP) isa usage-based metric. The question for you to consider is: is the number of users (or seats) the most highly correlated metric with value?
Beware of the use of UBP as a way to solve for a problem. While you consider pricing, you should be focusing on something: is the pricing considered reasonable.
In this post, I'll break down my views on the concept of usage-based pricing and how to decide if it's worth investigating to your firm.
Why Is UBP Trending?
SaaS pricing can be difficult to maximize. One primary reason is it has very little limitation. Because of the huge gross profit margins and few technical constraints, products have the potential to be wildly creative with their pricing and packaging, in ways aren't seen in other industries.
SaaS is also a young industry, and we're just beginning to get into the nascent stage of thinking about pricing, packaging, and even sales models. Innovative companies are developing fast, not only on their product but in the methods they use to monetize. In various ways, we're in the very beginning, and usage-based pricing gives people a more accessible way of approaching pricing.
It's all thrilling, however it suggests that, with fewer limits and tried-and-tested the best practices, we could quickly get caught with the "next biggest new thing."
Why do you think UBP "the the next biggest thing"?
Similar to many of the new trends, usage-based pricing has a catchy name with recent success stories that play on the idea of price fair. The consumers, whether either individuals or businesses, would like to feel like they are getting a fair cost. In the world of SaaS the customers make this decision each time they renew or accept a new monthly fee. However, fairness is not a one-way street. SaaS companies should also be compensated fairly in exchange for the benefits they provide In most instances, this is the case with each improvement in the product and usage by customers increases. The creation of a pricing structure that is fair and fair- in both directions -is the primary tenet of SaaS pricing. For this to be done successfully, the measurement on the basis of your pricing should be as closely to your customers' perception of worth as is possible.
If it is done properly, UBP accelerates you toward this answer. It's crucial to understand, however, that alignment to value is not the sole factor to consider when trying to come to a perfect pricing measure that's tied to value. Two aspects you have to optimize:
- The metric of linked price is as close to the value of its potential (the fairness principle)
- Create pricing that is as simple and easy to calculate as is possible.
The degree to which you evaluate one over the other depends on many factors including your market, what your competitors are making, the average price, product type, and the tastes of your clients. It generally isn't easy to strike the ideal balance between the product you offer and for your customers, and there are no solutions. Testing continuously is the only sure path to success.
The majority of the time when you read or hear regarding UBP is that it's promoted in a different way to the seat-based pricing model, which has been the dominant sales model for B2B SaaS firms.
(But even with more companies trying out other methods of pricing and metrics the seat-based model is stillthe preferred B2B model.)
But one of the biggest motives behind why UBP is gaining momentum is that there's been some huge positive stories of success in the recent IPOs of companies using this model, such as Snowflake, Twilio, and Agora.
These stories of success are interesting however, they shouldn't be copied blindly. Instead, think about the factors that make UBP work for certain firms by asking three simple questions in order to take the insights away so you can best apply them to your own scenario:
- How is their pricing metric related to customers' perception of value?
- What is the degree of complexity (or simplicity) of their model impacting their renewal process and sales? Does it slow it down or speed it up? Will it make it simpler or harder?
- What is their pricing strategy placed in comparison to other competitors? Is it unique or similar? What is the advantages and disadvantages?
What are the most successful UBP stories have in common?
It's not difficult to find firms that have succeeded in going to the public market with massive valuations, and want to pattern match for ideas you could implement in your own company.
However, there are a few points that all these businesses have in common that make usage-based pricing particularly effective for their needs. Before you decide that UBP will be right for your business You'll need to check if your company also is a good fit for these characteristics.
1. The Model lends itself to A Measurable Usage Metric
Highly successful UBP companies all have an underlying pricing metric that is the primary one, like:
- Snowflake: Compute and storage use
- Twilio: The number of phone numbers used as well as messages, call lengths and calls that are sent
- Agora: Call or live stream lengths or messages sent
They can easily be tracked and estimated by their clients. The problem is that people often overlook this truth - if a potential customer cannot easily predict the amount they will pay to purchase from you, you're making their ability to buy with you more challenging. This is especially the case for enterprise software where spend is required to be budgeted.
2. Success stories tend to Have Long-Term Time Horizons
Another important commonality of effective UBP modelsis that their goals are far-sighted. Choosing this track allows companies to take actions in the early or even growing stages of their business which were focused on the long-term goal of maximising value.
As an example, the more innovative B2B services typically use UBP to price very low for the initial year or two with a customer, so they can prove the value and gain customers' buy-in. Then over time, as this company grows and expands, so do the annual revenue per user (ARPU) and profits margin.
Although utilization-based pricing IPO successes are impressive, they don't do justice to the initial deal years when they probably left money on the table due to a more traditional pricing structure. The truth is that this kind of value has been getting better with time, and that's why we see only astronomical net-dollar retention numbers.
But businesses have very different timespans they operate within. Make sure you know what's right for you and your company first. If you're financing other projects through cash flow then you may not have the chance to move into a more long-term time duration.
Is UBP Worth Investigating For Your Company?
If you're thinking about UBP this means you're re-evaluating the metrics you're using to price your goods.
And instead of limiting yourself to metrics that typically are in the UBP camp, I'd urge that you think of what your ideal value measure or metrics could be. Start there.
It might be seats or minutes, gigabytes or gigabytes. It could be that an approach that is more tidier with integrated features will work the most effectively.
Analyzing the primary and the subsidiary values you're using to determine pricing and packaging is among the primary ways to increase your growth and, therefore, if you're wondering about the pricing you're using You're on the correct path. But pause if you consider UBP solely because of its popularity or the hype surrounding the marketplace.
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