Does Usage-Based Pricing work for Your SaaS? -
According to an OpenView study, by 2023 the majority of SaaS firms are using or expecting to test usage-based pricing, which they refer to as "a pricing model that enables customers to purchase the product based on the extent to which they utilize the product."
Utilization-based pricing (UBP) also known as consumption pricing is based on the amount of usage of a specific measure, for example, gigabytes of storage utilized 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 the best fit for most companies.
Here's what I think briefly:
-- UBP is trending as a solution to the old problem: pricing needs to accurately reflect value -- on both sides. UBP will better coordinate the value of a deal so both buyers and sellers perceive the deal to be reasonable.
But that doesn't mean that UBP is right for everybody -- and it's possible that you already be deploying a variant of UBP.
Seat-based pricing (SBP) isa measurement based on usage. It is a good idea to consider is: is the amount of seats (or seats) the most closely related metric for value?
- Don't get sucked into making use of UBP as a remedy for a problem. When you are thinking about pricing, you should be focusing on the one aspect: is pricing perceived to be fair.
In this post, I'll break down my thoughts on usage-based pricing and help you decide whether or not it's worth looking into for your company.
What is the reason UBP is trending?
SaaS pricing can be difficult to maximize. A major reason is because the fact that there are no limitations. Due to the high margins on gross sales, and little technical restrictions, goods are able to go crazy with their pricing and packaging in ways aren't seen elsewhere in the industry.
SaaS is also a very young industry, and we're just beginning to get into the nascent stages of ideation around pricing packaging, pricing, as well as the sales model. The best companies are innovating fast, not only on their products but also on the ways they monetize. In various ways, we're just at the new era, and the use-based pricing gives people a more easily accessible method of pricing.
It's all exhilarating, but it suggests that, with fewer limitations and well-tested methods, we are able to easily get caught by the "next major thing."
So why do you think UBP "the next major thing"?
As with many other new trends, usage-based pricing has popular with the recent successful stories that play off an existing concept -- pricing fairly. The consumers, whether either individuals or businesses, would like to be sure that they're getting a fair cost. In the world of SaaS, customers are making this decision each time they renew or permit a monthly cost. But fairness cuts both ways. SaaS suppliers should be compensated fairly in exchange for the benefits they provide Most of the time, that value increases as the product continually improves and the customers' usage increases. Designing a pricing model which is fair -either way -is an essential element for SaaS pricing. For this to be done successfully, the measurement on that your pricing model is built must be as similar to the customers' perceived value as possible.
If it is done properly, UBP accelerates you toward this answer. It is important to realize, however, that alignment with value is not the only consideration when coming to a perfect pricing measure that's tied to value. There are two aspects you have to optimize:
- Linked pricing metric as closely to value as possible (the principles of fairness)
- Your pricing should be as easy and as easy to predict as you can.
The extent to which you evaluate one over the other depends upon a myriad of variables like your industry, the market you are in, what your competitors are making, the average price as well as the type of product you sell and the preference of your buyers. It typically isn't easy to strike an appropriate balance for your product and your market, and there are no solutions. Continuous testing is the only proven way to be successful.
In the majority of cases, when you read or hear concerning UBP, it's positioned in a different way to pricing based on seat which is the most popular sales strategy for B2B SaaS businesses.
(But even with more companies testing different metrics and pricing models seating-based pricing is currentlythe the most popular B2B pricing model.)
However, one of the primary motives behind why UBP is trending is the fact that there have been some major positive stories of success in the recent IPOs for companies that use this method, like Snowflake, Twilio, and Agora.
These success stories are intriguing but they should not be replicated blindly. Instead, think about the core factors behind why UBP work for certain businesses by asking three questions to abstract the learnings from the experience so that you are able to use them in your personal circumstances:
- How does their price measurement correlated with customer perception of value?
- What is the degree of complex (or the simplicity) of their business model affecting their sales and renewal process? Do they slow down or accelerate it? Will it make it simpler or more challenging?
- What pricing structure is 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 easy to look at businesses that have gone public with huge valuations and you'd like to match their patterns to discover what you can implement in your own company.
But there are a couple of things that most of these companies have in common which make UBP particularly efficient for them. If you're unsure if UBP would be a good fit for your company, you'll want to see the company you work for exhibits these qualities.
1. The Model Lends Itself To an Usage Metric that is Measurable
The most successful UBP firms all use an underlying pricing metric that is the primary one, such as:
- Snowflake: Storage and compute usage
- Twilio: Amount of numbers that are used in the phone system and lengths of calls or messages sent
- Agora Contact or live stream messages or lengths
The metrics are easily measured and interpreted by clients. The problem is that people often overlook this truth - if a potential customer isn't able to predict easily what they'll spend to purchase from you, you're making the process of buying with you more challenging. This is especially true of business software, where spending needs to be budgeted.
2. Success stories tend to Have Long-Term Time Horizons
Another important commonality of effective UBP models: the goals are far-sighted. Choosing this track allows companies to do things in the early or even expansion stages of a company which were focused on the long-term goal of maximising value.
For example, more novel B2B services typically use UBP to set prices that are very affordable initially or two with a customer and prove the value and gain customers' buy-in. Then over time, as this company grows, so does the ARPU, or average revenue per customer (ARPU) as well as profit margin.
While usage-based pricing IPO success stories are very impressive, they don't do justice to those initial years of deal in which they likely left money in the bank as a result of a conventional pricing model. Ultimately, that value is getting better in recent years, and that's why we see just astronomical net dollar retention numbers.
Businesses have different timespans they operate within. Make sure you know the best option for your and your business first. If you're financing projects through cash flow then you may not have an opportunity to change to a longer term time period.
Is UBP Worth Investigating For Your Company?
If you're contemplating UBP It means you're re-evaluating your value-based metrics you're using to determine the price of your product.
In lieu of being confined to metrics that normally fall into the UBP camp, I'd urge you to think about the ideal value measurement or metrics may be. begin there.
It might be seats or megabytes, or even minutes. Perhaps the more structured approach using bundles of features is the best.
Analyzing the primary and the subsidiary value measures you employ for pricing and packaging is among the most important growing levers that you have and, therefore, if you're wondering about the pricing you're using then you're on the right path. Be wary if you find yourself considering UBP simply because of its positive or negative publicity in the marketplace.
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