Does Usage-Based Pricing work for Your SaaS? -
Based on an OpenView survey, by 2023, more than half of SaaS businesses will use or expecting to test price-based usage, which they define as "a pricing system that allows customers to purchase an item based on the amount they will use it."
Utilization-based pricing (UBP) (also known as consumption pricing -- is dependent on the utilization of a certain measurement, like gigabytes used in storage or the number of API calls that are made over a period of time.
This method of pricing SaaS products is extremely trendy right now, however that doesn't mean it's the ideal choice for all businesses.
Here's what I think in the simplest way:
-- UBP is gaining popularity as the solution to an 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 see the deal to be fair.
- BUT this doesn't mean that it's the right choice for everyone . actually, you may have already been using a particular variant of UBP.
- Seat-based pricing (SBP) isa measurement based on usage. The question for you to consider is: is the amount of seats (or seats) the most highly correlated metric with significance?
Beware of making use of UBP as a remedy to solve a problem. While you consider pricing, focus on the one aspect: is pricing viewed as acceptable.
In this post, I'll break down my thoughts on usage-based pricing and how to decide whether or not it's worth looking into to your firm.
Why Is UBP Trending?
SaaS pricing is tough to optimize. A major reason is because it has very little limitation. Due to the high margins on gross sales and little technical restrictions, goods are able to go crazy when it comes to pricing and packaging in ways we don't see elsewhere in the industry.
SaaS is also a new industry and is just beginning to get into the nascent phases of conceiving pricing, packaging, and even the sales model. The best companies are innovating quickly, not only in the design of their products, but also in the ways they monetize. In various ways, we're just at the starting point, and using usage-based pricing gives people a more affordable way to approach pricing.
All of this is very exhilarating, but it means that, with fewer limitations and well-tested the best practices, we could easily get caught up in the "next major new thing."
Why do you think UBP "the the next big trend"?
As with many other developments, the usage-based pricing model is an appealing name that has recently been featured in successful stories that play off an existing concept -- price fair. Customers, regardless of whether they're either individuals or businesses, would like to believe that they're getting a fair cost. In the world of SaaS, customers are making this decision each time they renew their subscription or accept a new monthly fee. Fairness should be considered in both directions. SaaS suppliers should be paid fairly to provide the services they offer In most instances, this is the case when the service is continually improved and the customers' usage expands. Designing a pricing model that is fair and faireither way -is an essential element for SaaS pricing. To do that effectively, the metric upon the basis of your pricing needs to be as close to your customers' perception of value as it is.
If done correctly, UBP accelerates you toward the answer. It's crucial to understand, however, that alignment with value is not the sole factor to consider when trying to come the perfect price measure that's tied to value. There are two considerations that you have to optimize:
- A linked pricing metric that is as close to value as possible (the principles of fairness)
- Create pricing that is as simple and easy to predict as you can.
The amount you decide to weigh one against the other depends on many factors like your industry, the market you are in, what your competitors are doing, average price point or product, as well as the preferences of your customers. It typically isn't easy to strike the ideal balance between your product and your market as there aren't any solutions. Continuous testing is the only sure method to achieve success.
Most of the time, whenever you hear or read anything about UBP is that it's promoted as an option to seat-based pricing, which has been the dominant sales model for B2B SaaS businesses.
(But regardless of the fact that more companies are testing different methods of pricing and metrics, seat-based pricing remains currentlythe most common B2B pricing model.)
One of the main reason why UBP is trending is the fact that there are some significant success stories around recent IPOs of companies using this method, like Snowflake, Twilio, and Agora.
These success stories are intriguing however, they shouldn't be copied blindly. Instead, think about the core factors behind why UBP work for certain firms by asking three simple questions that help you abstract the lessons away to help you use them in your personal circumstances:
- What is the price metric in relation to their the value perceptions of customers?
- How is the complex (or simple) of their model impacting their sales and renewal process? Does it slow it down or accelerate it? Will it make it simpler or more difficult?
- 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 companies that have successfully gone public with huge valuations and want to pattern match to discover what you can apply to your own business.
There are a handful aspects that the majority of these businesses have in common that makes usage-based pricing efficient for them. Before you decide that UBP would be a good fit for your business, you'll want to see the company you work for is a good fit for these characteristics.
1. The Model lends itself to an Usage Metric that is Measurable
Highly successful UBP businesses all share a primary pricing metric, for example:
- Snowflake: Calculation and storage usage
- Twilio: Number of numbers that are used in the phone system, call lengths or messages delivered
- Agora Contact or live stream messages or lengths
The metrics are easily monitored and estimated by customers. This is an often overlooked truth - if a potential customer cannot easily predict the amount they'll spend they will pay, it makes your prospects' ability to purchase with you more challenging. This is especially true of business software, where spending needs to be budgeted.
2. The Success Stories Tend To Be Long-Term in Time
A key feature of the effective UBP model is that the objectives are a long-term view. The choice of this model permits companies to take actions in the early or even growth stages of the company which were focused on the long-term goal of maximising value.
As an example, the more innovative B2B products often use UBP to charge very little for the initial year or two with a customer and thus show their value and earn the customer's buy-in. Then over time, as this company grows as does its ARPU, or average revenue per customer (ARPU) as well as profits margin.
While the usage-based pricing IPO successes are appealing, they are not as convincing as those initial years of deal where they may have left cash at the end of the tunnel because of a traditional pricing system. In the end, this value is catching up with time, which is why we're seeing just astronomical net dollar retention rates.
Businesses have different timespans they operate under. Make sure you know what's right for you as well as your company initially. If you're financing other projects through cash flow then you may not have an opportunity to change to a longer term time duration.
Is UBP Worth Investigating For Your Company?
If you're considering UBP, it means that you're re-evaluating the value metrics that are used to value your goods.
Instead of restricting yourself to metrics that normally are in the UBP category, I'd like you to think about what your ideal value measure or metrics could be. start there.
The number of seats could be as low as a few, it might be minutes, gigabytes or gigabytes. Or it might be that a more tiered approach with bundles of features is the well.
Analyzing the primary and the subsidiary value measures you employ to determine pricing and packaging is one of the most important growing levers that you have and, therefore, if you're unsure about your pricing strategy, you're on the right track. However, you should not consider UBP just because of the success or hype in the market.
Live Interview With Kurt Smith on Pricing Strategies to Combat Stagflation
Take part in a live interview with Chief Product Officer Kurt Smith about pricing strategies to think about in highly volatile markets. RSVP to learn more.
