Does Usage-Based Pricing work for Your SaaS? -
Based on the findings of an OpenView survey, in 2023, the majority of SaaS businesses will be using or planning to use the concept of usage-based pricing. They define as "a pricing system that allows users to purchase the product based on how much they use the product."
Utilization-based pricing (UBP) -- or consumption pricing -- is dependent on the utilization of a certain metric, such as gigabytes of storage used or the amount of API calls performed over a period of time.
This way of pricing SaaS products is extremely trendy right now, however this doesn't mean that it's the ideal choice for all businesses.
Here's what I think briefly:
-- UBP is being touted as a solution to the old problem price must accurately reflect value for both sides. UBP helps to better align value so buyers and sellers can see that the deal to be honest.
But this doesn't mean that it's the right choice for everybody -- and in fact you might already be deploying a variant of UBP.
Seat-based price (SBP) isa usage-based metric. It is a good idea to ask yourself is: Is the number of users (or seats) the most closely correlated metric with worth?
Beware of making use of UBP as a remedy to solve a problem. While you consider pricing, you should be focusing on one thing: is pricing perceived to be fair.
In this piece I'll go over my views on the concept of usage-based pricing and how to decide whether it's worth a look for your company.
Why is UBP trending?
SaaS pricing can be difficult to maximize. One primary reason is it has very little limitation. Due to the high margins on gross sales, and little technical restrictions, goods can really go wild with their pricing and packaging in ways that isn't the case elsewhere in the industry.
SaaS can also be a very emerging industry. We're just beginning to get into the nascent stages of ideation around pricing packaging, pricing, as well as selling models. The best companies are innovating rapidly, not just on their products, but also in the methods they use to monetize. In various ways, we're at the beginning of the beginning, and usage-based pricing gives people a more accessible way of approaching pricing.
All of this is very exciting, but it also suggests that, with fewer limits and tried-and-tested methods, we are able to quickly get caught up in the "next major trend."
Why is UBP "the the next biggest thing"?
Like many trends, usage-based pricing is a catchy name with recent successes that build on an existing concept -- the concept of pricing fair. Consumers, whether they are business or private, need to be sure that they're paying a fair price. In the realm of SaaS, customers are making the decision to renew or when they permit a monthly cost. Fairness should be considered in both directions. SaaS providers should also be compensated fairly to provide the services they offer, and in most cases this value grows when the service is continually improved as well as the usage of customers increases. The creation of a pricing structure 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.
When done right, UBP accelerates you toward the answer. It is important to realize, 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 aspects should be optimized:
- The metric of linked price is as close to its value as is possible (the principles of fairness)
- Your pricing should be as easy and as easy to forecast as possible
The extent to which you weigh one versus one is based on many factors like your industry, the market you are in as well as what your competitors are doing, average price point or product, as well as the tastes of your clients. It generally requires time to determine an appropriate balance for your products and market as there aren't any shortcuts. Constant testing can be the only proven path to success.
The majority of the time whenever you hear or read anything about UBP is that it's promoted in a different way to pricing based on seat, which has been the dominant sales model for B2B SaaS firms.
(But even with more companies testing different methods of pricing and metrics the seat-based model remains stillthe most common B2B model.)
However, one of the primary reasons that UBP is gaining momentum is that there's been some huge successes in recent IPOs by companies using the UBP model, including Snowflake, Twilio, and Agora.
The success stories of these companies are fascinating but shouldn't be blindly copied. Think about the factors that make UBP perform for particular firms by asking three simple questions that help you abstract the lessons away so you can best apply them to your own circumstances:
- What is the price metric correlated with customers' perception of value?
- What is the degree of complexity (or the simplicity) of their business model affecting their sales and renewal process? Can it affect the speed of renewal or speed it up? Can it make it easier or harder?
- What is their pricing strategy placed in comparison to other competitors? Is it unique or similar? What are the pros and cons?
What are the most successful UBP Stories Have In Common?
It's not difficult to find businesses that have gone public with huge valuations and are looking to pattern match to find things you can implement in your own company.
There are a handful of things that most of the companies that makes usage-based pricing effective for their needs. Before you decide that UBP will be right for your business it is important to determine the company you work for is a good fit for these characteristics.
1. The Model lends itself to An Usage Metric Measurable
Highly successful UBP businesses all share an underlying pricing metric that is the primary one, for example:
- Snowflake: Calculation and storage use
- Twilio: The number of telephone numbers utilized and lengths of calls or messages that are sent
- Agora Contact or live stream lengths or messages sent
The metrics are easily tracked and estimated by their customers. This is an often overlooked truth - if a potential customer isn't able to predict easily what they will pay, you are making the process of buying from you much more difficult. This is particularly true for business software, where spending needs to be budgeted.
2. The Success Stories Tend To Be Long-Term in Time
Another important commonality of effective UBP modelsis that their goals are a long-term view. This model allows businesses to implement strategies in the early or even growth stages of the company with a focus on longer-term value-maximizing.
As an example, the more innovative B2B product types often make use of UBP to price very low initially or two when a client is involved and thus prove the value and gain customers' buy-in. Then over time, as this company grows as does its average revenue per user (ARPU) as well as profit margin.
While the usage-based pricing IPO successes are impressive, they don't do justice to the first deal year in which they likely left money on the table because of a traditional pricing structure. In the end, this value is getting better over the last few years and that's why we see an astronomical increase in net dollar retention rates.
But businesses have very different timelines they work within. Be sure to determine what's right for you and your company first. If you're financing other projects through cash flow there's a chance that you won't get the chance to move to a longer term time duration.
Is UBP Worth Investigating For Your Company?
If you're thinking about UBP, it means that you're looking at the value metrics that are used to value your products.
And instead of limiting yourself to metrics that typically are in the UBP category, I'd like you to simply consider what your ideal value metric or metrics could be. start there.
It might be seats, it might be gigabytes, or minutes. Or it might be that an approach that is more tidier with bundles of features is the best.
Analyzing the primary and the subsidiary values you're using to determine pricing and packaging is one of the biggest growing levers that you have and, therefore, if you're wondering about the pricing you're using You're on the correct track. But pause if you consider UBP just because of the positive or negative publicity in the market.
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