Are Usage-Based Prices the right choice for Your SaaS? -
Based on an OpenView survey, in 2023 more than half of SaaS firms will use or plan to implement price-based usage, which they define as "a pricing model that enables customers to purchase an item based on the extent to which they utilize the item."
Usage-based pricing (UBP) also known as consumption pricing -- is dependent on the utilization of a certain measurement, like gigabytes of storage utilized or the amount of API calls made -- for a certain period of time.
The method of pricing SaaS services is very trendy right now, however that doesn't mean it's necessarily the ideal choice for all businesses.
Here's my take on it in the simplest way:
- UBP is being touted as the solution to an older problem that pricing must accurately reflect value -- for both sides. UBP can better align values so that buyers and sellers see the price to be reasonable.
But that doesn't mean it's right for everyone -- and actually, you may have already been using a particular version of UBP.
Seat-based pricing (SBP) isa measurement based on usage. One thing to ask yourself is: Is the amount of seats (or seats) the most highly connected metric to value?
- Don't get sucked into using UBP as a remedy for a problem. When you are thinking about pricing, think about one thing: is pricing considered reasonable.
In this piece, I'll break down my views on the concept of usage-based pricing and help you decide if it's worth investigating for your company.
Why Is UBP Trending?
SaaS pricing is tough to maximize. A major reason is because the fact that there are no limitations. 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 that aren't seen elsewhere in the industry.
SaaS is also a new industry and is just beginning to get into the nascent stages of ideation around pricing, packaging, and even sales models. Innovative companies are developing fast, not only on their products, but also in the ways they monetize. In many ways, we are in the very starting point, and using usage-based pricing gives people a more accessible way of approaching pricing.
It's all exciting, but it also means that, with fewer limits and tried-and-tested methods, we are able to be easily swept by the "next biggest trend."
Why does it matter that UBP "the new major trend"?
As with many other trends, usage-based pricing is popular with the recent successes that build on the concept of the concept of pricing fair. Customers, regardless of whether they're either individuals or businesses, would like to believe that they're paying an appropriate price. When it comes to SaaS, customers are making this decision each time they renew or allow another monthly charge. But fairness cuts both ways. SaaS providers should also be compensated fairly to provide the services they offer Most of the time, that value increases as the product continually improves and usage by customers grows. The creation of a pricing structure which is fair -- in both directions -is the primary tenet for SaaS pricing. To do that successfully, the measurement on that your pricing model is built should be as closely to what customers perceive as value as possible.
If it is done properly, UBP accelerates you toward this answer. It's important to recognize that aligning with value isn't the only consideration when coming the perfect price measurement that's linked to value. There are two considerations that you have to optimize:
- Linked pricing metric as closely to its value as is possible (the Fairness Principle)
- Make your pricing as simple and easy to forecast as possible
The degree to which you decide to weigh one against the other depends upon a myriad of variables including your market and what your competition is doing, average price point, product type, and the preferences of your customers. It typically takes time to find the ideal balance between your products and market There aren't any shortcuts. Continuous testing is the sole method to achieve success.
Most of the time, whenever you hear or read about UBP is that it's promoted as an option to pricing based on seat that has long been the most popular sales strategy for B2B SaaS firms.
(But despite more businesses trying out other methods of pricing and metrics the seat-based model is currentlythe most common B2B model.)
But one of the biggest reason why UBP is trending is the fact that there's been some huge positive stories of success in the recent IPOs for companies that use the UBP model, including Snowflake, Twilio, and Agora.
These success stories are intriguing however, they shouldn't be copied blindly. Think about the underlying factors making UBP work for certain businesses by asking three questions to abstract the learnings away to help you adapt them to your circumstances:
- How does their price measurement in relation to their the value perceptions of customers?
- What are the effects of the complex (or simplicity) of their model impacting their renewal process and sales? Do they slow down or accelerate it? Can it make it easier or more challenging?
- How is their pricing model positioned relative to their competitors? Is it unique or similar? What are the pros and cons?
What Do Many UBP Success stories have in common?
It's not difficult to find companies that have successfully gone into the market, with enormous valuations, and you'd like to match their patterns for ideas you could use for your business.
However, there are a few of things that most of these businesses have in common that make usage-based pricing particularly effective for their needs. And before assuming that UBP is the right choice for your company, you'll want to see whether your business has these traits.
1. The Model lends itself to an Usage Metric that is Measurable
Successful UBP firms all use a primary pricing metric, for example:
- Snowflake: Storage and compute usage
- Twilio: Amount of numbers that are used in the phone system and lengths of calls or messages delivered
- Agora: Call or live stream lengths or messages sent
These metrics can be easily monitored and estimated by customers. The problem is that people often overlook this truth - if a potential customer cannot easily predict the amount they'll spend they will pay, it makes their ability to buy from you much more difficult. This is especially the case for business software, where spending is required to be budgeted.
2. Success stories tend to have long-term time horizons
Another important commonality of success-oriented UBP models: the goals are far-sighted. This model allows businesses to implement strategies during the initial or growth stages of the company that were oriented around the long-term goal of maximising value.
As an example, the more innovative B2B product types often make use of UBP to charge very little initially or two when a client is involved and thus show their value and earn customers' buy-in. As time passes, this company grows, so does the ARPU, or average revenue per customer (ARPU) and profit margin.
While utilization-based pricing IPO success stories are very compelling, they undersell those initial years of deal where they may have left cash in the bank because of a traditional pricing structure. Ultimately, that value is growing over the last few years and that's why we see only astronomical net-dollar retention rates.
Businesses have different timelines they work within. Be sure to determine the best option for your as well as your company initially. If you're financing other projects through cash flow there's a chance that you won't get the opportunity to shift towards a long-term duration.
Is UBP Worth Investigating For Your Company?
If you're considering UBP this means you're reviewing your value-based metrics are used to value your goods.
In lieu of being confined to metrics that typically are in the UBP group, I'd suggest you to simply consider the ideal value measurement or metrics might be - Start there.
It might be seats, it might be megabytes, or even minutes. Or it might be that the more structured approach using bundled features would work best.
Analyzing the primary and the subsidiary values you're using for packaging and pricing 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 track. But pause if you consider UBP solely because of its success or hype in the market.
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