Does Usage-Based Pricing work for Your SaaS? -
Based on the findings of an OpenView survey, in 2023 the majority of SaaS companies are using or expecting to test the concept of usage-based pricing. They describe as "a pricing model that enables users to purchase an item based on how much they use the item."
Usage-based pricing (UBP) -- or consumption pricing dependent on the usage of a specific measure, for example, gigabytes of storage utilized or the number of API calls made -- over the course of.
This way of pricing SaaS products is extremely trendy right now, however that doesn't mean it's necessarily the best fit for most companies.
This is my opinion in the simplest way:
- UBP is gaining popularity as an solution to an older issue that pricing must accurately reflect value for both parties. UBP helps to better align the value of a deal so both buyers and sellers see the transaction as honest.
- BUT that doesn't mean it's right for everyone -- and in fact you might already be deploying a version of UBP.
- Seat-based pricing (SBP) isa measure based on the use of. One thing to consider is: is the amount of seats (or seats) the most strongly related metric for value?
- Don't get sucked into using UBP as a solution looking for the root of a issue. As you think about pricing, focus on one thing: is pricing perceived to be fair.
In this post, I'll break down my views on the concept of 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. The main reason for this is that it has very little limitation. Because of the huge gross profit margins, and limited technical limitations, the products can really go wild in their pricing and packaging in ways aren't seen within other sectors.
SaaS can also be a emerging industry. We're just beginning to get into the nascent phases of conceiving pricing, packaging, and even sales models. Companies that are innovative are advancing rapidly, not just on their product but in how they make money. In many ways, we are at the beginning of the beginning, and usage-based pricing is an affordable way to approach pricing.
All of this is very exhilarating, but it implies that with less limits and tried-and-tested methods, we are able to quickly get caught up in the "next biggest trend."
So why is UBP "the next major thing"?
As with many other developments, the usage-based pricing model is a catchy name with recent success stories that play on the idea of pricing fairly. The consumers, whether either individuals or businesses, would like to believe that they're paying a fair price. In the realm of SaaS, customers are making the decision to renew their subscription or permit a monthly cost. Fairness should be considered in both directions. SaaS suppliers should be compensated fairly in exchange for the benefits they provide In most instances, this value grows when the service is continually improved as well as the usage of customers grows. The creation of a pricing structure that is fair and fairand in both directions- is a fundamental tenant for SaaS pricing. For this to be done successfully, the measurement on that your pricing model is built needs to be as close to what customers perceive as value as it is.
If it is done properly, UBP accelerates you toward the answer. It's important to recognize, however, that alignment to 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:
- The metric of linked price is as close to its value as is possible (the Fairness Principle)
- Create pricing that is as simple and easy to predict as you can.
The degree to which you weigh one versus the other depends upon a myriad of variables like your industry, the market you are in, what your competitors are making, the average price, product type, and the preference of your buyers. It usually requires time to determine an appropriate balance for the product you offer and for your customers as there aren't any quick fixes. Testing continuously is the only sure way to be successful.
The majority of the time when you read or hear something regarding UBP the idea is to present it as an option to seat-based pricing, which has been the most popular sales strategy for B2B SaaS firms.
(But despite more businesses exploring different measures and pricing strategies seating-based pricing is the most popular andthe most common B2B model.)
However, one of the primary reasons that UBP is trending is the fact that there are some significant positive stories of success in the recent IPOs for companies that use this method, like Snowflake, Twilio, and Agora.
The success stories of these companies are fascinating but shouldn't be blindly copied. Consider the underlying factors making UBP perform for particular companies 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 in relation to their customers' perception of value?
- What are the effects of the complexity (or the simplicity) of their model impacting the renewal and sales process? Can it affect the speed of renewal or accelerate it? Can it make it easier or more difficult?
- How is their pricing model set in relation to the competition? Is it unique or similar? What is the advantages and disadvantages?
What are the most successful UBP Stories Have In Common?
It's simple to study businesses that have gone to the public market with massive valuations, and want to pattern match to discover what you can use for your business.
But there are a couple points that all the companies which make UBP particularly effective for them. And before assuming that UBP is the right choice for your company, you'll want to see whether your business is a good fit for these characteristics.
1. The Model is lent to A Measurable Usage Metric
Successful UBP companies all have one primary price metric like:
- Snowflake: Compute and storage use
- Twilio: Number of telephone numbers utilized and lengths of calls or messages delivered
- Agora: Call or live stream lengths , or messages that are sent
These metrics can be easily measured and interpreted by clients. This is an often overlooked reality - if your prospect can't easily forecast how much they'll spend they will pay, it makes your prospects' ability to purchase from you much more difficult. This is particularly true for business software, where spending needs to be budgeted.
2. The Success Stories Tend To Have Long-Term Time Horizons
One of the main characteristics of successful UBP models: the goals are far-sighted. The choice of this model permits companies to take actions during the initial or growing stages of their business which were focused on long-term value maximization.
As an example, the more innovative B2B services typically use UBP to price very low initially or two with a customer and prove the value and gain the customer's buy-in. In time, as this company grows and expands, so do the annual revenue per user (ARPU) as well as profit margin.
While utilization-based pricing IPO success stories are very appealing, they are not as convincing as the initial deal years when they probably left money on the table because of a traditional pricing system. In the end, this value is growing in recent years, and that's why we see just astronomical net dollar retention figures.
Businesses have different timelines they work within. You must determine the best option for your and your company initially. If you're financing projects through cash flow there's a chance that you won't get an opportunity to change to a longer term time duration.
Is UBP Worth Investigating For Your Company?
If you're thinking about UBP It means you're looking at your value-based metrics you're using to price your products.
And instead of limiting yourself to metrics that usually belong to the UBP category, I'd like you to think about what your ideal value metric or metrics may be. begin there.
It might be seats or gigabytes, or minutes. Perhaps a more tiered approach with integrated features will work the well.
Examining the primary and secondary values you're using for pricing and packaging is one of the biggest growth levers you can pull and, therefore, if you're wondering about the pricing you're using You're on the correct track. However, you should not consider UBP solely because of its success or hype in the marketplace.
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