Estimated learn time: 7 minutes, 6 seconds
In accordance with an OpenView survey, by 2023, 56% of SaaS firms might be utilizing or anticipating to check usage-based pricing, which they outline as “a pricing mannequin that allows prospects to pay for a product in response to how a lot they use it.”
Utilization-based pricing (UBP) — or consumption pricing — is predicated on the quantity of utilization of a selected metric, resembling gigabytes of storage used or the variety of API calls made — over a time period.
This fashion of pricing SaaS merchandise is tremendous fashionable proper now, however that doesn’t imply it’s the most effective match for many firms.
Right here’s my tackle it in a nutshell:
→ UBP is trending as a answer to an outdated drawback: pricing must precisely mirror worth — for each side. UBP can higher align worth so consumers and sellers understand the deal to be honest.
→ BUT that doesn’t imply it’s proper for everybody — and in reality you may already be deploying a model of UBP.
→ Seat-based pricing (SBP) is a usage-based metric. The query so that you can take into account is: is the variety of customers (or seats) probably the most extremely correlated metric with worth?
→ Don’t get sucked into utilizing UBP as an answer on the lookout for an issue. As you concentrate on pricing, concentrate on one factor: is pricing perceived to be honest.
On this piece, I’ll break down my ideas on usage-based pricing and learn how to determine if it’s price investigating to your firm.
Why Is UBP Trending?
SaaS pricing is hard to optimize. One main cause is there are only a few limitations. With excessive gross margins and few technical constraints, merchandise can actually go wild with their pricing and packaging in ways in which we don’t see in different industries.
SaaS can also be a really younger business, and we’re nonetheless within the early phases of ideation round pricing, packaging, and even gross sales fashions. The perfect firms are innovating quickly, not simply on their product however within the methods they monetize. In some ways, we’re at first of the start, and usage-based pricing provides individuals a extra accessible method of approaching pricing.
That is all very thrilling, however it additionally implies that, with fewer limitations and well-tested greatest practices, we will simply get caught up within the “subsequent massive factor.”
So why is UBP “the following massive factor”?
Like many tendencies, usage-based pricing is a catchy title with current success tales that play on an present idea — pricing pretty. Customers, whether or not they’re companies or people, wish to really feel like they’re paying a good worth. On the planet of SaaS, prospects are making that call each time they renew or after they permit one other month-to-month cost. However equity cuts each methods. SaaS suppliers must also be compensated pretty for the worth they ship, and most often that worth will increase because the product frequently improves and the shoppers’ utilization will increase. Designing a pricing mannequin that optimizes for equity — in each instructions — is a elementary tenant of SaaS pricing. To try this successfully, the metric upon which your pricing is predicated must be as near the shoppers’ perceived worth as potential.
When executed proper, UBP accelerates you towards this reply. It’s essential to acknowledge, nonetheless, that alignment with worth shouldn’t be the one consideration when arising with a perfect pricing metric that’s linked to worth. There are two concerns that it’s important to optimize:
- Linked pricing metric as intently to worth as potential (the equity precept)
- Make your pricing as easy and straightforward to forecast as potential
The diploma to which you weigh one versus the opposite depends upon a wide range of elements together with your market, what your opponents are doing, common worth level, product sort, and the desire of your consumers. It usually takes time to search out the proper stability to your product and your market, and there are not any shortcuts. Steady testing is the one confirmed path to success.
More often than not, if you learn or hear one thing about UBP, it’s positioned as an alternative choice to seat-based pricing, which has been the dominant gross sales mannequin for B2B SaaS firms.
(However even with extra firms attempting out different metrics and pricing fashions, seat-based pricing is nonetheless the commonest B2B mannequin.)
However one of many greatest causes that UBP is trending is as a result of there have been some main success tales round current IPOs of firms utilizing this mannequin, resembling Snowflake, Twilio, and Agora.
These success tales are intriguing however shouldn’t be blindly copied. As a substitute, take into consideration the underlying elements making UBP work for sure companies by asking three inquiries to summary the learnings away so you’ll be able to greatest apply them to your personal scenario:
- How is their pricing metric correlated with prospects’ notion of worth?
- How is the complexity (or simplicity) of their mannequin impacting their gross sales and renewal course of? Does it sluggish it down or pace it up? Does it make it simpler or tougher?
- How is their pricing mannequin positioned relative to their opponents? Is it distinctive or related? What are the professionals and cons?
What Do Many UBP Success Tales Have In Widespread?
It’s straightforward to have a look at firms which have efficiently gone public with big valuations and wish to sample match to search out issues you’ll be able to apply to your personal enterprise.
However there are a few issues that almost all of those firms have in widespread that make usage-based pricing significantly efficient for them. And earlier than assuming that UBP might be proper for your corporation, you’ll wish to see if your organization additionally has these traits.
1. The Mannequin Lends Itself To A Measurable Utilization Metric
Profitable UBP firms all have a main pricing metric, for instance:
- Snowflake: Compute and storage utilization
- Twilio: Quantity of telephone numbers used, name lengths or messages despatched
- Agora: Name or stay stream lengths or messages despatched
These metrics could be simply tracked and estimated by their prospects. That is an typically neglected actuality – in case your prospect can’t simply forecast how a lot they are going to pay, you’re making their potential to purchase from you rather more troublesome. That is significantly true for enterprise software program the place spend must be budgeted.
2. The Success Tales Have a tendency To Have Lengthy-Time period Time Horizons
One other essential commonality of profitable UBP fashions: the objectives are far-sighted. Selecting this monitor permits firms to do issues within the early and even progress phases of the corporate that have been oriented round long-term worth maximization.
For instance, extra novel B2B merchandise typically use UBP to cost very low within the first yr or two with a buyer, to allow them to show the worth and acquire buy-in. Then over time, as that firm grows, so does the typical income per person (ARPU) and revenue margin.
Whereas usage-based pricing IPO success tales are very compelling, they undersell the preliminary deal years after they most likely left cash on the desk as a consequence of a extra conventional pricing mannequin. In the end, that worth is catching up lately, and that’s why we see simply astronomical web greenback retention numbers.
However companies have very totally different time horizons that they function below. Be sure you know what’s best for you and your corporation first. When you’re funding different tasks with money circulation, then you might not have the chance to shift to a long run time horizon.
Is UBP Value Investigating For Your Firm?
When you’re contemplating UBP, it implies that you’re re-evaluating the worth metrics that you just’re utilizing to cost your merchandise.
And as a substitute of limiting your self to metrics that usually fall into the UBP camp, I’d urge you to easily take into account what your splendid worth metric or metrics may be – begin there.
It may be seats, it may be gigabytes, or minutes. Or it may be {that a} extra tiered strategy with bundled options would work greatest.
Assessing the first and subsidiary worth metrics you employ for pricing and packaging is without doubt one of the most essential progress levers you’ll be able to pull — so in case you’re questioning your pricing mannequin, you’re heading in the right direction. However pause if you end up contemplating UBP simply due to the success or hype available in the market.
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Kurt Smith
Kurt Smith leads the FastSpring Product group the place he focuses on market analysis and strategic product innovation to ship a world-class ecommerce expertise to the worldwide software program firms partnered with FastSpring. Previous to becoming a member of FastSpring, Kurt was an Working Principal at Accel-KKR Consulting Group, and he obtained an MBA from the Wharton Faculty on the College of Pennsylvania in Strategic Administration.
