Estimated learn time: 7 minutes, 6 seconds
In response to an OpenView survey, by 2023, 56% of SaaS firms will probably be utilizing or anticipating to check usage-based pricing, which they outline as “a pricing mannequin that allows clients to pay for a product in keeping with how a lot they use it.”
Utilization-based pricing (UBP) — or consumption pricing — relies on the quantity of utilization of a particular metric, resembling gigabytes of storage used or the variety of API calls made — over a time frame.
This fashion of pricing SaaS merchandise is tremendous common proper now, however that doesn’t imply it’s the perfect match for many firms.
Right here’s my tackle it in a nutshell:
→ UBP is trending as a resolution to an outdated downside: pricing must precisely mirror worth — for either side. UBP can higher align worth so consumers and sellers understand the deal to be truthful.
→ BUT that doesn’t imply it’s proper for everybody — and actually you would possibly already be deploying a model of UBP.
→ Seat-based pricing (SBP) is a usage-based metric. The query so that you can think about is: is the variety of customers (or seats) essentially the most extremely correlated metric with worth?
→ Don’t get sucked into utilizing UBP as an answer searching for an issue. As you consider pricing, give attention to one factor: is pricing perceived to be truthful.
On this piece, I’ll break down my ideas on usage-based pricing and the best way to determine if it’s value investigating in your firm.
Why Is UBP Trending?
SaaS pricing is hard to optimize. One major 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 trade, and we’re nonetheless within the early levels of ideation round pricing, packaging, and even gross sales fashions. The very best firms are innovating quickly, not simply on their product however within the methods they monetize. In some ways, we’re initially of the start, and usage-based pricing offers folks a extra accessible approach of approaching pricing.
That is all very thrilling, nevertheless it additionally implies that, with fewer limitations and well-tested greatest practices, we will simply get caught up within the “subsequent large factor.”
So why is UBP “the following large factor”?
Like many traits, usage-based pricing is a catchy title with current success tales that play on an current idea — pricing pretty. Customers, whether or not they’re companies or people, wish to really feel like they’re paying a good value. On the earth of SaaS, clients are making that call each time they renew or after they enable one other month-to-month cost. However equity cuts each methods. SaaS suppliers also needs to be compensated pretty for the worth they ship, and usually that worth will increase because the product regularly 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 relies must be as near the shoppers’ perceived worth as doable.
When completed proper, UBP accelerates you towards this reply. It’s vital to acknowledge, nonetheless, that alignment with worth just isn’t the one consideration when arising with an excellent pricing metric that’s linked to worth. There are two issues that you must optimize:
- Linked pricing metric as intently to worth as doable (the equity precept)
- Make your pricing as easy and simple to forecast as doable
The diploma to which you weigh one versus the opposite relies on quite a lot of elements together with your market, what your opponents are doing, common value level, product kind, and the choice of your consumers. It usually takes time to search out the appropriate stability in your product and your market, and there aren’t any shortcuts. Steady testing is the one confirmed path to success.
More often than not, while you learn or hear one thing about UBP, it’s positioned as a substitute for seat-based pricing, which has been the dominant gross sales mannequin for B2B SaaS firms.
(However even with extra firms making an attempt out different metrics and pricing fashions, seat-based pricing is nonetheless the commonest B2B mannequin.)
However one of many largest 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 an alternative, take into consideration the underlying elements making UBP work for sure companies by asking three inquiries to summary the learnings away so you possibly can greatest apply them to your individual scenario:
- How is their pricing metric correlated with clients’ notion of worth?
- How is the complexity (or simplicity) of their mannequin impacting their gross sales and renewal course of? Does it gradual it down or velocity 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 enormous valuations and wish to sample match to search out issues you possibly can apply to your individual enterprise.
However there are a few issues that the majority of those firms have in frequent that make usage-based pricing significantly efficient for them. And earlier than assuming that UBP will probably be proper for your small business, 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 major pricing metric, for instance:
- Snowflake: Compute and storage utilization
- Twilio: Quantity of cellphone numbers used, name lengths or messages despatched
- Agora: Name or reside stream lengths or messages despatched
These metrics may be simply tracked and estimated by their clients. That is an typically missed actuality – in case your prospect can’t simply forecast how a lot they are going to pay, you make their capacity 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 vital commonality of profitable UBP fashions: the targets are far-sighted. Selecting this monitor permits firms to do issues within the early and even progress levels 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 achieve buy-in. Then over time, as that firm grows, so does the common 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 in all probability left cash on the desk as a consequence of a extra conventional pricing mannequin. Finally, that worth is catching up lately, and that’s why we see simply astronomical web greenback retention numbers.
However companies have very completely different time horizons that they function beneath. Ensure you know what’s best for you and your small business first. Should you’re funding different initiatives with money circulate, then it’s possible you’ll not have the chance to shift to a long run time horizon.
Is UBP Price Investigating For Your Firm?
Should 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 an alternative of limiting your self to metrics that usually fall into the UBP camp, I’d urge you to easily think about what your splendid worth metric or metrics is likely to be – begin there.
It is likely to be seats, it is likely to be gigabytes, or minutes. Or it is likely to be {that a} extra tiered method with bundled options would work greatest.
Assessing the first and subsidiary worth metrics you employ for pricing and packaging is likely one of the most vital progress levers you possibly can pull — so when 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 out there.
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Kurt Smith
Kurt Smith leads the FastSpring Product crew 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 acquired an MBA from the Wharton College on the College of Pennsylvania in Strategic Administration.
