Is Usage-Based Pricing Right For Your SaaS? -
Based on an OpenView study, by 2023 56% of SaaS companies will be using or expecting to test usage-based pricing, which they refer to as "a pricing model that enables customers to pay for a product according to the extent to which they utilize the product."
Utilization-based pricing (UBP) also known as consumption pricing determined by the usage of a specific measure, for example, gigabytes of storage utilized or the number of API calls performed for a certain period of time.
The method of pricing SaaS products is extremely trendy right now, however that doesn't mean it's the optimal choice for every company.
Here's what I think briefly:
- UBP is being touted as a solution to an old issue that pricing must accurately reflect value for both sides. UBP will better coordinate value so buyers and sellers can see that the transaction as reasonable.
But this doesn't mean that it's the right choice for everybody -- and it's possible that you already be deploying a Version of UBP.
Seat-based price (SBP) isa measurement based on usage. One thing to think about is: is the number of users (or seats) the most strongly connected metric to worth?
Do not get caught up in using UBP as a remedy for a problem. While you consider pricing, think about something: is the pricing perceived to be fair.
In this article I'll go over my thoughts on usage-based pricing and help you decide whether it's worth a look for your business.
Why is UBP trending?
SaaS pricing can be difficult to optimize. A major reason is because there are very few limitations. With high gross margins, and few technical constraints, products can really go wild when it comes to pricing and packaging in ways isn't the case within other sectors.
SaaS can also be a new industry and is only in the beginning stage of thinking about pricing, packaging, and even sales models. The best companies are innovating rapidly, not just on their products, but also in the ways they monetize. In many ways, we are just at the beginning, and usage-based pricing is an easily accessible method of pricing.
This is all very exhilarating, but it implies that with less limitations and well-tested best practices, we can quickly get caught by the "next big trend."
Why is UBP "the the next biggest trend"?
As with many other new trends, usage-based pricing has popular with the recent successful stories that play off the idea of the concept of pricing fair. Consumers, whether they are either individuals or businesses, would like to feel like they are paying a fair price. In the world of SaaS consumers are making that decision every time they renew or when they allow another monthly charge. Fairness should be considered in both directions. SaaS companies should also get fair compensation in exchange for the benefits they provide Most of the time, this value grows as the product continually improves and usage by customers expands. The creation of a pricing structure which is fair -- in both directions -- is a fundamental tenant of SaaS pricing. To do that effectively, the metric upon that your pricing model is built should be as closely to what customers perceive as worth as is possible.
If done correctly, UBP accelerates you toward this solution. It's crucial to understand the fact that alignment with value isn't the sole factor to consider when trying to come the perfect price measurement that's linked to value. Two aspects must be considered when determining the best price:
- The metric of linked price is as close to value as possible (the Fairness Principle)
- Make your pricing as simple and simple to calculate as is possible.
The extent to which you weigh one versus one is based on many factors such as your marketplace, what your competitors are performing, their average price as well as the type of product you sell and the preference of your buyers. It usually takes time to find the ideal balance between your product and your market as there aren't any solutions. Continuous testing is the only proven path to success.
In the majority of cases, whenever you hear or read anything concerning UBP, it's positioned in a different way to the seat-based pricing model that has long been the predominant sales method for B2B SaaS companies.
(But regardless of the fact that more companies are exploring different measures and pricing strategies seating-based pricing is the most popular andthe the most popular B2B model.)
However, one of the primary reason why UBP is trending is because there's been some huge success stories around recent IPOs of companies using this method, like Snowflake, Twilio, and Agora.
The success stories of these companies are fascinating but shouldn't be blindly copied. Instead, think about the core factors behind why UBP be successful for specific companies by asking three questions that help you abstract the lessons away so you can best apply them to your own situation:
- How does their price measurement in relation to their customer perception of value?
- What are the effects of the complexity (or simple) of their approach affecting the renewal and sales process? Do they slow down or accelerate it? Does it make it easier or harder?
- What is their pricing strategy placed in comparison to other competitors? Is it unique or similar? What is the advantages and disadvantages?
What Do Many UBP Success Stories Have In Common?
It's not difficult to find companies that have successfully gone to the public market with massive valuations, and you'd like to match their patterns for ideas you could implement in your own company.
But there are a couple points that all the companies that make usage-based pricing particularly efficient for these companies. If you're unsure if UBP would be a good fit for your business You'll need to check the company you work for is a good fit for these characteristics.
1. The Model is lent to A Measurable Usage Metric
Successful UBP companies all have a primary pricing metric, such as:
- Snowflake: Calculation and storage use
- Twilio: The number of telephone numbers utilized as well as messages, call lengths and calls sent
- Agora Live stream or call messages or lengths
These metrics can be easily monitored and estimated by clients. It is a common truth - if a potential customer cannot easily predict the amount they'll pay they will pay, it makes the process of buying with you more challenging. This is particularly true for enterprise software where spend is required to be budgeted.
2. The Success Stories Tend To have long-term time horizons
One of the main characteristics of effective UBP modelsis that their goals are far-sighted. Choosing this track allows companies to take actions during the initial or expansion stages of a company which were focused on the long-term goal of maximising value.
As an example, the more innovative B2B product types often make use of UBP to set prices that are very affordable for the initial year or two when a client is involved and demonstrate their worth and get buy-in. In time, as this company grows, so does the annual revenue per user (ARPU) as well as profits margin.
While utilization-based pricing IPO successes are compelling, they undersell those initial years of deal in which they likely left money at the end of the tunnel because of a traditional pricing system. In the end, this value is growing over the last few years and that's why we see just astronomical net dollar retention numbers.
But businesses have very different timelines they work with. You must determine what's right for you and your business first. If you're financing other projects using cash flow there's a chance that you won't get the opportunity to shift to a longer term time period.
Is UBP Worth Investigating For Your Company?
If you're thinking about UBP this means you're reviewing the value metrics that are used to value your products.
In lieu of being confined to metrics that normally fall into the UBP category, I'd like you to think about what your ideal value measure or metrics could be. Start there.
The number of seats could be as low as a few or minutes, gigabytes or gigabytes. Perhaps the more structured approach using bundles of features is the most effectively.
Examining the primary and secondary values you're using to determine pricing and packaging is one of the biggest ways to increase your growth If you're questioning your pricing model, you're on the right track. Be wary if you are considering UBP just because of the positive or negative publicity in the market.
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