Does Usage-Based Pricing work for Your SaaS? -
According to an OpenView survey, by 2023, 56% of SaaS firms are using or expecting to test usage-based pricing, which they define as "a pricing model that enables customers to pay for an item based on how much they use the product."
Usage-based price (UBP) -- or consumption pricing dependent on the usage of a specific metric, such as gigabytes of storage utilized or the amount of API calls performed over a period of time.
This way of pricing SaaS services is very current, but that doesn't mean it's the optimal choice for every company.
Here's what I think briefly:
-- UBP is trending as the solution to an older problem price must accurately reflect value -- for both parties. UBP can better align value so buyers and sellers can see that the price to be fair.
However, that doesn't mean that UBP is 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. It is a good idea to ask yourself is: Is the amount of people who use (or seats) the most highly connected metric to significance?
- Don't get sucked into using UBP as a solution looking for a problem. While you consider pricing, focus on something: is the pricing considered acceptable.
In this piece I'll share my opinions on pricing based on usage and help you decide whether it's worth a look for your business.
Why Is UBP Trending?
SaaS pricing can be difficult to maximize. One primary reason is it has very little limitation. Because of the huge gross profit margins and limited technical limitations, the products can really go wild when it comes to pricing and packaging, in ways isn't the case elsewhere in the industry.
SaaS can also be a very emerging industry. We're still in the early stages of ideation around pricing, packaging, and even selling models. The best companies are innovating fast, not only on their product but in how they make money. In various ways, we're just at the new era, and the use-based pricing provides people with a more easily accessible method of pricing.
All of this is very exciting, but it also implies that with less limitations and well-tested methods, we are able to easily get caught with the "next big new thing."
Then why do you think UBP "the new major trend"?
Similar to many of the trends, usage-based pricing is a catchy name with recent success stories that play on an existing concept -- pricing fairly. Customers, regardless of whether they're business or private, need to be sure that they're paying an appropriate price. When it comes to SaaS, customers are making this decision each time they renew their subscription or accept a new monthly fee. Fairness should be considered in both directions. SaaS providers should also be compensated fairly in exchange for the benefits they provide Most of the time, that value increases as the product continually improves and the customers' usage expands. The creation of a pricing structure that is fair and fair- in both directions -is the primary tenet in SaaS pricing. For this to be done successfully, the measurement on that your pricing model is built needs to be as close to your customers' perception of value as possible.
When done right, UBP accelerates you toward this answer. It's crucial to understand, however, that alignment with value is not the only factor when it comes to coming to a perfect pricing metric that is linked to value. There are two considerations that must be considered when determining the best price:
- Linked pricing metric as closely to value as possible (the fairness principle)
- Your pricing should be as easy and simple to calculate as is possible.
The amount you decide to weigh one against one is based on many factors such as your marketplace as well as what your competitors are making, the average price as well as the type of product you sell and the preference of your buyers. It generally requires time to determine the ideal balance between the product you offer and for your customers There aren't any solutions. Continuous testing is the only proven path to success.
Most of the time, when you read or hear something concerning UBP, it's positioned in a different way to the seat-based pricing model, which has been the most popular sales strategy for B2B SaaS companies.
(But despite more businesses exploring different methods of pricing and metrics seating-based pricing remains the most popular andthe the most popular B2B model.)
However, one of the primary reasons that UBP is trending is because there are some significant success stories around recent IPOs by companies using this model, such as Snowflake, Twilio, and Agora.
These success stories are intriguing but shouldn't be blindly copied. Think about the factors that make UBP work for certain firms by asking three simple questions in order to take the insights from the experience so that you are able to apply them to your own scenario:
- What is the price metric in relation to their customers' perception of value?
- How is the complexity (or simple) of their business model affecting their renewal process and sales? Does it slow it down or accelerate it? Does it make it easier or harder?
- How is their pricing model positioned relative to their competitors? Is it unique or similar? What are the pros and cons?
What are the most successful UBP Stories Have In Common?
It's simple to study firms that have succeeded in going into the market, with enormous valuations, and are looking to pattern match to discover what you can apply to your own business.
There are a handful of things that most of these companies have in common that make usage-based pricing particularly efficient for their needs. Before you decide that UBP is the right choice for your company, you'll want to see if your company also has these traits.
1. The Model lends itself to an Usage Metric that is Measurable
Highly successful UBP companies all have an underlying pricing metric that is the primary one, like:
- Snowflake: Storage and compute usage
- Twilio: Amount of phone numbers used, call lengths or messages that are sent
- Agora Live stream or call lengths or messages sent
The metrics are easily monitored and estimated by clients. The problem is that people often overlook this fact - if your customer isn't able to predict easily what they will pay they will pay, it makes the process of buying from you far more difficult. This is especially true of business software, where spending is required to be budgeted.
2. The stories of success tend to Be Long-Term in Time
A key feature of the successful UBP models: the goals are long-term. Choosing this track allows companies to do things at the beginning or expansion stages of a company that were oriented around longer-term value-maximizing.
In particular, newer B2B products often use UBP to set prices that are very affordable in the first year or two of a relationship with a customer and thus show their value and earn customers' buy-in. Then over time, as that company grows as does its ARPU, or average revenue per customer (ARPU) and profits margin.
Although usage-based pricing IPO successful stories are appealing, they are not as convincing as the initial deal years where they may have left cash in the bank as a result of a conventional pricing model. In the end, this value is getting better in recent years, which is why we're seeing an astronomical increase in net dollar retention rates.
However, businesses operate with very distinct time horizons that they operate with. You must determine what's right for you and your company initially. If you're financing other projects using cash flow there's a chance that you won't get the chance to move towards a long-term horizon.
Is UBP Worth Investigating For Your Company?
If you're thinking about UBP It means you're reviewing the value metrics that you're using to price your product.
Instead of restricting yourself to metrics that typically belong to the UBP category, I'd like you to think about the ideal value measurement or metrics might be - start there.
The number of seats could be as low as a few It could be gigabytes, or minutes. Perhaps a more tiered approach with bundled features would work best.
Assessing the primary and subsidiary value metrics you use for pricing and packaging is among the most important ways to increase your growth and, therefore, if you're unsure about your pricing strategy then you're on the right path. However, you should not consider UBP solely because of its success or hype in the market.
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