Does Usage-Based Pricing work for Your SaaS? -
Based on an OpenView study, by 2023, the majority of SaaS firms will use or plan to implement price-based usage, which they define as "a pricing strategy that allows users to purchase an item based on the amount they will use it."
Utilization-based pricing (UBP) also known as consumption pricing is dependent on the utilization of a certain measurement, like gigabytes used in storage or the number of API calls that are made over a period of time.
This way of pricing SaaS products is extremely current, but this doesn't mean that it's the best fit for most companies.
This is my opinion in the simplest way:
- UBP is being touted as an solution to the old problem price must accurately reflect value -- for both sides. UBP can better align value so buyers and sellers see the transaction as reasonable.
However, this doesn't mean that it's the right choice for everyone . actually, you may be already using an earlier variant of UBP.
Seat-based pricing (SBP) isa measurement based on usage. One thing to ask yourself is: Is the amount of people who use (or seats) the most strongly connected metric to significance?
Do not get caught up in the use of UBP as a solution looking to solve a problem. As you think about pricing, focus on one thing: is pricing considered fair.
In this article, I'll break down my opinions on pricing based on usage and how to decide if it's worth investigating for your company.
What is the reason UBP is trending?
SaaS pricing can be difficult to improve. One primary reason is there are very few limitations. Because of the huge gross profit margins and little technical restrictions, goods have the potential to be wildly creative in their pricing and packaging in ways we don't see within other sectors.
SaaS is also a very young industry, and we're just beginning to get into the nascent stages of ideation around pricing packaging, pricing, as well as selling models. The best companies are innovating fast, not only on their products but also on the ways they monetize. In many ways, we are in the very beginning, and usage-based pricing provides people with a more accessible way of approaching pricing.
It's all thrilling, however it suggests that, with fewer restrictions and tested best practices, we can quickly get caught by the "next biggest trend."
So why is UBP "the next major trend"?
As with many other new trends, usage-based pricing has an appealing name that has recently been featured in successful stories that play off an existing concept -- price fair. Customers, regardless of whether they're businesses or individuals, want to feel like they are paying a fair price. In the world of SaaS the customers make this decision each time they renew or when they permit a monthly cost. But fairness cuts both ways. SaaS providers should also be compensated fairly to provide the services they offer In most instances, that value increases when the service is continually improved and usage by customers grows. Making a pricing system which is fair -and in both directionsis an essential element for SaaS pricing. For this to be done efficiently, the measure on which your pricing is based should be as closely to what customers perceive as value as it is.
When done right, UBP accelerates you toward this answer. It is important to realize the fact that alignment with value isn't the only factor when it comes to coming the perfect price metric that is linked to value. Two aspects must be considered when determining the best price:
- The metric of linked price is as close to the value of its potential (the fairness principle)
- Make your pricing as simple and simple to predict as you can.
The degree to which you weigh one versus the other is contingent upon a myriad of variables like your industry, the market you are in and what your competition is making, the average price as well as the type of product you sell and the tastes of your clients. It usually takes time to find the ideal balance between your product and your market There aren't any quick fixes. Testing continuously is the sole path to success.
The majority of the time when you read or hear anything regarding UBP is that it's promoted as an alternative to pricing based on seat which is the predominant sales method for B2B SaaS firms.
(But even with more companies testing different metrics and pricing models seating-based pricing remains stillthe most common B2B model.)
One of the main motives behind why UBP is trending is the fact that there are some significant successes in recent IPOs for companies that use the UBP model, including Snowflake, Twilio, and Agora.
These stories of success are interesting but they should not be replicated blindly. Instead, think about the factors that make UBP work for certain companies by asking three questions that help you abstract the lessons away so you can best adapt them to your situation:
- What is the price metric in relation to their the value perceptions of customers?
- What is the degree of complexity (or the simplicity) of their model impacting their sales and renewal process? Does it slow it down or accelerate it? Can it make it easier or more challenging?
- What pricing structure is placed in comparison to other competitors? Is it unique or similar? What is the advantages and disadvantages?
What do the UBP Success Stories have in Common?
It's simple to study companies that have successfully gone public with huge valuations and want to pattern match for ideas you could implement in your own company.
However, there are a few aspects that the majority of the companies which make UBP particularly effective for them. And before assuming that UBP will be right for you it is important to determine the company you work for is a good fit for these characteristics.
1. The Model lends itself to A Measurable Usage Metric
Highly successful UBP businesses all share one primary price metric for example:
- Snowflake: Calculation and storage usage
- Twilio: Number of phone numbers used as well as messages, call lengths and calls delivered
- Agora: Call or live stream lengths or messages sent
These metrics can be easily measured and interpreted by clients. It is a common reality - if your prospect isn't able to predict easily what they'll spend, you are making the process of buying from you much more difficult. 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
A key feature of the effective UBP modelsis that their goals are long-term. The choice of this model permits companies to do things during the initial or expansion stages of a company which were focused on the long-term goal of maximising value.
In particular, newer B2B products often use UBP to charge very little in the first year or two when a client is involved and thus show their value and earn customers' buy-in. As time passes, the company expands, so does the average revenue per user (ARPU) as well as profit margin.
While utilization-based pricing IPO successes are impressive, they don't do justice to the initial deal years where they may have left cash on the table because of a traditional pricing system. Ultimately, that value is getting better over the last few years which is why we're seeing just astronomical net dollar retention numbers.
However, businesses operate with very distinct timespans they operate with. Make sure you know what's right for you and your company first. If you're financing projects through cash flow then you may not have the opportunity to shift to a longer term time duration.
Is UBP Worth Investigating For Your Company?
If you're contemplating UBP It means you're looking at your value-based metrics are used to value your products.
Instead of restricting yourself to metrics that usually are in the UBP group, I'd suggest you to simply consider what your ideal value metric or metrics might be - Start there.
The number of seats could be as low as a few, it might be minutes, gigabytes or gigabytes. Or it might be that an approach that is more tidier with bundles of features is the most effectively.
Analyzing the primary and the subsidiary values you're using for packaging and pricing is among the biggest growing levers that you have and, therefore, if you're questioning your pricing model You're on the correct path. However, you should not consider UBP simply because of its success or hype in the marketplace.
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