Are Usage-Based Prices the right choice for Your SaaS? -
According to an OpenView study, by 2023 more than half of SaaS businesses will be using or planning to use price-based usage, which they define as "a pricing strategy that allows users to purchase the product based on the extent to which they utilize it."
Utilization-based pricing (UBP) -- or consumption pricing determined by the use of a particular measurement, like gigabytes of storage utilized or the number of API calls made -- over the course of.
This method of pricing SaaS products is extremely popular right now, but that doesn't mean it's the optimal choice for every company.
Here's what I think briefly:
- UBP is being touted as a alternative to an old issue: pricing needs to accurately reflect value for both sides. UBP will better coordinate the value of a deal so both buyers and sellers perceive the transaction as fair.
However, that doesn't mean it's right for everyone . actually, you may have already been using a particular variant of UBP.
Seat-based pricing (SBP) isa usage-based metric. The question for you to ask yourself is: Is the amount of seats (or seats) the most closely connected metric to worth?
Beware of the use of UBP as a solution looking for a problem. While you consider pricing, focus on one thing: is pricing perceived to be reasonable.
In this piece I'll go over my views on the concept of usage-based pricing and help you decide whether it's worth a look to your firm.
Why Is UBP Trending?
SaaS pricing is tough to improve. A major reason is because there are very few limitations. Because of the huge gross profit margins and little technical restrictions, goods have the potential to be wildly creative with their pricing and packaging in ways we don't see within other sectors.
SaaS is also a emerging industry. We're only in the beginning stage of thinking about pricing packaging, pricing, as well as the sales model. Companies that are innovative are advancing quickly, not only in the design of their products, but also in how they make money. In many ways, we are at the beginning of the beginning, and usage-based pricing is an easily accessible method of pricing.
It's all thrilling, however it suggests that, with fewer restrictions and tested best practices, we can quickly get caught by the "next major thing."
So why does it matter that UBP "the next biggest thing"?
As with many other trends, usage-based pricing is an appealing name that has recently been featured in successes that build on the idea of price fair. The consumers, whether either individuals or businesses, would like to believe that they're getting a fair cost. In the world of SaaS, customers are making that decision every time they renew their subscription or accept a new monthly fee. But fairness cuts both ways. SaaS companies should also get fair compensation for the value they deliver, and in most cases this is the case as the product continually improves as well as the usage of customers grows. Designing a pricing model that is fair and fair- in both directions -- is a fundamental tenant in SaaS pricing. For this to be done successfully, the measurement on which your pricing is based needs to be as close to your customers' perception of value as possible.
When done right, UBP accelerates you toward this answer. It's important to recognize, however, that alignment with value isn't the only factor when it comes to coming up with an ideal pricing measurement that's linked to value. There are two considerations that should be optimized:
- The metric of linked price is as close to value as possible (the Fairness Principle)
- Create pricing that is as simple and easy to calculate as is possible.
The amount you weigh one versus the other depends on many factors including your market, what your competitors are performing, their average price as well as the type of product you sell and the tastes of your clients. It generally takes time to find the ideal balance between your products and market, and there are no quick fixes. Testing continuously is the sole method to achieve success.
In the majority of cases, when you read or hear anything about UBP, it's positioned as an alternative to the seat-based pricing model that has long been the predominant sales method for B2B SaaS companies.
(But even with more companies testing different metrics and pricing models seating-based pricing is stillthe preferred B2B pricing model.)
But one of the biggest reason why UBP is gaining momentum is that there's been some huge successes in recent IPOs of companies using this model, such as Snowflake, Twilio, and Agora.
These stories of success are interesting but they should not be replicated blindly. Instead, think about the core factors behind why UBP be successful for specific businesses by asking three questions to abstract the learnings away to help you use them in your personal circumstances:
- How is their pricing metric in relation to their customer perception of value?
- What is the degree of degree of complexity (or the simplicity) of their approach affecting their renewal process and sales? Do they slow down or speed it up? Does it make it easier or harder?
- What pricing structure is set in relation to the competition? Is it unique or similar? What are the pros and cons?
What do the UBP Success Stories Have In Common?
It's easy to look at businesses that have gone into the market, with enormous valuations, and are looking to pattern match to discover what you can use for your business.
However, there are a few aspects that the majority of the companies which make UBP particularly effective for their needs. If you're unsure if UBP would be a good fit for your business, you'll want to see if your company also exhibits these qualities.
1. The Model lends itself to An Usage Metric Measurable
Highly successful UBP businesses all share one primary price metric for example:
- Snowflake: Calculation and storage usage
- Twilio: The number of telephone numbers utilized as well as messages, call lengths and calls delivered
- Agora Contact or live stream messages or lengths
The metrics are easily monitored and estimated by customers. The problem is that people often overlook this truth - if a potential customer isn't able to predict easily what they'll spend they will pay, it makes your prospects' ability to purchase with you more challenging. This is particularly true for business software, where spending needs to be budgeted.
2. The stories of success tend to have long-term time horizons
One of the main characteristics of effective UBP models: the goals are far-sighted. Choosing this track allows companies to implement strategies during the initial or growing stages of their business that were oriented around the long-term goal of maximising value.
In particular, newer B2B products often use UBP to charge very little for the initial year or two of a relationship with a customer and demonstrate their worth and get customers' buy-in. In time, as the company expands as does its ARPU, or average revenue per customer (ARPU) and profit margin.
While the usage-based pricing IPO successful stories are appealing, they are not as convincing as those initial years of deal in which they likely left money at the end of the tunnel due to a more traditional pricing system. In the end, this value is catching up with time, and this is the reason we're seeing just astronomical net dollar retention figures.
But businesses have very different timespans they operate under. You must determine the best option for your as well as your company first. If you're financing projects through cash flow it's possible that you don't have an opportunity to change to a longer term time duration.
Is UBP Worth Investigating For Your Company?
If you're considering UBP this means you're re-evaluating the metrics you're using to price your goods.
Instead of restricting yourself to metrics that usually belong to the UBP camp, I'd urge that you think of the ideal value measurement or metrics might be - Start there.
It might be seats It could be gigabytes, or minutes. It could be that a more tiered approach with bundled features would work well.
Analyzing the primary and the subsidiary values you're using for packaging and pricing is among the primary growing levers that you have -- so if you're wondering about the pricing you're using You're on the correct path. Be wary if you are considering UBP just because of the popularity or the hype surrounding the market.
Live Interview with Kurt Smith on Pricing Strategies to Combat Stagflation
Come join us for a live chat with Chief Product Chief Executive Officer Kurt Smith about pricing strategies to take into consideration in markets that are volatile. RSVP to learn more.
