Usage-based pricing, or quantity-based pricing, is the next iteration of the subscription economy, especially for B2B software companies. If you’re considering how your company would fare with usage-based pricing, there’s no time like the present, but here are a few things to think about before you jump in.
The shift to subscription pricing many years ago led to what we now call the subscription economy, a term coined by Zuora. Basically, the subscription pricing model marked a distinct shift in the way customers consumed and paid for products and services—by what they knew they would use, how much, and for how long—rather than by a flat price for an entire product.
Over the years, subscription pricing has become the norm. But, things are shifting again, and more companies are switching to a usage-based pricing system, which is a consumption model where customers are charged based on how much they use a product or service.
Because it better aligns the price they are paying with the value they receive from use of the product, customers today seem to prefer a usage-based pricing option, especially when done correctly. As a result, usage-based pricing appeals to early stage startups and Fortune 100 companies alike.
However, it is not easy to shift to a usage-based pricing model if the offering wasn’t designed that way at the start. Furthermore, it is critical that companies intimately know and understand their customer behavior to succeed with a usage-based pricing model.
Not sure if a usage-based system is for you?
Here are 3 supportive resources that’ll help educate you on the pros and cons:
- Inhouse vs Outsourced? Kyle Poyar at OpenView Partners recently wrote a great article on how to run a pricing project. I would argue that many early stage companies should be doing this work themselves because they need to get closer to their customer base. But many later stage or public companies would benefit from hiring a consultant to bring an outside (objective) perspective. Regardless, Kyle’s article will help you prepare for either approach.
- What type of usage model is right for you? To use Neeraj Periwal’s words directly “Finding just the right pricing model can mean the difference between a wildly successful business and one that doesn’t meet your subscribers where they are”. Check out this article that explains the difference between quantity-based & usage-based pricing models.
- Can the business infrastructure support the model? One of the biggest pitfalls when moving to a usage-based pricing model is managing the consumption forecast. How do you manage a sales forecast if you can’t predict your customer’s consumption? Maggie Kullman from Clari provides a high-level overview to get you started.
There’s no time like the present to think about new ways to use pricing changes to accelerate your business performance. Whether you are focused on revenue growth, margin improvement, or anything in between, strategic pricing initiatives should be front and center in your commercial strategy.