Usage-based charges The model feels almost like a cheat code. This allows SaaS companies to more efficiently acquire new customers, grow with them as they succeed, and keep them on the platform.
Compared to other companies in the same industry, companies with usage-based pricing are trading at a multiple premium of 50% revenue, with a 10pp increase in net dollar retention.
However, the transition from pure subscription to usage-based pricing is about as complex as the transition from on-premises to SaaS. It opens an addressable market by lowering purchasing barriers, and it then requires finding new ways to get users in a scalable manner. It coordinates payments more closely with customer spending, thereby affecting cash flow and revenue recognition. It also reduces the predictability of revenues and can lead to procurement and legal backlash.
SaaS companies looking at usage-based models need to plan both time-to-market and operational challenges, from pricing to revenue and billing.
Choosing the right usage index
There are many usage metrics that SaaS companies may be able to use for pricing. Datadog charges based on host, HubSpot uses marketing contacts, Zapier pricing is used per task, and Snowflake has computing resources. Choosing the wrong usage metric can have disastrous consequences for long-term growth.
Optimal usage indicators meet five key criteria: value-based, flexibility, scalability, predictability, and feasibility.
- Value base: It needs to be consistent with how customers derive value from their products and see success. For example, Stripe charges a transaction fee of 2.9%, so it grows directly as your customers grow their business.
- flexible: Customers need to be able to accurately select and pay for coverage. Start small and grow as you mature.
- Scalable: When the average customer adopts a product, it should grow steadily over time. There’s a reason mobile providers are now charging based on GB data rather than talk time — the amount of data continues to grow.
- Predictable: Customers need to be able to reasonably predict usage so that they can predict their budget. (You may need some assistance during the sales process.)
- Executable: You need to be able to monitor, manage, and monitor usage. Metrics need to track the cost of providing a service so that customers are not unprofitable.
Navigating a company’s legal and procurement team
Corporate customers often crave price predictability for annual budget purposes. For traditional legal and procurement teams, it can be difficult to worry about purchasing at unspecified costs. SaaS vendors need to be creative with a variety of usage-based pricing schemes to reassure their enterprise customers.
Customer Engagement Software Twilio offers even greater discounts when customers commit to long-term use. AWS takes this one step further by allowing customers to commit in advance, but still pays the royalties when they occur. Data analytics firm Snowflake will allow customers to roll over unused credits as long as next year’s commitment is at least the same as the previous commitment.
No one wants to see the shock costs when they unknowingly exceed their usage limits. It’s important to design a thoughtful excess policy that gives your customers the feeling that they are in control of their spending.
How to overcome the challenges of switching to usage-based pricing – TechCrunch Source link How to overcome the challenges of switching to usage-based pricing – TechCrunch