Usage-based pricing

Usage-based pricing is a company-wide effort, not a pricing strategy

November 10, 2021

Kyle Poyar and Sanjiv Kalevar of OpenView Ventures recently published this report - The State of Usage-Based Pricing in 2021.

It is chock-full of insights about how companies are leading with Usage-Based Pricing (UBP). 

Some key highlights from approximately 600 SaaS companies that were surveyed:

  1. 45% of SaaS Companies say they have usage-based pricing, up from 34% last year
  2. Usage-based companies can be found in all layers of the tech stack
  3. Usage-based companies continue to outperform their peers
  4. Usage-based pricing is a company-wide effort, not a pricing strategy

Let’s talk little bit more about point number #4 - 

Usage-based pricing is a company-wide effort, not a pricing strategy

Unlike traditional subscription pricing, where there was never a need to meter or instrument actual usage (of the product or service) because the money was collected upfront and irrespective of actual usage, in UBP this model is flipped on its head. Money is collected after use (or pay-as-you-go) based on actual usage.

This business model change has a cascading effect into all functional areas of the company. 

  1. Usage need to be metered and instrumented
  2. Usage needs to be translated into usage-based pricing plans; And presented to customers in the form of on-demand, metered billing
  3. Usage and Revenue information needs to be made available to various functional groups (sales, marketing, product, engineering, operations, support, finance, and more) and delivered in the form of actionable insights specific to their functional areas
  4. Product and Development teams become a big part of owning UBP and its evolution over time

If you are thinking about shifting to UBP or already on it, you will want to make sure you have both a strategy and tactical measures in place for each of the items outlined above.

Some questions you would want to ask…?

  1. Where do you begin w.r.t. Shifting to UBP? 
  2. What is the very first step? And what are the steps thereafter?
  3. How do you know if you are on the right track? 
  4. What metrics do you track and how to interpret them? 
  5. How do you construct Usage-Based Pricing Plans? UBP comes in many variations, unlike subscription per user pricing, for UBP, one size does not fit all. 
  6. How do you grandfather existing customers onto the new pricing plans?

We have been fortunate to have been part of the UBP business model framework outlined above and lessons learnt at AWS. 

Connect with us to learn more about the right approach and best practices of shifting to Usage-Based Pricing. 

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