Daniel Elman, Puneet Gupta
May 5, 2022
It is clear that usage-based pricing is here to stay. According to OpenView Partners, by 2023 a majority of SaaS companies will employ usage-based pricing in their GTM motions. Major business publications consistently publish content extolling the accelerated revenue growth potential and increased transparency that usage-based pricing delivers (here from VentureBeat; here from TechCrunch). Even subscription management technology vendors like Zuora (here) have written and spoken about usage-based pricing as a necessary component of modern technology GTM strategy. Despite its staying power and establishment as a standard operating model, there are still some commonly-cited criticisms against usage-based pricing that merit valid investigation and response.
Tomasz Tunguz from Redpoint Ventures summarized the main critiques well in his blog post: “Customers may be frustrated to estimate how much of a product they’ll use and the surprise of overage charges. Separately, the [company] may have to reinvent its GTM: new AE quotas, sales materials, margin calculations.”
Traditionally it has been difficult to estimate and forecast usage of a product or service. This translates to uncertainty around the cost of the solution with the potential for a black swan-type billing cycle where usage spikes unpredictably, leaving the customer on the hook with a massive bill that doesn’t fit the company budget. Traditionally, this has been a way for vendors to leverage the lack of predictability inherent to legacy usage-based pricing implementations as a way to drive additional margins with costly overage charges.