Usage-based pricing

Usage-Based Pricing is highly predictable

May 5, 2022
The often cited concern that UBP lacks revenue predictability is a concern that stems from not having the right set of tools. It is not a limitation of the pricing model.

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.”

Predictability Concern

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.

Closing thoughts

No business strategy or pricing model is perfect, and each comes with their own unique set of pros and cons. That being said, it is important not to get stuck into a rut of thinking that these challenges are immutable or unsolvable. Usage-based pricing is just beginning to enter the mainstream, with an entirely new class of vendors creating technology that is built from the ground-up to make usage-based pricing as easy, efficient, and intelligent as possible. With these new vendors come new technologies and approaches (like metering at scale), that can be creatively applied to create predictability and intelligence in a usage-based context where it was conspicuously absent before.

The key to long-term success with usage-based pricing is a metering pipeline that can accurately and completely track usage in real time. Legacy systems for usage-based pricing have approached the problem from the perspective of billing first, with metering as a means to that end. By first looking at usage-based pricing from the lens of metering, we allow businesses to set up a complete metering pipeline that tracks and collects all meaningful usage, even usage that isn’t included in the pricing plan (read more on Amberflo’s tips for creating a modern metering strategy here). This allows customers to create a 360-degree view of customer and system usage, which can then be used to create and optimize new pricing plans or shared throughout the organization to benefit various cross-functional teams across sales, marketing, support, finance, and product.

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