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Why Price Modeling is necessary to succeed and scale with usage-based pricing

Daniel Elman

April 26, 2022

Price Modeling is an essential capability for any business operating or considering transitioning to a usage-based pricing model. As we’ve written before, the optimal usage-based pricing plan constantly changes as the product and customer usage evolve over time. There are many events that can require a UBP adjustment. In addition to your own product evolution and roadmap, oftentimes pricing changes of your underlying cloud provider can have ripple effects into your pricing model. You need a Price Modeling tool that is available at the click of a button to operate on the current (real-time) and historical usage data, and deliver actionable insights.

Building usage-based pricing plans

When building usage-based pricing plans, Price Modeling allows you to perform what-if analysis and experiment with different pricing dimensions (charge vectors), product item rates, and plan configurations. As a best practice, we recommend that businesses implement the metering pipeline first and collect at least one or two billing cycles’ worth of usage data on live customers. Then using this real data, build different pricing plans, simulate with Price Modeling, and then tweak and refine as needed until you arrive at the suitable pricing model. 

When exploring and building usage-based pricing models, the Price Modeling tool can help you answer such questions like:

  • What pricing dimensions should you choose?
  • What price should you select for each pricing dimension? And what configuration should you choose (i.e. volume-based, tiered, block, etc.)?
  • What is the optimal price ratio across all pricing dimensions?

Optimizing and forecasting existing usage-based pricing plans

Once deployed with usage-based pricing, the work is not done. As we’ve said, the optimal plan and strategy changes with usage and product development, so Price Modeling is necessary for visualizing, forecasting, and ultimately staying ahead of these changes. It allows you to answer such questions like:

  • How will changes in price or plan features impact revenue?
  • What different customer segments or usage patterns emerge?
  • How are these different groups impacted by changes to pricing plans? How are specific customers impacted by changes to pricing plans?

Price Modeling also allows you to accurately forecast future revenue, based on accurate and complete historical usage data. This allows you to eliminate spreadsheet-based forecasting and experimentation processes and save time by running simulations in Amberflo at the touch of a button. There is no need to continually prepare and ingest updated data as Amberflo stays current with all customer usage in real time. Price Modeling is also valuable when developing and pricing new features and capabilities; it allows you to identify which are the most “charge-worthy” and likely to drive greater revenue and product adoption based on real customer usage. Deploy a new capability and meter it to see how the usage trends, and then correlate that usage to customer value and explore different pricing strategies with the tool.

Metering enables Price Modeling

Price Modeling is invaluable at all stages of considering, implementing, and optimizing usage-based pricing strategies. The key infrastructure that enables such a tool is the metering pipeline. Without investing in comprehensive usage instrumentation throughout your solution, you will not have sufficient data to run pricing simulations and make informed decisions. This is why we preach so vociferously that metering must be the way forward for any and all usage-based businesses. Meter actions, features, and capabilities that you may want to track and charge upon (now or potentially in the future); the more comprehensive your metering strategy is, the more granular and complete data you will have to inform future pricing decisions.

At Amberflo we are proud to offer a Metering Cloud that is designed to accurately track and capture billions of events per month in real time with guaranteed completeness, accuracy, and idempotency (by way of data deduplication built throughout the pipeline). This provides the necessary footprint to build robust and flexible tools like Price Modeling that allow businesses to succeed at any scale with usage-based pricing.

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