Usage-Based Pricing is all the rage across multiple B2B SaaS news outlets.
Subscription-based pricing has been the standard pricing model for over 20 years, which has provided B2B SaaS companies more predictable revenue growth over time versus the famous end of quarter "hockey stick" of perpetual licensing software companies.
However, companies such as Twilio, Snowflake and DataDog have been using "Usage-Based" pricing to achieve Net Dollar Retention Rates of 130% - 150% and associated Enterprise:Revenue multiples of 20x - 25x.
On this episode of Metrics that Measure Up, we speak with Adam Howatson, long-time subscription software executive, and currently CEO of LogiSense, a leading Usage-Based Billing platform company to better understand the trend and what is required to deploy a successful Usage-Based pricing strategy.
The first topic we covered was the transition from a perpetual license model to subscription pricing, which was really a cost-plus model that included value for the hosting and intellectual property. Adam believes we are in a similar pivot from subscription-based pricing to Usage-Based Pricing.
One main component of the trend to Usage-Based Pricing is the customer requirement to have more transparency on what they are being charged for and to ensure those variables are directly linked to the value they are receiving. Adam believes the trend to Usage-Based Pricing will be long-lived, and the next material transformation for the B2B SaaS and Cloud industry.
Usage-Based Pricing is a very strategic decision, as it impacts the entire monetization strategy of your business. A key starting point is to ensure you put yourself in the shoes of your customer, and then confirm with your customer/buyers that the element you are using for Usage-Based pricing is validated as a key-value contributor to the buyers.
Using a "hybrid model" may be the most prudent way to deploy a pricing model that uses a fixed subscription pricing to cover the vendor's cost, and then adds on a usage-based subscription billing element that becomes the primary profit driver for the B2B SaaS company.
Another key element to model out prior to any Usage-Based Pricing strategy is to understand what the minimum baseline of pricing is required is to cover fixed costs of providing the service. This evolved into the importance of having the right resources, especially data analysts and monetization experts who provide a balanced approach to the impact on both the vendor and the customer using multiple scenarios on the usage, that include the usage of variables such as seasonality, macro, and micro-economic trends and internal expense trends.
Product analytics is another trending topic across the B2B SaaS due to the increasing use of Product Led Growth as a primary customer acquisition motion. A solid product analytics foundation will be critical to understanding customer usage patterns and trends. This analysis will provide insights for pricing and monetization resources to facilitate which usage variables are best positioned to serve as the foundation for a Usage-Based pricing strategy.
The conversation kept coming back to the central theme of "ensure the Usage-Based Pricing variable used" is validated as directly aligned to the VALUE the customer receives. Most importantly, ensure this value is tested with the actual customers and potential buyers, and not based upon INTERNAL assumptions within the vendor.
If you are considering Usage-Based pricing, it will be important to understand the increasing requirement for transparency, value for money, easy access to usage data and even stakeholder value will contribute to the emergence of the "USAGE ECONOMY".
Adam is a true expert on all things Usage-Based Pricing and Billing, and is a great source of information for any company evaluating how to operate within a Usage Ec