6 Questions To Ask Before Adopting Usage-Based Pricing

Companies with usage-based pricing. Source: Kyle Poyar at TechCrunch
  • An important part of usage-based pricing is the pricing axis. A good axis will have the following properties:
  • ____ Customers should experience more value if their usage increases.
  • ____ If customers throttle usage, they should experience a decrease in value.
  • ____ If customers throttle usage, it should not go against the growth strategy of the company.
  • ____ Customers should be able to predict their future usage.
  • ____ The axis should be of sufficiently large scale, preferably tens of thousands of units.
  • Has your buyer bought usage-based software in the past?

Question #1: Does value increase with usage?

Pricing should always align with business value. In other words, a customer will happily pay more for your product if they get more benefit from it today than yesterday, #pricing101.

Question #2: If the customer throttles usage, is the value reduced?

Developers use Split through an API call that calculates whether a feature is on or off. Since an increase in API calls reflects an increase in customer value, I charged by API calls.

Question #3: If the customer throttles usage, is that ok for your strategy?

It is an axiom that whatever you tax, it doesn’t grow at the rate it used to. It is true in pricing as well.

Question #4: Is usage predictable for the customer?

A benefit of usage-based pricing is that you can land a customer small and watch them grow over time. This growth is acceptable to customers as long as they can predict the growth rate. At a bare minimum, they need to predict the usage and price of your product next year for budgeting purposes. Your buyer will be incredibly unhappy if they have to go back to the Finance team multiple times within a budgetary cycle because of unexpected increases in product usage. If your product is in the top 5 expenses in your buyer’s budget, the need for predictably is even higher.

Question #5: Is the pricing axis large-scale?

This is a niche concern, but some customers will estimate how much you are charging per unit. If your pricing axis is such that you will only ever have a few hundred units, the price per unit may be large, which can be a psychological barrier for some customers. Alternatively, it can put a cap on the most you can charge for your product ever.

Question #6: Is your buyer used to buying by usage?

Engineering is a buyer profile that is very comfortable with usage-based pricing. However, if you are selling to the Sales or Finance teams, they may not be used to buying this way. While there is always an opportunity to educate your buyer, ask yourself whether this is a risk you are willing to take.

Summary

Usage-based pricing is a fantastic driver of land-and-expand. When done right, it reduces the sales cycle and lets you meet your customer where they are today. It also builds in a promise of future growth.

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