The usage-based pricing model just feels right. Some reports suggest public SaaS companies with usage-based pricing models forecast 38% more revenue growth than their contemporaries. Usage-based pricing models also align the value of the product with your billing interactions and make you more efficient at acquiring new customers by lowering the cost of entry and allowing them to grow over time. These models also prevent customer or ARR churn from dragging you under.
Usage-based pricing is one the greatest opportunities to transform your business, increase revenue and stay in front of competition: Not only that, but switching to usage-based pricing can also help you increase your customer lifetime value.
With customers demanding greater flexibility, enterprises have recently aimed to develop more effective and flexible pricing models - go to market, pricing and packaging are key points of differentiation in every industry. Enterprises that move away from traditional sales models, towards usage-based pricing models are gaining market share. Customers are happier since they only pay for the services they consume and vendors are happier because they can better manage customer satisfaction, up and cross-sell opportunities and can offer pre-paid draw-down buckets based usage across products and services; this encourages customer commitment, but also offers the ultimate in flexibility and transparency. Both sides win.
Like making any other major change in pricing, you should expect some work to go into finding the ideal offering for your customer base. Some of the important things to consider when adopting a usage-based product model are:
One of the main challenges of usage-based pricing is to understand the value of your products by identifying the core value metrics. It is important to identify a metric that matches with the perceived value it offers to your customers or else it may lead to customer dissatisfaction and even churn.
To overcome this issue choose a usage-based metric that is flexible, scalable, and value-based in the minds of your customers.
When you switch to a usage-based billing model, some customers with high usage may see an increase in their prices. A lot of companies struggle with managing this pricing fluctuation.
You can tackle this issue by being transparent with your customers about upcoming changes. You should also design overage policies keeping your customers in mind. Provide them full access to their usage reports via customer portals. You should also choose a usage-based billing platform that can send alerts to customers when they reach certain usage thresholds so that they don’t exceed their allocated limits.
Forecasting revenue is complex with consumption-based models as customer usage varies every period and you possibly cannot guarantee a steady flow of revenue. This makes it harder to forecast future revenue since customers usage isn’t uniform every month.
To minimize revenue fluctuations, consider a minimum commitment model with usage and overage structures when a customer exceeds an assigned usage threshold. When you offer your customers a plan that combines fixed and variable fees, their usage fees become more predictable and customers won’t be penalized for exceeding the limits of their plan.
Alternatively, many businesses in the IoT, Communications, and XaaS spaces are shifting to a pre-paid consumption draw-down model, which enables customers to buy a ‘bucket’ of credits and then deplete those credits across a multitude of services based on their usage.
Customers like to have a sense of control over their spending, and they can be turned off by confusing or hidden pricing and will look elsewhere if the pricing is not clear. Money walks. Period.
Create a clear and transparent pricing strategy to dramatically improve your customer experience. Understand which pricing model will work best for your customers and your business model. Is it event-based, value-based, and/or tiered pricing, or should you opt for a hybrid approach where you charge a flat or dynamic recurring fee for access to basic features, and charge extra per- use?
Making the transition to usage-based billing is scary for some customers. You’re probably going to encounter some degree of apprehension from your customers when you start charging for the usage of a service that you have previously offered as part of a single flat fee.
As a service provider, you have the opportunity to inform your customers of the benefits that they derive from the new flexible pricing model once they start using it. Focus on creating a good set of customer communications strategies and showing the value of your pricing changes.
Give your customers full access to their usage consumption reports through customer portals, which will let them see a breakdown of their real-time usage and improved billing and invoicing features.
One of the biggest challenges, when you switch to usage-based pricing, is finding a billing solution that can accurately track large volumes of usage data from multiple sources without any errors or discrepancies. You need to look for a billing system that can manage complex usage and rating scenarios. As you grow your business and the complexity of your operations grow, so too will the need for a more sophisticated billing system.
A robust usage-based billing system like LogiSense can adapt to your unique business and industry needs. As your organization scales and introduces complex changes to the product, you can be confident that you have a billing solution tailored to fit your roadmap with LogiSense. As an entirely API-driven cloud platform accessible through available RESTful APIs, LogiSense allows you to extend the application with no-code/low code configuration.
After all, is said and done, usage-based pricing is not the right solution for every business. But if you’re a subscription-based business that wants to grow, while maintaining customer satisfaction then this pricing model is the right fit for you.
The intent of usage-based billing is to ensure that customers are fairly charged for the resources they use, but which may otherwise go underpriced or unmonetized. Implementing usage-based billing will require a bit more work but the positive benefits it provides will likely far outweigh the short-term challenges.
The best practice for designing usage-based pricing plans is to create your usage-based pricing model based on the needs of your customers. By analyzing the needs of your target customers and then crafting a model that helps meet those needs you can entice new customers and increase customer retention.
Want to learn how usage-based pricing can help you enjoy explosive growth, gain a greater market share, and have higher valuations? Contact one of our billing experts at LogiSense today.
Adam Howatson joined LogiSense as President and Chief Executive Officer in January of 2019, where he also serves as a member of the Board and Board Secretary. Before joining LogiSense, Adam led the go to market and partner functions of Canada’s largest software company, OpenText, as Chief Marketing Officer and SVP.