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Launching a usage-based pricing model
Launching a usage-based business model
02
Getting started with usage
Whether you’re adding a new product or implementing a new usage-based business model, you know you need to take action quickly—before your competitors catch up. But the data can be hard to wrangle, pricing experimentation takes too long, and you aren’t sure how to mix and match multiple pricing models.
In this chapter, we’ll walk you through the steps to determine if usage is right for your product, customers, and business.
How do you know if a usage model is the right choice?
When deploying usage, there are three key factors that must be considered in order to achieve recurring growth: the company and product, use cases, and pricing model.
Company and product
Usage-based business models can be a powerful lever for growth, but some companies hesitate to implement them because of the perceived risks and investments involved. Building the capabilities and deploying in the appropriate situation is critical. Consider the following variables:
- The tech stack: How does the entire technology stack align with respect to flexible use? For infrastructure as a service (IaaS) and platform as a service (PaaS) companies that sit on an AWS stack, usage flexibility is critical, and usage models tend to fit well. AWS EC2, Snowflake, and Fivetran are examples of three different technology offerings that are complementary and aligned in flexible use.
- Product-led vs. sales-led growth: Pure usage-based models often work well with product-led growth because they scale naturally without the need for selling a new contract. Sales-led paradigms can work with usage-based as well, but often are best suited for committed spend or hybrid contracts.
- Fixed vs. variable economics: For products with more predictable cost of goods sold (COGS) and stable usage patterns, a recurring user-based subscription model would likely be a good choice. For products with spikes in consumption and variable costs (e.g., in many Generative AI use-cases), usage, outcome-based, or hybrid models would be a better choice.
Use cases
A key insight from our data analysis reveals that most deployments of usage-based pricing actually involve a combination of usage and recurring charges as part of a hybrid model. Companies that succeed in their deployment often target use cases more aligned with the benefits and value they bring.
A few example use cases where usage-based models often make more sense include:
- Spiky demand profiles (e.g., certain analytics workloads, Snowflake) where flexibility is more important than predictability.
- Seasonal businesses and industry sectors (e.g., retail technology around the holidays, accountants at tax season).
- Generative AI tools that have a variable consumption of tokens.
Pricing models
As you plan your usage model, it’s good to know what your pricing options are. Here are just a few that you can mix and match as you fine tune your strategy:
- Pure usage: A pay-as-you-go usage model offers the most flexibility for the customer and can go to zero in a month where they don’t use the product.
- Overages: This model gives customers a certain quantity of units per billing period. Anything over this limit is charged per-unit based on the overage price.
- Minimum commitment: With this model, customers are charged at their commitment level on each invoice, even if they don’t consume the committed usage amount.
- Hybrid consumption: This approach employs a mix of both subscription and usage-based charge models for a single offering.
Related resource
How usage models contribute to business success
Learn the proven strategies and tools to launch and scale a usage pricing model. Our research has shown that SaaS companies using hybrid models outperform all other businesses when it comes to recurring growth.
How do you implement a usage model?
Now you know the benefits of usage and how to choose the right model or mix of models for your business, but how do you implement usage pricing quickly and what features should you look for?
Here are the top 4 capabilities you’ll need to make your usage model a success:
1. Price without developer intervention
- No-code pricing tools: Change pricing models or adjust price points without needing extensive developer resources.
- Automated pricing updates: Ensure that changes in pricing are reflected across all systems, including in-app purchases, eCommerce platforms, and CPQ systems.
- Data-based value metrics: Quickly track and define meters you can monetize across all of your products.
2. Experiment with diverse pricing strategies
- Try a mix of models: Include volume, tiered, multi-attribute, or pay-as-you-go options to cater to different customer needs.
- Prepaid credits and top-ups: Allow customers to manage their budgets better by prepaying and using credits as needed.
- Discounts and trials: Introduce promotional pricing or trials to attract new users and encourage consumption.
3. Capture, measure, and track usage data
- Automated mediation: Effectively manage the aggregation and processing of usage data, ensuring that data from various sources is normalized and accurately represented for billing.
- Scalability and integration: Seamlessly integrate usage data into billing systems and support scalability by handling large volumes of data without compromising on performance.
- Dynamic data integration: Stream usage from various sources then automatically enrich, aggregate, and deduplicate the data.
4. Analyze and optimize for growth
- Real-time analytics: Continuously monitor and analyze usage patterns to understand customer behavior and adjust offerings accordingly.
- Cost and revenue tracking: Compare costs against revenue for each pricing plan to identify the most profitable strategies.
- Experimentation: Apply different pricing plans to the same usage data to discover which maximizes revenue and customer satisfaction.
- Cross-functional implementation: Successfully roll out new pricing company-wide by consulting and planning with multiple stakeholders, such as sales and revenue accounting teams.
Learn more about usage
By now, you might have a better idea about whether a usage model is the right choice for your business, product, and customer. But how do you handle all the data that comes along with usage pricing?
Keep reading for a comprehensive guide to measuring and tracking usage data across your business.
