Monetizing Usage Model Must #1: Pilot First

Transitioning to a usage-based business model can significantly alter a company’s growth trajectory, offering the potential for accelerated revenue growth and improved customer satisfaction. However, this shift is challenging. For companies introducing a usage model into their business, piloting allows them to test and validate strategies in a controlled environment before committing significant resources. Below, we’ll share examples of how pilots can reduce risk and best practices for piloting usage models with SaaS and High-tech customers.

Reducing Risk

Successful pilots minimize risk while maximizing learning. Launching at scale without adequate piloting to understand product market fit and how the experience may be received by customers may have negative implications for the business and brand. VMware, a leader in virtualization and cloud computing experienced this in the early 2010s when they rolled out usage-based pricing based on vRAM; a unit of processing that customers weren’t familiar with, didn’t have visibility into, and wasn’t aligned to how they defined the value of the services they were buying. Some of its most valuable customers experienced costs that rose to churn-inducing levels. After a year of tweaks and changes to the model, VMware eventually scrapped it and issued a mea culpa from the CEO (VMware has launched a string of successful and widely adopted, usage-based products since then). 

Compare the VMware example to Amazon’s approach to launching its OpenSeach service. Before launch, the initial pricing model was built off a byzantine combination of vectors that were difficult to bring together and communicate to its early adopter customers. The product team used metering data from these early-stage customers and observed patterns around how they used the service. From these patterns, the team identified the most relevant components to include in the charge model that customers could easily understand, monitor, and manage such as the amount of data transferred, storage used, and query volume. Over time, AWS has expanded its approach to monetizing OpenSearch and introduced free trials for new customers, multiple tiers, and reserved instance pricing. Today, it is regarded as one of the most successful offerings in the portfolio.

The Four Ds of Pilot Design 

Pilot scope can vary widely depending on the company, market, experience with usage-based models, and the offer being piloted. No matter how large or small, usage pilots should have four critical elements included in the design: Definition, Description, Data, and Duration. 

– Definition

Clear goals and objectives of the pilot that answer the question, “What do we want to understand?” For usage models, the definition should include objectives focused on whether or not the customer can equate usage of a product or a feature to measurable value or outcomes. Depending on the nature of the product or service, the providing company may have visibility into customer outcomes, though this is often not the case. More often, companies will have to rely on survey data or interviews to understand how the value equation is playing out. While other objectives around things like desirability, engagement, and ease of use may be part of the Definition, having fewer, bigger objectives will lead to a more focused and successful pilot.

– Description

Who and where are the customers whose preferences and usage patterns you want to understand better?  Some companies have a clear articulation of their ideal customer profile (ICP), while others may use the pilot to flesh out the attributes of their targets. Businesses that operate in multiple markets benefit from launching pilots in regions that contribute minimally to overall revenue (to minimize business risk) or where customers are most likely to adopt new models. Pay-as-you-go or low-commitment plans, pilots will be more successful in regions where customers have a lower risk tolerance for buying new software. 

– Data

The lifeblood of any successful pilot. But be wary of creating an environment of information overload by focusing your collection and analysis on data that will provide a sufficient answer to the questions in the Definition. Are there specific milestones or benchmarks the leadership team will be looking at?

Will the team rely purely on quantitative data or will qualitative “voice of the customer data” also be included? Does the pilot team have the process, the tools, and the capabilities to collect and analyze the data being collected?

– Duration

How long will the pilot run? Duration is influenced by the number of available customers participating in the pilot and the complexity of the offer. The more complex the solution, the more time customers need to get onboarded, explore, use, and receive value. Don’t forget to carve out enough time for synthesis and analysis of the data elements described above. 

Usage Model Pilot Success

A pilot is deemed successful when it reinforces what’s working and/or catalyzes actions around what isn’t. Revenue and financial metrics are important for sure. In the usage model world, the most important thing to learn is why a customer is or isn’t using the product more often over time. 

Is it a functional issue (“this thing doesn’t work”)? 

Is it an enablement issue (“I don’t understand how to use this”)? 

Or is it a value equation issue (“I don’t see why I should pay this much to use this”)? 

Understanding what will encourage a customer to increase their usage over time will provide clarity to product teams about what features to improve or introduce while giving the go-to-market team insights and ideas about how to talk about the product to the next wave of prospects. 

Conclusion

Piloting is a vital step in successfully transitioning to a usage-based model. Companies can improve the likelihood of pilot success and reduce risk by creating a fleshed out design that incorporates the “Four Ds,” starting small, learning quickly, and iterating on the offer based on real-world data.