The art and science of SaaS pricing: True usage-based pricing

In part 2 of this sequence, we explored scalable unit-based pricing and highlighted just a few of the frequent pitfalls and classes the trade has realized. On this ultimate article, we’ll delve deeper into the last word alignment with buyer worth: true usage-based pricing.

No matter how superior you get with the selection of your unit, the pricing essentially nonetheless boils all the way down to a flat (inside the unit limits) subscription price — except you go all the way in which to true usage-based “transaction pricing.” With transaction pricing, you merely defines a charge per unit after which assess and bill month-to-month in arrears primarily based on precise utilization. In B2B SaaS, usage-based pricing is extra the exception than the rule and is often employed together with a subscription, such that the usage-based income usually makes up solely 25-50% of complete recurring software program income.

Utilization-based pricing may be extremely highly effective, significantly in instances the place the SaaS answer handles the circulation of cash, and the transaction charges may be imbedded — or generally buried — within the circulation of cash. Examples are clearly B2B funds for items and providers, both on the purchase aspect (e.g. expense administration, purchase-to-pay, provide chain finance, freight audit and fee) or the promote aspect (e.g. ecommerce platforms and different options that contact income and AR).

In such instances the SaaS utilization charges may be extracted from (income) or tagged onto (bills) the enterprise’ circulation of cash and are thus typically seen as “value of doing enterprise,” as a part of COGS. And that may be extremely profitable for the SaaS vendor and often permits a far increased share of worth than a easy subscription ever would.

Subscriptions are seen as OpEx spend, an IT price range line merchandise that receives preliminary and infrequently annual scrutiny, significantly as the answer’s worth proposition over time involves be seen as establishment. I’ve personally witnessed instances the place giant enterprise prospects balked at a six-figure annual subscription however fortunately allowed a really wholesome seven-figure utilization price to be embedded within the funds circulation. As OpEx it was a show-stopper. In COGS it was a rounding error.

However earlier than you get overly excited, there’s a comfortable underbelly of usage-based pricing. In actual fact, I’d suggest that almost all of B2B SaaS firms steer effectively away from usage-based pricing except they do deal with the circulation of cash and might “tag-on” their charges. As a standalone price, invoiced month-to-month in arrears and picked up instantly from the SaaS buyer, it’s problematic and, normally, not definitely worth the headache. Right here is why:

  • It’s tough to foretell for each the client (price range) and the SaaS vendor (income) and triggers a whole lot of pushback from IT consumers to “please flatten it right into a subscription.”
  • It causes money circulation delays as you’ll be able to solely bill month-to-month in arrears. You possibly can experiment with asking for some pre-pays to clean cashflow, however normally that’s a non-starter.
  • It usually causes a income delay as utilization does scale up slowly with rollout and adoption, delaying income significantly in comparison with a subscription.
  • Usually that rollout turns into an entire second, multi-year gross sales cycle. First your gross sales crew sells the client on shopping for and deploying. Then your buyer success crew sells the customers and buying and selling companions (consider a P2P answer) on really utilizing it. Solely then and regularly do you notice income and money.
  • In lots of instances this mannequin represents the worst of each worlds: Clients just like the usage-based mannequin whereas their use continues to be small and ramping up, making you await income whereas they’ve little pores and skin within the sport. However as soon as the answer catches on and quantity actually grows, they are going to push you very exhausting towards an all-in “enterprise deal” that’s huge however a flat subscription, depriving you of the upside.
  • You have to a way more sturdy billing infrastructure to supply but additionally defend your invoices. I bear in mind all too effectively the frequent requests from F&A, triggered by buyer disputes, asking the R&D crew to take their eyes off the innovation ball to supply extra detailed “billing stories” to defend usage-based invoices.
  • Seasonality and financial cycles drive variability and might precipitously shrink income month over month and, for those who give attention to sure verticals, induce a nasty seasonality in your personal income (e.g. retail).
  • And final, however under no circumstances least: Incentive constructions could be a actual battle round usage-based pricing. Do you need to pay gross sales commissions on signature or go-live on the anticipated quantity however earlier than any income? Or wait till quantity transpires after rollout, probably months and even years later? How lengthy are your account executives keen to attend? What in the event that they go away — otherwise you wish to terminate one? What for those who discover they spend all their time shepherding the rollout (and their fee) of that enormous deal they offered final 12 months reasonably than promoting the subsequent? I’ve seen a whole lot of completely different fashions round this, making an attempt to strike one of the best steadiness and being honest to all events. None of them was excellent, and all of them had been complicated and dangerous.

As you’ll be able to see, there are vital obstacles to usage-based pricing fashions for B2B SaaS firms. When it matches, it’s highly effective. However don’t power it the place it doesn’t belong.

In abstract, the correct pricing technique for B2B SaaS firms is extremely necessary — and too typically neglected or poorly designed. Completely perceive your numerous buyer segments and the way they ascribe worth to your providing. Discover a scaling unit most intently aligned to that worth and use it to ascertain a tiered subscription mannequin that also is simple sufficient to manage. And with an affordable quantity of effort and a focus to it, you must take pleasure in vital optimistic impression on annual contract worth, progress, and retention.

Andy Stinnes is Enterprise Companion at Cloud Apps Capital Partners.


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