The Potential Driving the Usage-Based Pricing Trend

It wasn’t that long ago that the software-as-a-service (SaaS) subscription model replaced on-premise-license-per-machine pricing. However, today, companies are transitioning once again—from the subscription model to a usage-based pricing one, where customers pay only for what they actually use. Together with Finmark, which provides financial planning software for start-ups, Tesorio recently hosted the webinar, Usage-Based Pricing: How Finance Teams Need to Adapt and Lead, in order to discuss this trend with two leaders who have already made the switch: Mark Sachleben, CFO at New Relic, and Kyle Poyar, Partner at OpenView. Both say that usage-based pricing is a win-win for your customers and your business. Here’s why.

Customer Benefits

First, let’s look at usage-based pricing from your customers’ perspective. It affords them the opportunity to do the following:

• Pay for value: Sachleben says customers don’t mind paying for software if they feel they’re getting value for their money and are able to pay for what they actually consume. But they dislike paying for “shelfware,” software that’s paid for but not used to its fullest.
• Start at a low cost and grow: Customers can incorporate your product into their operations and reap its benefit without a significant upfront investment. Allowing them to test drive a product with minimal financial risk gives them the chance to grow at their own pace.
• Scale up or down: Customers can increase or decrease their usage whenever their demand calls for it or their budget dictates it. There’s no fear that a seasonal spurt of activity results in overpayment the rest of the year or that scaling back during a slow spell later leaves them unprepared.
• More easily understand pricing: Poyar says that overly complex pricing systems tend to confuse customers who, by subscription’s end, either think they’re paying too much or using too little. With usage-based pricing, it’s easy for customers to understand and see exactly what they’re paying for.

Company Benefits

Now, consider what usage-based pricing does for your company:

• Encourages a customer-centric philosophy: Instead of happening annually, Poyar notes that renewal essentially happens every day, which forces you to truly think about your customer’s needs at every step, from your product’s ease-of-implementation to its ease-of-use.
• Spurs you to create more useful products or services: Likewise, he notes that same impetus drives you to develop products that are “so sticky and embedded in customer workflows that renewal isn’t even a question” for them.
• Generates significant data: According to Sachleben, once you get into a consumption model, it generates a lot of specific data about customer usage and behavior, which helps you to more accurately predict their future usage and, therefore, your company’s future revenue.
• Widens the net of potential customers:With low start-up costs and customer-focused products, you can market your company to far more customers.
• Improves customer satisfaction and retention:Customers who understand and appreciate what they’re paying for are happier, and happier customers equal long-term relationships.

Both Sachleben and Poyar acknowledge that it takes a bit of work, especially for the finance team, to make the switch to usage-based pricing, but they say the benefits are worth it.Want to find out more about this pricing trend and how to convert your company to it? Listen to Tesorio’s recent webinar, Usage-Based Pricing: How Finance Teams Need to Adapt and Lead.