.png)
Estd 4.22.2023
In the competitive SaaS landscape, your pricing strategy isn't just about setting dollar amounts—it's a critical component of your overall business strategy that communicates your value proposition and directly impacts your growth trajectory. At the heart of this strategy lies your value metric: the unit by which you charge customers.
Selecting the right value metric—whether it's per user, based on usage, or aligned with outcomes—can be the difference between stagnant growth and explosive success. Let's explore how to align your pricing model with the actual value your customers receive.
Understanding Value Metrics in SaaS Pricing
A value metric is the unit of measure upon which you base your pricing. The ideal value metric grows in proportion to the value your customers derive from your product. When chosen wisely, this metric creates a win-win situation: as customers extract more value, they pay more, and your revenue grows accordingly.
According to OpenView Partners' 2022 SaaS Benchmarks report, companies that align their pricing with customer value see 25% higher growth rates and 20% better retention than those using arbitrary pricing metrics.
Per-User Pricing: The Traditional Approach
How It Works
Per-user pricing is straightforward: customers pay for each individual who accesses your software. This model dominated early SaaS offerings and remains popular due to its simplicity and predictability.
Ideal For
This model works best for:
- Collaboration tools where individual usage is distinct
- Applications where user identity and security are paramount
- Products where value directly correlates with the number of people using it
Strengths
- Easy to understand and communicate
- Predictable revenue for vendors
- Simple to implement technically
Limitations
Slack's Chief Product Officer, Tamar Yehoshua, has noted that "per-user pricing can create artificial barriers to adoption within organizations." When companies limit licenses to control costs, they inadvertently limit the software's potential value and your growth.
According to Profitwell research, per-user pricing models show 30% higher churn rates compared to value-based alternatives, as they often fail to align with customer value realization.
Usage-Based Pricing: Pay for What You Consume
How It Works
Usage-based pricing charges customers based on their consumption of specific resources or actions within your platform—storage used, API calls made, transactions processed, etc.
Ideal For
This approach works best for:
- Infrastructure and developer tools
- Data processing applications
- Communication services
- Platforms with variable consumption patterns
Strengths
- Creates natural alignment between cost and value
- Removes barriers to user adoption
- Enables land-and-expand revenue growth
Twilio's CEO Jeff Lawson attributes their remarkable growth to usage-based pricing: "When customers succeed and use more of our product, we succeed too. It's a powerful alignment of incentives."
Limitations
While powerful, usage-based models aren't perfect. According to Gainsight data, 68% of companies cite "billing unpredictability" as the main customer concern with usage-based pricing. For vendors, revenue forecasting becomes more challenging without fixed recurring revenues.
Outcome-Based Pricing: Aligning With Customer Success
How It Works
The most sophisticated approach, outcome-based pricing ties costs directly to the business results customers achieve through your product—revenue generated, costs saved, conversions achieved, etc.
Ideal For
This model excels for:
- Marketing and sales technology
- Business optimization software
- Solutions with clear, measurable ROI
- Enterprise products with high strategic impact
Strengths
- Creates perfect alignment with customer value
- Differentiates from commodity offerings
- Positions your product as an investment, not an expense
HubSpot's tiered pricing model incorporates elements of outcome-based pricing by charging based on contacts and marketing capabilities, directly tying costs to potential marketing outcomes.
Limitations
Implementation complexity is the primary barrier. According to Forrester, only 17% of SaaS companies have successfully implemented true outcome-based pricing, largely due to measurement challenges and the need for sophisticated tracking mechanisms.
Making the Right Choice for Your Business
Selecting your value metric requires careful consideration of several factors:
Customer Value Alignment: Map the customer journey from implementation to ROI. Where does value actually materialize?
Market Expectations: Research how competitors price similar solutions and understand if your target market has established expectations.
Growth Strategy: Your pricing model should support your go-to-market strategy. Per-user works for top-down enterprise sales; usage-based excels for product-led growth.
Operational Feasibility: Consider your ability to track, bill, and support your chosen metric.
The most innovative SaaS companies are increasingly adopting hybrid models. Snowflake combines usage-based pricing with commitments that provide customer predictability while maintaining growth alignment. MongoDB offers consumption-based pricing with the option to purchase reserved capacity for predictable workloads.
The Impact on Key Business Metrics
Your value metric choice will significantly impact:
- Customer Acquisition Cost (CAC): Complex pricing models may increase sales cycles and CAC
- Net Revenue Retention: Value-aligned metrics typically drive higher expansion revenue
- Churn: When prices align with value, customers are less likely to churn
- Lifetime Value: The right metric creates natural expansion opportunities
Moving Forward: Evolving Your Pricing Strategy
Your value metric isn't set in stone. As your product and market mature, your pricing should evolve accordingly. Successful SaaS companies typically revisit their pricing strategy every 6-12 months.
When considering a change, prioritize grandfathering existing customers or providing gradual migration paths. Abrupt changes to pricing structures can trigger significant customer backlash, as Slack discovered when attempting to modify its pricing model in 2018.
Conclusion
The choice between per-user, usage-based, and outcome-based pricing isn't merely a tactical decision—it's a strategic one that shapes how customers perceive, adopt, and ultimately extract value from your product.
The most successful SaaS companies recognize that their pricing model is a product feature in itself, deserving the same level of strategic thought and continuous refinement as the core offering. By aligning your pricing with your customers' perception of value, you create the foundation for sustainable growth and competitive differentiation.
As you evaluate your options, remember that the perfect value metric creates natural alignment between your customers' success and your own—when they win, you win too.