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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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In the competitive landscape of SaaS, founders are increasingly turning to usage-based pricing models to align value delivery with revenue. Yet one critical decision can make or break this strategy: choosing the right pricing metrics. As consumption-based models gain momentum, the metrics you select become the foundation of your entire revenue structure, customer relationships, and growth trajectory.
The Fundamental Challenge for SaaS Founders
Many founders rush into usage-based pricing without fully understanding the implications of their chosen metrics. According to OpenView Partners' 2022 SaaS Benchmarks report, companies with usage-based pricing grew at nearly 30% faster rates than their counterparts with traditional subscription models. However, that same advantage becomes a liability when the wrong metrics are selected.
The question isn't whether to adopt usage-based pricing, but rather: what exactly should you charge for?
Why Your Pricing Metric Selection Matters
The pricing metric you choose is far more than just a billing detail—it's a strategic decision that:
- Communicates your value proposition: Your metric tells customers what you believe is valuable about your product
- Guides product development: Teams naturally optimize for whatever drives revenue
- Influences customer behavior: Users will minimize actions tied to costs and maximize those that are unlimited
- Determines your scale potential: Some metrics cap out quickly; others grow exponentially with customer success
"Choosing the right metric is actually choosing what business you want to be in," explains Patrick Campbell, founder of ProfitWell (acquired by Paddle). "You're betting on which customer activities will correlate most strongly with their long-term success."
Key Criteria for Selecting Effective Usage-Based Metrics
1. Value Alignment
Your pricing metric should directly connect to the core value customers receive. This sounds obvious, but many startups get it wrong. Ask yourself:
- Does usage of this metric correlate with value received?
- When this number goes up, does customer success genuinely increase?
For example, Twilio charges per API call because each message delivered creates tangible value. Conversely, charging for storage might make sense for Dropbox but would be misaligned for a collaboration tool where saved documents represent preparation, not end value.
2. Predictability for Customers
According to a 2023 survey by Paddle, 67% of customers cite unpredictable costs as their primary concern with usage-based models. Your pricing should be transparent enough that customers can forecast their expenses with reasonable accuracy.
Consider:
- Can customers estimate their usage in advance?
- Do they have control over the factors driving their costs?
- Are there usage patterns they can optimize?
3. Growth Correlation
The most powerful consumption KPIs grow naturally as customers become more successful. Snowflake's data storage and compute metrics increase as their customers' businesses expand. This creates natural revenue expansion without requiring additional sales efforts.
Your metric should answer:
- Does it scale automatically with customer growth?
- Will revenue expand organically as customers extract more value?
- Does it create a "success flywheel" where your incentives and customer goals align?
4. Simplicity and Comprehensibility
According to research by Simon-Kucher & Partners, 81% of successful pricing models can be explained in under 30 seconds. Complex pricing creates friction in the sales process and confusion post-purchase.
Your metric needs to:
- Be immediately understandable to potential customers
- Make intuitive sense relative to the value provided
- Be easily communicated by sales teams
- Appear fair and reasonable based on industry norms
Common Founder Mistakes with Usage-Based Metrics
Choosing Technical Rather Than Value-Based Metrics
Many founders, especially those with technical backgrounds, gravitate toward metrics they can easily track in their systems rather than those that best represent value. CPU usage, storage capacity, or database calls might be easy to measure but often don't translate to customer-perceived value.
Overcomplicating with Multiple Metrics
In an attempt to capture value perfectly, some founders create pricing models with multiple usage dimensions. While major platforms like AWS can support complex pricing, most startups benefit from simplicity. Stripe succeeded by charging a simple percentage of transaction value rather than creating complex payment processing metrics.
Failing to Account for Network Effects
For platforms with network effects, individual usage metrics may miss the exponential value created. Slack's pricing per user makes sense because each additional user creates organization-wide value through increased connectivity.
Case Studies: Usage-Based Pricing Done Right
Twilio: API Calls as the Perfect Metric
Twilio's decision to charge per API call directly ties costs to successful message delivery. As customers scale their communication needs, Twilio's revenue scales proportionally. This creates perfect alignment: Twilio only succeeds when messages are successfully delivered, and customers only pay for actual value received.
Snowflake: Separating Storage and Compute
Snowflake innovated by separately charging for data storage and computational processing. This allowed customers to scale these dimensions independently based on their specific needs. This approach respects that some customers have large data stores but simple queries, while others run complex analytics on smaller datasets.
Datadog: Multi-Dimensional but Cohesive
Datadog charges primarily based on hosts monitored and data points collected. While this involves multiple dimensions, they remain cohesive around the core value proposition: comprehensive infrastructure monitoring. Each metric directly correlates with the scope of monitoring coverage.
How to Test Your Pricing Metric
Before fully committing to a usage-based metric, founders should:
- Run correlation analyses: Measure how closely your proposed metric aligns with customer success outcomes
- Simulate revenue models: Project how revenue would evolve under different usage patterns
- Test customer reactions: Present pricing scenarios to prospects and gauge their reactions
- Shadow bill: Track what customers would pay under the new model while still charging under your current approach
According to startup analytics firm ChartMogul, companies that test pricing at least quarterly grow 30% faster than those that adjust pricing yearly or less.
The Founder's Decision Framework
When finalizing your usage-based metric selection, ask yourself:
- Does this metric directly represent the value customers receive?
- Will customers understand and be able to predict their costs?
- Does increased usage correlate with increased customer success?
- Will revenue expand naturally as customers grow?
- Is this metric resistant to gaming or artificial optimization?
- Can your systems accurately track and bill based on this metric?
Conclusion: The Ongoing Metric Evolution
The perfect pricing metric isn't static—it evolves with your product, market, and customer base. Successful founders regularly reassess their pricing metrics as their understanding of customer value deepens.
Usage-based pricing represents a fundamental shift in how SaaS businesses capture value, but its success hinges entirely on selecting the right consumption KPIs. By thoughtfully choosing metrics that align with real customer value, you create the foundation for sustainable growth where your success is inextricably linked to your customers' success.
For founders navigating this decision, remember that pricing is not merely a financial consideration but a core strategic choice that communicates your understanding of customer value. The metrics you choose today will shape your company's trajectory for years to come.