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Estd 4.22.2023
Based on our saas pricing book, Price to Scale, usage-based pricing can align our interests with those of our customers by ensuring that they only pay more as they derive more value from the product. At the same time, the book highlights that careful design is needed to prevent the pricing from becoming too unpredictable.
Key points from Price to Scale include:
• Predictability is crucial: Our book explains that customers typically prefer consistent, forecastable bills. When usage-based pricing leads to significant month-on-month variations, it may complicate cost forecasting for customers and pose risks in revenue predictability for the provider. (See the discussion on the "Predictable" criterion.)
• Alignment of interests: Ideally, usage-based pricing aligns the provider’s and customer's interests by linking price increases directly to increased product usage and value. This approach means you charge customers in proportion to the benefits they obtain, which can lead to fairer, value-driven billing. However, this alignment holds true only if the underlying usage metrics are stable and predictable.
• Potential for backfire: If the method of measuring usage isn’t granular or stable enough, the resulting bills can fluctuate excessively. Such unpredictability might cause discomfort or uncertainty for customers, which could jeopardize adoption and retention. The book emphasizes the need to model price increases reliably over time and to ensure that the chosen metrics are both acceptable and trackable for customers.
In summary, while usage-based pricing can create a mutually beneficial pricing structure by aligning costs directly with value delivery, its success hinges on the predictability and stability of the usage measurements. To implement this pricing model effectively, it’s essential to design it with careful attention to billing consistency to avoid any potential drawbacks related to cost unpredictability.