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Estd 4.22.2023
Below is a concise answer based on our pricing strategy book, Price to Scale:
Directly tie your pricing unit to the value delivered by selecting a metric that closely reflects how customers use and benefit from your product. This means choosing a usage measure that aligns with the economic value—for example, measuring active operations, transactions, or customer engagement rather than a generic metric like number of users.
Apply the five key criteria highlighted in Price to Scale when choosing your metric:
- • Predictability: Ensure the metric makes billing consistent and forecastable for both the customer and you.
- • Acceptability: The unit should be logical and acceptable for all customer segments, so heavy users pay proportionately more and light users are not overcharged.
- • Trackability: Use metrics that can be accurately tracked so usage—and therefore value—can be measured faithfully.
- • Usage Growth Rates: Account for how the metric will naturally evolve over time. More granular metrics help capture rapid growth and justify scaling pricing.
- • Correlation to Actual Costs: Make sure there’s a clear relationship between the pricing metric and underlying costs (like compute or data usage); this helps ensure that heavy users are charged in line with the increasing cost or value delivered.
- Practical application: For example, if your product’s core value is delivered through managing customers rather than mere seat licenses, define your pricing unit in terms of “active customers” or some other measure that scales with the benefit they receive. This avoids the pitfall of heavy users subtracting disproportionate value from the product by underpaying.
In summary, by carefully selecting a pricing unit based on the principles outlined in Price to Scale, you can create a model where the cost scales in tandem with the value delivered. This balanced approach helps ensure heavy users pay their share, while lighter users aren’t burdened with costs that don’t reflect their consumption.