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Estd 4.22.2023
Based on our saas pricing book, Price to Scale, the answer is that you typically don’t want to pass on 100% of the additional costs incurred by heavy usage. Instead, you should design your pricing model to balance and match the underlying cost structure.
Here are the key points to consider:
• Marginal Versus Average Cost:
As explained in our book, the marginal cost (the cost of serving one additional unit of usage) is usually much lower than the average cost because many costs (like development, customer support, etc.) are fixed. This means that while one customer’s heavy usage can affect average costs, the cost to serve incremental usage is often lower.
• Granular Pricing Structures:
The book recommends using granular usage metrics so that you can more closely align pricing with the actual costs incurred on a per-unit basis—especially when hard costs (such as compute power or storage) are directly tied to usage. If a customer’s heavy usage is driving up these specific costs, then it might be appropriate to build in a cost pass-through component for that excess usage.
• Balancing Risk and Growth:
If you pass on all additional costs, you might risk discouraging product adoption or causing negative customer sentiment. Conversely, absorbing all costs could jeopardize your margins if your costs scale unexpectedly. Therefore, the ideal approach often involves sharing some of the cost risk: you might absorb a portion of the cost increase to maintain customer satisfaction while passing on the remainder to protect your margins.
In summary, our book suggests that for usage-based SaaS pricing, a balanced approach is required. You should design your pricing to pass through enough of the variable, incremental costs (especially when they are directly tied to usage), while absorbing a portion of the fixed or marginal costs to continue incentivizing customers to drive usage growth. This nuanced approach ensures sustainability without sacrificing market competitiveness.