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Estd 4.22.2023
Our book, Price to Scale, emphasizes the importance of a transparent and granular usage-based pricing model that ties costs closely to value and underlying expenses. While the book does not prescribe an absolute rule that every usage-based pricing model must have an upper cap, it does discuss the need for careful consideration of usage growth rates and the potential pressures this growth can exert on both cost and customer perception.
Key points to consider include:
• Transparency and Predictability:
The book stresses that customers should clearly understand how their charges will scale with usage. If customers feel uncertain about how costs will escalate, it may affect adoption or retention. An upper cap might serve as a useful tool to provide predictability and alleviate fear of runaway costs.
• Granular Pricing and Cost Alignment:
As discussed in our book (see the section on Usage Growth Rates), the pricing model should be granular enough to reflect true cost drivers. For services with rapidly increasing usage (or for customers whose consumption can spike quickly), not having a cap could lead to unexpectedly high fees, potentially straining the customer relationship.
• Balancing Value Capture with Customer Comfort:
On one hand, allowing costs to scale indefinitely can ensure that you capture increasing value as customers grow. On the other, imposing a maximum monthly charge can mitigate concerns and create a sense of fairness, helping to ease customers' worries about unpredictable bills.
In summary, while it is acceptable to design a usage-based pricing model with costs that scale indefinitely—as long as the model is clear and justified by underlying costs—many companies find that implementing an upper cap can help prevent customer apprehension. The decision should be based on balancing your cost structure and the ability to communicate the model effectively, ensuring that the pricing feels fair and predictable.