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Estd 4.22.2023
Based on our saas pricing book, Price to Scale, the best approach depends on your product’s nature and how the value is delivered to your customers. Here are some key considerations:
• Usage (Consumption) Pricing
- This model works well when you can directly tie pricing to the value a customer receives.
- It is ideal if your costs scale with usage (for example, storage or compute costs) or if usage data is readily measurable across customers.
- By charging based on actual consumption, you can potentially align costs to customer value and support easier adoption.
• Flat Monthly (Capability) Pricing
- This is a lump-sum model where you charge a fixed fee regardless of the level of consumption.
- It suits scenarios where the product is viewed as a full capability that doesn’t vary significantly with usage.
- However, as noted in Price to Scale, using this approach for the base software might leave revenue on the table or even discourage enterprise adoption if not aligned with the product’s inherent value delivery.
Overall, the book recommends deciding on your primary pricing metric by first analyzing whether your product fits better with a consumption-based model or a capability (flat fee) model. If your product’s costs and customer value scale with usage, a usage-based pricing model could be more appropriate. Conversely, if the product is best perceived as a complete package, a flat monthly fee might better communicate its value.
In summary, evaluate how closely your pricing should mirror the real use of your product and the corresponding costs you incur. This strategic decision, as advised in Price to Scale, will help you maximize both customer value and revenue.