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Estd 4.22.2023
Based on our book Price to Scale, the best way to identify the right usage metric for a usage-based pricing model is to follow a structured evaluation process that ensures your chosen metric aligns with both the value your customers receive and the underlying costs you incur. Here’s how you can approach it:
Determine Your Overall Pricing Model
• As discussed in our book, start by deciding whether your product fits a consumption-based model (usage-driven) or a capability-based model (fixed, lump-sum pricing). For a usage-based approach, you’re in the consumption realm.Generate and Evaluate Candidate Metrics
• List a few potential usage metrics (for example, API calls, GB of data processed, etc.)
• Evaluate each based on its ability to directly reflect the value delivered to the customer. In our book, we emphasize that the metric should be something your customers inherently understand and appreciate – it should be closely tied to how they benefit from the service.Align the Metric with Cost Drivers and Customer Perception
• Choose a metric that not only matches customer value perception but also mirrors your internal cost structure. For example, if data processing costs are a significant part of your expenses, charging per GB might better correlate with your infrastructure costs. Conversely, if each API call represents a core value-adding process, then that might be the better metric.Practical Testing and Validation
• Implement pilots or tests with different metrics if possible. Analyze which metric better supports straightforward pricing conversations and adoption among your customers.
• Use feedback as a part of the continual refinement process, ensuring that the usage metric remains relevant as your product and market evolve.
In summary, the book recommends that you begin with a clear identification of your pricing model, generate several candidate usage metrics, and then select the one that best aligns with the customer’s value perception and your internal cost dynamics. This systematic approach, as detailed in Price to Scale, helps ensure that your pricing model is both competitive and scalable.