“Executives and boards are curious about usage based pricing, but they don’t know the intricacies of actually getting started from an operational standpoint.” - Kate McCullough
Usage-based pricing is a model where a customer’s cost depends on how much of a product or service they consume. Typically, you count usage by tracking metrics like API calls made, storage used, and bandwidth consumed. No matter your business, there are operational upsides and downsides to usage-based pricing.
Usage-based pricing aligns price to the value of your product, mitigates issues with high usage using up resources, and is transparent for the customer. While some companies go all in on usage, it’s more common to deploy a hybrid pricing model that pairs subscription and services pricing with one of three types of usage-based models:
“Anything that’s really good and flexible for the customer becomes a bit of a nightmare for the operations team to implement.” - Eric Portugal Welsh
In the excitement of launching user-based pricing, companies can have some common misconceptions. They think that usage is just a billing problem, that it’s easy to set up as plug and play, or that it will make it easier for sales teams to sell.
In reality, implementing usage-based pricing affects the entire customer lifecycle. Buying a new billing tool won’t help the people that manage every step of your customer journey like sales, product, and especially finance. Without an operational strategy, you’re creating a lot of manual work.
“You might end up with an entire team that just explains bills every month.” - Lisa Kelly
Sales reps are usually the people that answer billing questions from customers. Tracking usage in a system that’s visible to everyone can help reduce the amount of manual calculations. Additionally, you’ll need to be very clear on what levers sales reps can pull to receive compensation and hit their sales targets.
Your customer success and support teams need to understand the new pricing model very well. If your product is misconfigured at implementation, for example, it can have huge implications. API calls can result in 10X the cost that the customer expected, eroding trust in your company.
Generating revenue through a consumption model is not guaranteed. Finance teams can't forecast usage for each customer next year or even next month. This makes revenue recognition very challenging. Transparent usage tracking can help them forecast future revenue.
“No matter how much you think you’ve thought through adding usage-based pricing into your product, you haven’t thought of everything.” - Lisa Kelly
To mitigate the biggest pitfalls of adding usage-based pricing, our panel of experts recommends assigning a singular product manager or owner to oversee the launch from day one. If you don’t have someone looking horizontally across your new processes, you’ll never catch all of the complications that may arise.
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