85% of companies reported their contract annualized price increases were below the U.S. year-on-year inflation rate in 2022!!!!
Source: Mckinsey 2023 study
What's even more concerning is that while a majority of software companies (85 percent) plan to derive value from price adjustments in the near future, they remain ill-equipped to realize the enduring benefits of pricing.
The implications? Pricing isn't just an operational task; it's a strategic imperative that the C-suite needs to pay attention to. Not just that, the study also concluded that 40% of the companies participating, implemented a standard seat-based billing.
For numerous businesses, relying on seat count as the main pricing metric has its pitfalls. This method isn't always conducive to sustainable growth in customer revenue over time. Moreover, such metrics present auditing challenges in instances like shared licenses or overlapping credentials. It's crucial to note that seat count doesn't always equate to the actual value derived from the service.
For instance an analytical tool used by an enterprise with 100 members, where only three 'super users' are responsible for a staggering 95 percent of the total usage. After the first three licenses, adding more users doesn't proportionally enhance the enterprise's value from the tool.
It's heartening to see that forward-thinking software companies are acknowledging these shortcomings. A remarkable 97 percent of survey participants from such high-growth companies anticipate a transformation in their pricing strategies soon.
A noticeable trend is the tilt towards usage-based pricing metrics. This change is motivated by the mounting interest in product-led growth strategies, which, when executed well, promise lucrative revenue expansion opportunities.
But how’d you prepare yourself for this shift and choose a billing tool that will support you from the backend no matter the pricing or pricing iterations you do. If you’re evaluating a billing tool, how’d you know how to choose the right one?
Well, let’s break it down for you.
Also Read: Top 10 Must-Have Features in Your Billing System
Features You Need To Implement Complex Pricing Strategies
1. Billable Items
Billable items are foundational to your pricing strategy. It lets you configure various pricing models with different permutations and combinations that’s in line with your business needs. Think of them as the building blocks of your pricing model.
Billable items, the building blocks of your pricing model. 3 types of billable items, - usage meter (no. of workflows, emails sent, API calls any form of usage counting has to be done), add-on (fixed fee you want to collect, in advance, arrears, onboarding fee, subscription fee that is fixed and recurring), feature (feature credit or limit, if a customer needs to access 1000 workflows, they need to top-up or purchase more which can be modeled as a feature).
Usage Meter:
These are the usage components in your products like number of workflows, Emails sent, API calls, etc., This is basically any form of usage counting that needs to be done.
For instance, in a CPaaS setting like Twilio, the number of API calls or messages sent would be pivotal. These metrics should be aggregated in real-time, providing actionable insights into consumption patterns.
Here’s how a sample Usage Meter looks inside Togai. You can configure any usage based component of your choice into this.
Add-ons:
Add-ons are basically any fee you want to collect upfront or periodically. It can be a one-time onboarding fee, subscription fee if you want to implement a fixed and a recurring component or any service based fee that you’ll be providing
Inside Togai, you can also have a usage component as well as a seat-based component as your billable item.
Suppose you have a SaaS product like Slack. An onboarding fee could be a one-time fee charged initially, while a recurring subscription fee gets charged at the commencement of every billing cycle.
Features:
This can be either modeled as a feature credit or limit. For instance, A customer’s plan allows them to access 100 workflows. If they need to use that particular feature beyond that limit then they can top-up or purchase more workflows. This can be modeled as a feature inside Togai.
So if someone in the startup plan needs to use a feature from the mid-tier plan, they can pay for that particular feature alone and you can set conditions on how they will be charged. Post consumption their usage will be billed.
If your company finds this as an ongoing trend, then it can roll out that feature as credit limits for startup users.
This is how a sample feature called workflow is modeled inside Togai.
2. Prepaid and Postpaid Invoicing:
Subscription billing is traditionally deemed as the pay-upfront model. But if you’re catering to mid-market or enterprises which usually prefer postpaid billing, you’re in a pickle. Also, with prepaid billing you can only implement one billing model, i.e, the seat-based model.
Other pricing models such as usage-based or hybrid pricing, needs your billing tool to have postpaid billing capabilities. Else, you need to raise two bills every month, and this piles onto not only manual work internally but also a lot of confusion and hassle.
How will you know if a customer cleared both their invoices and with how can you customers can you possibly keep a track of along with other duties?
With Togai, you can keep track of all your transactions under one account. You can trigger invoices for any custom billing period.
3. In-house Usage Monitoring Capabilities:
When you choose a billing tool, you need to choose one that encompasses every aspect you envision your pricing model to be.
Monitoring usage using third-party tools, calculating the fee and then manually consolidating it into an invoice is a hassle and requires way too many steps. Your billing tool should give you the flexibility to implement any billing model you wish and also provide features that enable you to do so.
Here’s a list of events configured that shows real-time status against each!
Not only billing flexibility but real-time usage data is more than just a number. It's a treasure trove of insights. This data from your billing tool allows you to swiftly react to user behaviors and optimize service offerings.
Additionally, you can also check the status of data ingestion for the usage metrics and perform reconciliations to ensure that no wrong invoices are sent.
Another important thing to remember is that your tool should allow you to fetch this data easily - be it integrations, bulk upload CSV values or anything else that you might have.
4. Overrides or Overages
Want to discount a certain amount for your customer or do a flat-fee discount on the total bill to align with your marketing teams’ goals, you need your billing system to account for it. Overrides or overages is a must-have pricing capability that enables you to offer discounts, provide additional or free top-ups or even discount the fee paid.
For instance in a monthly plan you might ask your customer to pay for 12 months but if they pay annually you might discount a month or 15 days.
All these nuances on how and what you want to offer should be accounted for and available in your billing tool. Otherwise it becomes too much of a hassle doing all the manual computing and aligning with your customer.
For example in Togai, you can provide overrides as a currency value or as a limit value across all monetizable metrics. This preferential pricing applies only to the particular customer and with Togai you don’t need to create a new plan for these custom contracts, unlike in other tools, where you need to create an entire price plan.
Your billing tool should be flexible enough and allow you to provide customized deals, discounts for certain upgrades, discounts (flat-fee or percentage) and other waivers you want to offer.
5. Entitlements
Entitlement management is a feature greatly sought after today. With entitlements you can provide access to certain features and gate the rest which aren’t a part of the paid plan. This is specifically useful for companies that want to provide a PLG/Self-Serve/Startup pricing tiers.
Here’s a sneak peek into Togai’s entitlements. The above image shows that in this particular configuration one prepaid credit is $0.05. Customers can choose how many credits they need and it gets multiplied, automatically in the backend and shows the final amount they need to pay to get the credits.
With entitlements you can create a new growth strategy and cater to different sections of the market. You need a billing tool that provides you with entitlements and ensure all limits and credits are taken care of, because manually enabling it can be a pain.
Also building a system for entitlements in-house can quickly get complicated as your product goes, not only do you need to maintain an in-house platform, you need to have a separate team, ensure your product scales and also take care of billing!
This is why you need a powerful billing system that not only takes care of all traditional use-cases but also solves for end-to-end billing needs your business might have.
Also Read: How to develop a holistic SaaS pricing strategy
Conclusion
The current scenario is tech is a trying time but also serves as the right wake-up call.
The days of sidelining pricing considerations amidst rapid growth are over. Today, with increasing economic challenges, billing should be revisited and thought about how it is done traditionally.
Togai, the efficient metering and billing software, optimized for usage-based and hybrid billing, is not just facilitating this shift but is also leading the change. As businesses adapt to the new normal, their choice of billing platform and the activities it can perform will play a pivotal role in their growth story.
