TL;DR
- To overcome challenges in implementing usage-based pricing, start by identifying a usage metric that grows with your customer's success, ensuring alignment with customer value.
- Adopt a flexible pricing model that may include a mix of event-based, value-based, and tiered pricing to cater to different customer needs and usage patterns.
- Address revenue forecasting challenges by offering plans with a mix of fixed and variable fees, making usage costs more predictable for customers.
- Overcome customer resistance to usage-based pricing by highlighting its benefits, offering transparency, and providing tools for monitoring usage.
- Manage customer expectations around overages with clear policies and proactive communication, helping to maintain satisfaction even with variable billing.
- Combat potential customer churn by ensuring a great initial experience, offering robust support, and incentivizing long-term commitment.
- Optimize the billing process by integrating usage tracking and billing systems, ensuring accuracy and transparency in customer charges.
- Consider leveraging software like Togai for accurate usage tracking and billing to streamline the implementation of usage-based pricing.
User-based or consumption-based pricing is fast making itself an indispensable solution for SaaS (Software as a Solution) companies, thanks to three primary reasons:
- It simplifies and streamlines customer acquisition.
- It improves customer satisfaction.
- It enables you to grow with those customers as they’re successful.
- It reduces customer churn.
Companies utilizing usage-based pricing platforms have better net dollar retention. So is it time you adopt a usage-based pricing model at your organization?
Transitioning to User-Based Pricing: Is it Easy?
As much as user-based pricing (UBP) is flexible, reliable, and affordable, transitioning to this platform from a pure subscription base is easier said than done. Introducing usage-based billing to your business has shortcomings—from how you integrate it into your subscription plans to whether your customers accept it.
But the opportunity to enter a new addressable market and other benefits makes it worth the effort. Let's explore some challenges you might encounter while implementing UBP in your business and how you can overcome them.
6 Common Challenges in Implementing User-based Pricing
Choosing the right usage metric
Pricing Innovation asks an important question for identifying the right pricing metric:
"What’s the metric that would allow your revenues to grow as your customers’ revenues grow if you acquire no new customers?"
"Most companies choose pricing metrics by tradition. While there is nothing inherently wrong with ‘per seat’ pricing, a pricing metric that genuinely aligns with customer value makes your product so much easier to sell" — Dan Balcauski
The right metric will help you capture the value that you are providing to your customers. Often, metrics are either user-based, usage-based, adoption-based, or value-based. It could be any number of things: total users, transactions processed, number of contacts in a marketing database, etc. But the best metric has to:
- Align with your customer’s needs and perceived value of the product.
- Be easy to measure and enforce.
- Be identifiable by different types of buyers
- Enable increased lifetime value of customers.
- Be flexible, scalable, and predictable.
Software like Togai can help you collect events from multiple data sources and accurately track measure, and compute usage metrics for your product.
When you understand your usage metrics better, it's time to think of what pricing model to implement. Create a clear and transparent pricing strategy to improve your customer experience. Decide if it is going to be event-based, value-based, and/or tiered pricing. You can also take the hybrid approach where you charge a flat or dynamic recurring fee for access to basic features, and charge extra for additional usage.
Estimating your revenue
Since customer usage varies, it becomes difficult to forecast revenue. The varying consumption cannot guarantee a steady flow of revenue, thus making it harder to predict future revenue.
So how can you solve this problem? We suggest you offer your customers a plan that combines fixed and variable fees. This way, their usage fees become more predictable.
Alternatively, many businesses are shifting to a pre-paid consumption draw-down model. For example, Mailchimp can buy email credits as needed. And still, pay as they go.
Getting your customers onboard
Any change is hard to adapt to. Your customers are going to show some resistance when you make the transition to usage-based billing. Mainly since they are used to accessing your service/product by paying a single flat fee.
But usage-based pricing is as beneficial to the customers as it is for you. If not more. Inform your customers of the benefits that they derive from the new pricing model. Further, give them access to their real-time usage via reports through portals.
Also Read: 8 Best Examples of SaaS Usage-Based Pricing Models
Effectively handling overages
While usage-based pricing has clear benefits for customers, some customers with high usage may see an increase in their prices. This can cause customer dissatisfaction.
Be transparent with your customers about upcoming changes in pricing and how they might affect them. Design overage policies keeping your customers in mind. Send alerts to customers when they reach certain usage thresholds— in-app and via email —so that they don’t exceed their allocated limits. Moreover, give them a grace period before they receive an overage bill. Or strategize ways for your customers to renew their contract ahead of time at a higher commitment level in return for forgiving the one-time overage usage.
Keeping your customers from churning
When there is no commitment to get started with a product, how can businesses ensure customers stay long enough to realize the product value offered? Companies need to build sticky experiences. When customers sign-up to try the free trial of the product, designing a great user experience with rapid time to value becomes crucial. Additionally, ensuring there is high-quality support available even to free users so, it doesn't hinder their adoption. These steps are critical on the path to monetization.
Also, when sales get involved, they need to adopt a customer-centric approach. Their aim should be to get new committed bookings. But their incentive shouldn't be based only on this component. Take Snowflake for example. Sales incentive is split between committed bookings and recognized consumption, which gets paid out as it’s earned.
Alleviating billing obstacles
Pricing and billing go hand in hand. While you are thinking so much about pricing, your customers' billing experience should be considered as something other than an afterthought. A good part of the customer experience is to collect user consumption data and then charge customers accordingly in a timely and transparent manner. When you are using two different systems, i.e., customer data is stored separately from the billing software, it can lead to discrepancies in billing.
If you are choosing a pricing infrastructure to help you implement UBP, understand what integrations they provide for billing.
Togai is a cloud metering and pricing infrastructure that offers ready-made integrations to help to bill your customers.
Takeaway
Consumption-based pricing may not be for everybody. However, when it fits your business, it can be quite a powerful component. So don't feel apprehensive about adopting UBP. The challenges discussed can be met and overcome with some thought and strategy.
