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How The Pay-Per-Feature Model Could Impact Software Companies

8 Mins Read
Abhishek Rajagopal
Published On : 12/12/2023

This article was originally published on Forbes Council.

A client from a Fortune 500 company recently shared that they were facing a common challenge with SaaS pricing structures when evaluating a communication bot: A specific feature was locked behind a higher-tiered plan. Since this was an all-or-nothing option, they felt forced to consider other vendors.

Usually, SaaS pricing works like this: Bundle a bunch of features and group them into different pricing tiers. But this client's concerns got us thinking: Why isn’t pay-per-feature more of a thing? This is a lesser-spoken-about topic, but can unlock revenue opportunities for tech companies.

Many companies are struggling and are focused on bringing in new revenue; the world’s successful companies are creating 80% of the value from their core business. How? By unlocking new streams of revenue from their existing customers.

So, let's look at two key ways the pay-per-feature approach can drive revenue growth as well as what companies should know before implementing this model.

1. Tailored Customer Experience For A Wider Audience

The pay-per-feature model speaks directly to the heart of modern consumerism: personalization. Users are often faced with the dilemma of needing just one more crucial feature that's locked away in a higher pricing tier—a tier that's out of budget and packed with unnecessary extras. It's like needing just a teaspoon of sugar but having to buy an entire pound.

By allowing customers to handpick their features, companies can attract and retain a segment of the market that's often overlooked: the mid-tier users who are willing to pay more than the basic price but can't justify the leap to premium. This flexibility not only captures additional market share but can also nurture customer loyalty by showing a willingness to accommodate diverse needs.

2. Incremental Upgrades Encourage Spending

A common barrier to upselling is the stark divide between pricing tiers. When users are forced to take an all-or-nothing approach, they're more likely to choose nothing. When given the option to incrementally add features, however, they're enticed to spend on what they value most.

Not just this, companies that use product-led growth (PLG) see a 75% growth. PLG helps users try, buy and scale their usage without a sales team. In fact, companies with a PLG focus are three times more likely to gain market share than companies that don’t have this focus.

Feature-led growth is like product-led growth, where people try out specific features in your product and upgrade as they scale. This à la carte approach can not only increase average revenue per user (ARPU) but also introduce a gentle gradient of spending, encouraging users to gradually increase their investment as they grow more comfortable with the service and discover the benefits of additional features.

A great example of this is gaming companies, who have been using this feature for a long time now. "Fortnite," for example, offers a free-to-play base model with the option for players to purchase cosmetic items, battle passes and other features. This model has led to significant revenue growth for game developers, with "Fortnite" reportedly earning immense profits from these transactions.

Also Read: Top 5 Must-have Features Your CPaaS Billing Tool Needs in 2024

Challenges With Pay-Per-Feature Pricing

While there's certainly quite a bit of upside to this model, companies looking to adopt a pay-per-feature pricing structure should be aware of a few key challenges.

1. Complexity In Billing Systems

The diverse combination of features chosen by different customers adds complexity to billing systems. Companies may need to upgrade to more dynamic billing solutions that can handle varied pricing models. This might involve investing in new technologies or modifying existing systems to ensure accurate and flexible billing.

2. Balancing Feature Value With Pricing

Setting the right price for each feature is crucial. It must reflect the value it offers and remain attractive to customers. Conduct market research and customer feedback sessions to gauge the perceived value of features. Use this data to inform pricing strategies, ensuring they align with customer expectations and market standards.

3. Risk Of Fragmented User Experience

A potential downside is a fragmented experience for users who may not opt for certain beneficial features due to cost concerns. Businesses with this model will need to improve customer awareness through education about the benefits of different features. Offering trial periods or bundling complementary features at a discount can also encourage wider adoption.

4. Technical Infrastructure Requirements

Implementing this model demands robust infrastructure to manage feature access and usage. You'll need to evaluate and enhance technological capabilities to support this flexible model. Ensure the platform can integrate various features and manage user access changes effectively.

5. Suitability For Business Models

Not all products or services are suitable for a pay-per-feature approach. Assess whether this model aligns with the company's products, customer base and market position. This strategic evaluation is crucial to determine the model's appropriateness for the business.

The Road Ahead

For businesses, the pay-per-feature model can open up new revenue streams. It can enable them to tap into segments of the market that were previously unreachable with traditional pricing models. By offering a more granular approach to feature access, companies can attract a wider range of customers, from those seeking basic functionalities to those requiring advanced features.

The pay-per-feature model has the potential to revolutionize how tech companies generate revenue based on how users interact with services. It's time for companies to break free from the tiered pricing mindset that has long dominated SaaS and tech industries. By leveraging the right tools and strategies, they can offer a new level of customization, driving revenue growth and creating a user experience that feels tailor-made for each customer.

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