TL;DR
- You're caught in the subscription economy problems, where the debate over the fairness and simplicity of seat-based versus consumption-based pricing intensifies.
- Realize the inherent issues with seat-based pricing, which often fails to reflect the true value customers derive from software, leading to potential dissatisfaction.
- See how the shift towards consumption-based models promises a fairer, more transparent approach to pricing, potentially increasing customer satisfaction and loyalty.
- Grasp the significance of customer loyalty in the subscription economy, where the ease of switching services amplifies the need for fair pricing models.
- Understand the role of modern pricing platforms like Togai in enabling SaaS companies to adopt flexible, usage-based pricing with minimal hassle.
- Learn how adopting modern pricing strategies can help navigate the looming recession and hiring freeze by aligning pricing more closely with customer usage patterns.
The subscription economy has become synonymous with seat-based pricing over the last few years. There is this internet quote - “If you're not paying for the product, you are the product!”. This in a nutshell is what the subscription economy is all about.
Just imagine if you had to pay for your groceries like this -
In the physical world, you know the value you are getting with each product that you purchase. There is an inherent tangibility to the concept of pricing because people know ‘what they see is what they get’. This, however, does not exist in the software industry. Software is an intangible product and this abstraction causes a lot of confusion in the way value is measured and thereby how pricing is done.
Software Pricing Today
You can check out our previous blog post on how SaaS pricing evolved in the software industry. This post gives valuable insights into the history of pricing across software and how it changed with the evolution of cloud computing and the birth of SaaS.
If you look at pricing from a first principle standpoint, all pricing is consumption-based pricing. What changes is only the item of consumption based on which the pricing is done? If you take an Uber, you pay for the distance travelled and the type of vehicle you travel in. If you buy a Netflix subscription, you are instead paying for the time of consumption, which can be a month or a year.
When you pay for time rather than other items, what you are essentially paying for is your attention and hence the quote “If you're not paying for the product, you are the product!”. Here, it goes one step further. At least, companies like Google and Facebook ensure that you do not pay and in many cases, you get paid for your attention. But subscription SaaS hits completely differently - you are essentially paying to give your attention - how bad is that?
We looked at the problem from the buyer's side. What about the seller? The software creator says that doing subscriptions based on time hides behind the statement that ‘my pricing is simple and predictable’ when they end up pricing based on per seat per month/year. While predictability is important, it does not trump simplicity or fairness in pricing for the end customer. We had written about the principles of SaaS pricing in an earlier post where we talked about how it’s important to be fair to the customer and that your pricing needs to be simple.
Also Read: 6 Core Principles for SaaS Pricing
By focusing too much on predictable cash flows to cater to stakeholders who look for benchmarks as opposed to ending customers’ value, you run the risk of losing them over time. Churn rate in SaaS is one of the most important metrics to be tracked to ensure that your customers do not leave you. The subscription model that prices for time (seat per month/year) are uni-dimensional and does not consider the value perceived by the customer. This pricing model also creates an incentive structure for sales teams to push annual seat-based contracts without understanding the value proposition for the customer. Unless, the value provided is strictly a time-based factor, which is rarely the case, it is unlikely that the customer’s value can be pigeonholed into a singular metric that is time.
It is important to understand that the value proposition for different customers can be different and that the same customer can perceive value differently over some time. Besides, your product also undergoes continuous evolution.
The Subscription Economy Index
In the past, the subscription-based economy has been touted as a win-win for both customers and companies, as it provides customers with convenient and affordable access to products and services while providing companies with a steady stream of revenue. However, in today’s market, the subscription-based economy is bound to harm customer loyalty. If a customer finds a better deal or a more suitable solution elsewhere, they will switch to that product. The other challenge today, especially in B2B SaaS, is that there is a recession looming, and multiple companies are putting a hiring freeze. This means that the ‘land and expand’ motion of companies that follow this pricing model cannot cross the chasm from land to expand. They cannot expand their revenue from existing customers and are at high risk of losing them if their pricing models do not reflect the customers’ underlying consumption patterns. By tweaking their pricing models to support components that are not just time-based, SaaS companies can solve both churn and revenue expansion, if implemented correctly.
Another challenge with a seat-based pricing model is the friction for a new customer to get started with using your product. By asking the customer to make a purchase decision upfront or with a minimal amount of usage, it’s extremely difficult for a customer to evaluate the product as she is still getting used to it and trying to understand its value. We had mentioned in Togai’s vision post that it takes a user time to start extracting value from a SaaS product but it’s not fair to expect them to pay upfront for using it. By making pricing inelastic, you are causing more friction and not less, as you might have intended to do originally.
If you are trying a consumption-based pricing model rather than a seat-based one, barriers to adoption become minimal. You are ensuring that customers start receiving value upfront before they make the purchase decision. A pure pay-as-you-go provides a clean elastic curve for pricing vs. usage and ensures that the interests between the customer and you are always aligned. This also helps you with a costless revenue expansion motion as your customer increases their usage of your product. Through this alignment of interests, you also increase your customer satisfaction and reduce churn by increasing loyalty.
To quote some numbers from Openview’s State of Usage-based pricing report, hybrid pricing models are the future of SaaS pricing. Over 60% of SaaS companies are actively using usage-based pricing strategies and as pricing gets more complex, that requires a more modern growth tech stack that is capable of handling any type of monetization model that is fit for your business. At Togai, we are a purpose-built metering and pricing platform that is capable of handling any pricing scenario without engineering effort at your end. If you are interested in moving away from traditional seat-based pricing to more modern pricing models, please reach out to us here.
