Thoughts on Usage-Based Pricing

I recently spoke on a panel about usage-based pricing (UBP). Here are my main three takeaways:

1) UBP is on the rise, but there is a general lack of understanding about how to operationalize and execute it.

• When collecting payments, you must decide whether to do so upfront or in arrears. This decision has a significant impact on your company's reporting mechanics and revenue recognition. It will also guide the rest of the process.
• If collecting upfront, you must have a way to provide an estimate of usage, set a limit, and handle scenarios when customers under-/over-utilize. This often involves credits and/or overages.
• If collecting in arrears, you must understand the mechanics of payment collection and provide customers with good visibility into their usage. Otherwise, they may be surprised by a large bill at the end of the month.

2) Selecting the right metric is hard, but there are some best practices.

• A good metric should be:

Aligned with value

Easy to understand

Easy to track/audit

Not impede usage

• A great metric should be:

Aligned with value and tied to outcomes

Easy to understand and help communicate product value

Easy to track/audit and highly accurate and predictable

Not impede usage and actively encourage it

3) UBP is rarely used on its own.

• Most companies that adopt it have a combination of variable and fixed pricing metrics, especially when selling to larger companies that require more structured and predictable pricing for their budgets.
• This flexibility is beneficial for customers and can lead to higher conversion rates.
• However, it is important to create a structure around when, what pricing is offered, and what the conditions are that benefit your business.
• For example, you may offer variable pricing for small accounts in the acquisition channels, but leverage fixed pricing for sales-led businesses to create better customer commitments and higher retention rates.

In conclusion, UBP is not a silver bullet, but can be a great way to supercharge your pricing if approached correctly. Either way, its exciting to see so many people talking about new and innovative pricing models. Love it! But what are your thoughts? Have you tried UBP? Do you plan to? If so, I’d love to hear about it!

#pricing #pricingstrategy #monetization #usagebasedpricing #plg #priceoptimization