Pricing StrategyMar 16, 2023

6 Ways Consumption-Based Pricing Can Reduce Churn in a Downturn

In times of economic uncertainty, businesses must do all they can to remain competitive and retain their customers. Fortunately, six steps can help optimize your consumption pricing for retention during a downturn.

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When the economy is contracting, the pressure on businesses to cut costs can be massive – and for SaaS businesses, that means a high risk of churn. But retention is one of the most important success metrics for SaaS businesses, so the impact of that churn is even more challenging.

Different software businesses will experience a downturn – and the risk of churn – in different ways. But those with elements of consumption-based pricing, also called usage-based pricing or UBP, may fare better in terms of logo churn than businesses with traditional subscription pricing.

Why Do Consumption-Based Businesses Have Less Churn Risk During a Downturn?

During a recession – or when businesses fear that one is approaching – the cost cutting search commences, and software is no exception. But usage-based SaaS subscriptions generally face less scrutiny, and are therefore safer from attrition, during these times.

Why is this the case? 

  • The bill automatically scales down for consumption-based SaaS products. When the CEO or CFO goes looking for low-hanging fruit to cut costs, they can see if the UBP product is being used. If it is, it probably passes this initial threshold while the executive goes looking for software with unused licenses.
  • Because the bill automatically scales down, customers can also manage their cost by using less. If the SaaS product is attached to a part of their business or metric that is slowing down, then their bill will also decrease.
  • Customers feel reassured that they’re receiving value from the product because it’s driven by their own consumption, so they’re less likely to drop the software completely.
  • On the vendor side, using UBP gives the SaaS company more flexibility – they can use a variety of levers to personalize pricing as needed, helping them to save logo churn.

How to Reduce Churn Using Usage-Based Pricing

Some SaaS businesses may be wondering how to make better use of their current UBP strategy, or introduce new elements of UBP in the quest to reduce churn. Here are six ideas from m3ter and SaaS pricing expert Todd Gardner: 

1) Offer Discounts or Trade Commitments

One way to proactively discourage churn is by offering discounts or trading commitments for discounts (i.e. a discount of X% in exchange for a longer-term contract). Offering discounts to boost retention is not specifically a UBP strategy. But with usage-based products, you actually have access to the customer’s usage patterns, allowing you to properly time those conversations and initiate them when they’ll be most impactful. 

2) Inject the Value of UBP Into Messaging and Conversations

Companies can also talk up the value-add of UBP in conversations to remind customers of the benefits or win new prospects during a recession, whether they’ve historically been using the pricing model or want to introduce it now. For example, “We want to ensure you’re receiving value, which is why we match your usage to your price,” or “You can scale down your usage as needed without having to cancel.” 

Slack’s “fair billing policy” is a great illustration of this, as they don’t charge for inactive users. In other words, if you set up your entire company of 100 people with Slack accounts but only 80 of your employees are using it, you won’t be charged for the extra 20. Slack uses this fact in their messaging to increase goodwill from customers. 

3) Proactively Downsell

If you recognize that a certain customer’s usage isn’t hitting the levels you’d expect for companies of their size or use case, you could step in and proactively downsell (particularly if you have hybrid pricing and could offer them a downgrade on their subscription tier). This can serve as a backstop to prevent logo churn for subscription customers who are intending to cancel. It’s also a great way to put customers first, improve their experience, and boost loyalty. They’ll remember what you did when the time comes to increase spend in the future.

4) Update Credit Systems and Rollovers

In traditional subscription pricing, you pay for your package regardless of whether you use it or not. But some pricing models – like Snowflake – sell credits that can roll over to the next period if the customer doesn’t use them. Some non-software examples of this would be mobile phone minutes and airline miles (particularly during the pandemic when, due to travel restrictions, many airlines rolled customers’ miles over to the next year).

If the credits you sell normally expire within six months, you could push that deadline out to a year. Giving customers more wiggle room during a time of hardship might make them more willing to continue the relationship.

5) Add Elements of UBP When Introducing Price Increases

Looking at the market, there are many software companies who have already raised prices in recent months or are planning to do so this year. Consumption-based elements can reduce the churn risk associated with those price increases. 

One way to combat this would be a hybrid model: keeping headline prices the same, but introducing a usage allowance. That way, the heavy users who exceed those allowances – and who are clearly getting value from the product already – are the ones to pay extra. 

6) Understand the Cause of Churn and Which Levers Can Be Used

Finally, you can use UBP to better understand the causes of churn with your product and which tactics can be used to fix the issues – or when it’s time to let go. As mentioned previously, UBP gives companies more direct insight into the usage of each customer. This can enable better timing of conversations, more relevant offers, etc. 

But it can also show you what won’t work. If a company is just not using the product, then a perfectly timed discount offer is not going to help. In these cases, you can try other levers, but it might be a situation where attrition is inevitable.

Is an Economic Downturn the Right Time to Introduce Consumption-Based Pricing?

Making big changes to your pricing model during an economic downturn might seem like a terrible idea. Maybe you already had to raise prices, or your customers are aggressively cutting costs, or you worry it would be confusing. 

All of these points are valid, and we’re not advocating a one-size-fits-all for one pricing model over another. Whether UBP is right for your business or not is product-driven; it still has to make sense for your software or introducing it won’t help you avoid churn in a slump. The model has to fit. However, the downturn could be a catalyst to start using elements of UBP.

With the added complexity that a time of economic hardship brings, UBP elements can introduce some much-needed flexibility. It can be a mechanism that allows customers to pay less if they use less, thereby aligning costs with value – and making the budget item easier to defend.

Like many other SaaS businesses, you might end up with a hybrid pricing model (elements of both traditional and usage-based pricing) or even a mix of models among different customers (some on UBP, some on subscription). Finding what works for your business and your product is what’s most important.

If you are experimenting with deploying UBP elements, you will require new operational and go-to-market capabilities. m3ter’s pricing infrastructure and analytics solutions power any variation of UBP and plugs into your existing stack, so you can price and sell better no matter the economic situation. Explore m3ter here.

For more on usage-based pricing and its impact on metrics like churn and NRR during a downturn, be sure to read SaaS expert Todd Gardner’s guest posts on the m3ter blog:

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