Pricing StrategyJan 31, 2022
Deploying usage-based pricing requires new operational and GTM capabilities. We review four of the key challenges, and discuss how they all share an underpinning - usage and spend data.
Usage-based pricing (UBP) is nothing new; it’s the standard way of pricing in verticals like utilities, telecommunications, and logistics.
But what is new is its application to B2B software, and it’s worth discussing the implications of usage-based pricing for operational and Go-To-Market (GTM) capabilities.
There are a host of new requirements, but there’s one thing they all have in common - usage data. Capturing it in the right way, and making it available to various systems around the business, is the foundation for essentially all of the new capabilities companies need when they move to UBP.
Let’s dive into four operational and GTM areas affected by usage-based pricing, and explore how data can power great performance.
Accurately invoicing your customers can be a challenge with UBP, particularly if you have sales-led motions that result in bespoke deals for a significant proportion of customers. You need to bring usage data (sourced from your core SaaS platform) together with account details and commercial terms (which will sit in your Sales CRM, your CPQ, your billing system, your finance system, or some combination of these) to calculate bill amounts before passing these to your billing system.
It’s not uncommon for even large organisations to have manual spreadsheet-based systems to achieve this, which is incredibly painful. It’s time-consuming, error prone, doesn’t scale, and struggles with complexity or change.
You should automate this process. Your finance team will certainly thank you, because it will free them of unpleasant heavy lifting and allow them to complete invoicing in hours rather than days. But so will your Sales and Success teams, because it will eliminate the errors that undermine customer trust, and increase pricing agility by making it easier to design bespoke deals and iterate to find your best pricing.
With traditional licensed software or subscription models, there is a separation between buying and using. Someone buys the software and negotiates renewals, and they care about cost. Someone else then uses the software, and they don’t.
This changes radically in UBP. Pricing becomes part of the product - customers need to understand their usage and how it is converting to spend.
At minimum this requires transparency and trust. You can’t just send an invoice with a single line item - you need to provide granular information about usage and show how that translates to cost, and the customer needs to be confident it’s accurate. As one commercial leader told OpenView Venture Partners for their Usage-Based Pricing Playbook, “I’ve been at three companies where billing is one of the biggest negatives in the customer experience. There’s so many complexities around it. At the end of the day, customers need to be able to trust their bill.”
But communicating via one invoice a month is not sufficient. Customers want information on demand - for example, they want to know the running total of their bill part way through the month, and to have a forecast of what it might be at month end. That information needs to be at the fingertips of your Customer Success and Support staff, and ideally you should also provide a billing dashboard as part of your product that allows the customer to self-serve.
Following from the above, customer-facing staff need usage data so they can respond elegantly to inbound billing enquiries - without it they appear ill-informed. But another powerful reason is helping them target their efforts to deliver better revenue growth.
There is a strong link between usage-based pricing and PLG (Product-Led Growth), but most B2B SaaS providers still have strong Sales or Success-led motions. These focus on identifying high potential customers and proactively reaching out to them to encourage further adoption, upsell them, or secure commitments.
This is partly about good account planning, where an intimate knowledge of a customer’s usage and billing history underpins focused effort and high value-add conversations.
But it’s also about responding to usage signals and being proactive in the moment. Consider a customer who’s approaching a threshold where overages will apply, or a limit above which their usage might be throttled, or who is experiencing a spike in usage that will lead to a significantly increased bill. This should be an opportunity - if Sales or Success initiate a conversation in a timely fashion, they can upsell or secure commitments, and at minimum increase customer trust. But if they are passive, this can result in a nasty shock to the customer which could trigger reappraisal, reduced usage, or even churn.
In the past, selling software was about shifting units and securing one-off fees. With the move to SaaS, it became about how many customers you had and how much they were paying.
With UBP, it’s not just how many customers and their spend, but also how much they’re actually using and what implications that has for profitability and future growth. It has demanding requirements for customer- and usage-oriented reporting. You need visibility of:
Identifying poor gross margin performance on a timely basis is important, because you can then trigger mitigations. These mostly relate to pricing - adapting public pricing to target particular segments, or (more commonly) putting in place bespoke commercial terms that encourage different behaviours.
The four operational and GTM challenges discussed above – along with others such as revenue predictability, pricing design, and sales compensation planning – are all major considerations for usage-based businesses.
Data is the thread that connects them all.
Data infrastructure is a foundational capability needed by all businesses with a usage-based pricing strategy. Without an effective way to meter, rate, and use data across all operations (in near real time), companies with a consumption-based model cannot compete at their best and might actually harm customer relationships.
To find out more about m3ter’s solution, visit our product page.