How to Handle Customer Objections to Usage-Based Pricing

Author: m3ter | Date: Jun 14, 2022 | #Sales
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Whether you’re an existing business making a change in pricing or a new company deciding on which pricing model to use, you’re likely facing one key question: how are the customers going to take it?

Will they find the pricing model fair? Will they buy (or continue to buy)? Or will you face massive objections that your sales team can’t talk its way out of?

These questions are valid, and many businesses implementing a usage-based pricing (UBP) model worry about customer objections and how to overcome them. But the good news is that the core value proposition for UBP is compelling. If you pay for only what you consume, you don’t waste money on unused capacity, and the overall costs will be lower in the long term in both upside and downside scenarios.

Knowing this, companies just need to be prepared for the types of objections they’ll encounter and have strategies ready to overcome them.

Types of customer objections to usage-based pricing

Even with such a solid value proposition, UBP can still be a challenging concept to some buyers, with objections typically breaking down into two broad categories:

  1. Control and predictability – UBP is more uncertain than other pricing models. That can feel challenging for some buyers, particularly where cost overruns would generate uncomfortable scrutiny.

  2. Incompatibility with organizational models and budgeting approaches – Some customers are not properly set up to buy on a UBP basis. 

There are mitigations you can use to respond to both categories of objections. Let’s talk through some of them.

Objection 1: Control and predictability

Other models of pricing offer quite a lot of certainty around what costs will be. For example:

  • With licensed software, you know the upfront cost of the license and hardware, and also the ongoing labor cost to manage and maintain the capability

  • With subscription models, you establish what functionality and/or capacity you require, and commit to a recurring subscription fee that delivers it

The core appeal of UBP is that cost flexes with usage, so you can pay a lot less than you would with other models. But you are also on a “meter”, meaning you don’t know with confidence what your bill will be – and that is challenging for some customers.

Here are some ways to mitigate these objections:

Mitigation 1: Make your pricing simple. 

If your pricing is complex and has lots of usage categories driving different fees, it becomes opaque. Customers will have difficulty working out what the cost would be in given circumstances. If it’s simple, with only one (or a few) pricing metrics, it’s much easier to predict, giving customers some semblance of control so they can do scenario analysis with confidence.  

Linking the cost of your service to successful outcomes for the customer (e.g. payment providers charging on a per-transaction basis) helps them stop worrying about getting a big bill. In fact, a big bill would be the consequence of success, and actively a good thing! Essentially, the costs of your service have become COGS – not only are they predictable, they are no longer something that needs to be contained. 

Mitigation 3: Be transparent. 

If you only told your customers how much they were using (and therefore spending) once per month at bill time, they would open that bill with some trepidation and would worry through the month about getting a nasty surprise. So, provide them with that information at any time. Put them in control by letting them know how much they are using (and spending) on a daily basis. 

Mitigation 4: Be proactive to earn trust. 

Even if you’re providing that daily information about usage and spend, you can’t be sure your customers are looking at or absorbing it. So, you should monitor it on their behalf, and your Sales or Success teams should reach out to them if it’s spiking upwards or is approaching a threshold above which new charges will be generated. Explaining to the customer that your teams are set up to do this – and they can trust you to – will help assuage their concerns.

Mitigation 5: Give customers certainty.

Even if you do all the above, many customers will still want more certainty. So give it to them! If they’re prepared to commit to a minimum level of spend, you can offer them significant discounts – these will make it unlikely that they’ll spend more than this level, or if they do, the costs will not run away quickly. 

Objection 2: Incompatibility with organizational models and budgeting approaches

The second type of objection is more around how the customer’s business is actually set up and how to support them so that UBP is compatible with their organization.

Capex vs. Opex

This objection is particularly applicable when the customer is moving from traditional licensed software models to UBP. In their current setup, software is largely capital expenditure (capex), with some operational costs for management and maintenance. In a UBP world, the spend is all operational expenditure (opex). 

In these cases, customers may have budget in the wrong places – perhaps too much in capex and not enough in opex. They may also worry (with reason) about UBP impacting short-term profitability. These are genuine obstacles to adoption, but your response should be to emphasize the greater efficiencies of UBP and that it is the lowest cost option over the long term.  

Roles 

If a customer is accustomed to buying licensed software or traditional subscription-based SaaS, they are likely to have a strong “Procurement” mindset – and probably also an influential Procurement team. 

The role of this team is to forecast need and negotiate terms that deliver low costs. UBP approaches undermine the role of Procurement, because the end user has more control over consumption and there is less requirement to forecast capacity requirements. But they can still have gatekeeper status and put a brake on adoption. 

One mitigation for any concerns here is to create a role for Procurement – and thereby secure their endorsement – by negotiating custom deal terms. For example, this could involve additional discounts in return for commitments to a greater level of spend (as discussed above).

Shifting customer focus to the positives of UBP

Introducing UBP can generate huge upsides for businesses. It helps control margins more effectively, garners more spend from heavy-usage customers – which in turn attracts new customers because there’s less adoption friction. And while reasonable customer concerns often stand in the way, the right techniques for handling them can help a) address them and b) ensure successful implementation. 

About m3ter

As you weigh up UBP and equip yourself to deal with customer objections, consider trying m3ter to help you deploy and manage usage-based pricing. Learn more at products or contact us.

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