Implementing Usage-Based Pricing? These Four Considerations Are Key

Usage-based pricing, also known as consumption-based pricing, is intuitively appealing for many in the B2B SaaS space. Without it, everyday life would likely grind to a halt. People pay for gas as they use it, for example; buying gas gift cards is an exception, but even then, card value is likely tied to how much gas the recipient plans to use. If everyone with a car had to pay on New Year’s Day for all the gas they might consume over the course of the next year, most drivers would probably stop driving.

While usage-based pricing offers great ease-of-use for customers, there are major behind-the-scenes challenges. Supporting usage-based pricing in SaaS can be a major lift across finance, sales, customer success, product, and engineering departments. And mishandling the way customers feel about usage-based pricing can result in lost revenue (at best) or lost relationships with long-time customers (at worst).

Tying pricing to usage will always have some inherent complexity and communication challenges, but setting it up in the right way can mitigate most challenges. You can bolster lead generation, grow consumer loyalty, and build natural opportunities for land-and-expand motions, but only if the operational and logistical burdens of implementing this new pricing model don’t waste money, time, and effort.

To that end, here are four essential aspects of usage-based billing and pricing to consider as you prepare for implementation.

1. Make Sure Your Pricing Aligns to the Product Value

Given that usage-based pricing is quickly gaining popularity for B2B SaaS right now, RevOps teams may find themselves facing strong stakeholder and customer pressure to migrate to a consumption-based pricing model. If your product doesn’t seem like a great fit for this model, it probably isn’t, and either the company or the customer will end up short-changed by the transition.

Your product should only tie pricing to consumption if that product:

• Requires frequent use. Products that see only sporadic use will likely generate much lower revenue when tied to usage - for example, financial and accounting applications that are often used periodically for tasks like closing the books or preparing financial reports.
• Have stable pricing for the foreseeable future. Once customers have acclimated to usage-based pricing, attempts to raise the cost will be met with frustration.
• Enable clearly-understood units of consumption. Customers need to know exactly how usage is measured. Given the complex workings of many B2B SaaS products, this may require usage to be abstracted into “credits.” If there is little transparency into what a “credit” is, expect tension when customers find they have run out of them. This is especially critical when implementing the popular credit burndown model, since customers buy a specific number of credits up front.

2. Recognize Usage-Based Pricing Is More Than a Billing Challenge

Pricing based on usage requires a new approach to billing, but that doesn’t mean it’s just a billing problem. Many companies view new billing software as the key to implementation, but just focusing on billing leaves other teams in silos to tackle the newfound importance of usage, giving rise to major inefficiencies. The only way to make this transition gracefully is to recognize it as a company-wide challenge and treat it as one, rather than a simple push for usage-based billing.

Customers and staff alike suffer when many teams are expected to adjust to usage-based pricing without support, including:

• Sales: Usage-based pricing often involves variable consumption costs based on the amount of usage, which complicates the process of producing quotes, and makes explaining the model to customers challenging. This is compounded by how difficult it often is to view historical usage data.
• Finance: Providing accurate invoices for customers demands detailed usage tracking, which is time-consuming and effort-intensive. The difficulty of predicting the final bill based on usage hinders efforts to forecast revenue and stay on top of revenue recognition.
• Product and Engineering: Engineering teams face two major challenges. The first is building systems that can accurately track usage, and the second is integrating those systems with Sales tools to quote and Finance tools to bill.
• Customer Success/Post Sales: Customer Success and Post Sales teams often cannot see product consumption to date, as that data sits within the product itself or has been processed as a hand off between the product and Finance for billing purposes. This makes it harder to manage customer relationships and decreases the chance of ensuring renewals or finding upsell opportunities.

3. Prioritize Real-Time Usage Rating Data

Usage-based pricing thrives or fails based on the transparency it offers customers. This is more than just telling customers how many credits or units they are consuming — it’s how much they’re paying. That’s why the rating process needs to happen daily or even hourly.

There are three critical benefits to rating as customers use a product, rather than retroactively (such as at the end of every month):

1. Customers can track their costs at any time, so they will not be surprised by an unexpectedly high charge at the end of the billing period.
2. Both the provider and the customer can better predict the cost of usage, enabling more accurate planning.
3. Billing becomes straightforward for finance teams, as the pre-rated usage data can be quickly converted into an invoice.

In addition to real-time rating, effective usage monitoring requires the entire company has consistent and comprehensive analytics access. Each team has different metrics it needs to review to ensure customers are engaging with a product as intended. For example, Customer Success teams need to know usage breakdown by component, so they can check in with customers about any components that see declining use.

4. Mitigate Risk by Integrating Hybrid Pricing Models

Even if it is implemented in ways that follow all of the suggestions above, transitioning a company away from a traditional model in favor of usage is often a huge gamble. If customers are not receptive to the alteration, usage-based pricing can severely hinder company growth.

Likely as a consequence, many companies are now integrating usage into pre-existing pricing models. This so-called hybrid pricing model typically leverages consumption to provide an attractive on-ramp, but requires a greater commitment once customers reach certain usage levels (see below for a representative model from DocuSign). There are many ways to do a hybrid model: For example, Slack famously provides prorated usage-based refunds as part of more traditional plans.

(Credit: DocuSign)

Hybrid models also provide more levers to incentivize customers, with greater chances for discounting or other adjustments to meet specific needs. Therefore, orchestrating a hybrid model requires a tech stack with a robust and flexible quoting tool (“CPQ”), as customization is otherwise prohibitively time-consuming at scale.

As you can see, usage-based pricing requires flexible technology that supports agile and flexible price adjustments while allowing many teams to collaborate effectively. Explore how products like Nue's Usage Accelerator align all teams across sales, product, and finance, and make usage- and hybrid-based pricing possible.