Technology

The art and science of SaaS pricing: True usage-based pricing

In part 2 of this collection, we explored scalable unit-based pricing and highlighted a number of of the frequent pitfalls and classes the business has realized. On this ultimate article, we’ll delve deeper into the last word alignment with buyer worth: true usage-based pricing.

No matter how superior you get with the selection of your unit, the pricing essentially nonetheless boils right down to a flat (inside the unit limits) subscription payment — except you go all the way in which to true usage-based “transaction pricing.” With transaction pricing, you merely defines a price per unit after which assess and bill month-to-month in arrears primarily based on precise utilization. In B2B SaaS, usage-based pricing is extra the exception than the rule and is normally employed together with a subscription, such that the usage-based income sometimes makes up solely 25-50% of complete recurring software program income.

Utilization-based pricing might be extremely highly effective, notably in instances the place the SaaS answer handles the circulate of cash, and the transaction charges might be imbedded — or generally buried — within the circulate of cash. Examples are clearly B2B funds for items and providers, both on the purchase aspect (e.g. expense administration, purchase-to-pay, provide chain finance, freight audit and cost) or the promote aspect (e.g. ecommerce platforms and different options that contact income and AR).

In such instances the SaaS utilization charges might be extracted from (income) or tagged onto (bills) the enterprise’ circulate of cash and are thus usually seen as “value of doing enterprise,” as a part of COGS. And that may be extremely profitable for the SaaS vendor and normally permits a far larger share of worth than a easy subscription ever would.

Subscriptions are seen as OpEx spend, an IT finances line merchandise that receives preliminary and infrequently annual scrutiny, notably as the answer’s worth proposition over time involves be seen as establishment. I’ve personally witnessed instances the place massive enterprise clients balked at a six-figure annual subscription however fortunately allowed a really wholesome seven-figure utilization payment to be embedded within the funds circulate. As OpEx it was a show-stopper. In COGS it was a rounding error.

However earlier than you get overly excited, there’s a delicate underbelly of usage-based pricing. In truth, I might advocate that almost all of B2B SaaS corporations steer nicely away from usage-based pricing except they do deal with the circulate of cash and might “tag-on” their charges. As a standalone payment, invoiced month-to-month in arrears and picked up straight from the SaaS buyer, it’s problematic and, typically, not well worth the headache. Right here is why:

  • It’s tough to foretell for each the client (finances) and the SaaS vendor (income) and triggers a variety of pushback from IT patrons to “please flatten it right into a subscription.”
  • It causes money circulate delays as you may solely bill month-to-month in arrears. You possibly can experiment with asking for some pre-pays to easy cashflow, however typically that’s a non-starter.
  • It sometimes causes a income delay as utilization does scale up slowly with rollout and adoption, delaying income significantly in comparison with a subscription.
  • Typically that rollout turns into a complete second, multi-year gross sales cycle. First your gross sales group sells the client on shopping for and deploying. Then your buyer success group sells the customers and buying and selling companions (consider a P2P answer) on really utilizing it. Solely then and steadily do you understand income and money.
  • In lots of instances this mannequin represents the worst of each worlds: Clients just like the usage-based mannequin whereas their use remains to be small and ramping up, making you anticipate income whereas they’ve little pores and skin within the sport. However as soon as the answer catches on and quantity actually grows, they are going to push you very exhausting towards an all-in “enterprise deal” that’s huge however a flat subscription, depriving you of the upside.
  • You’ll need a way more strong billing infrastructure to provide but in addition defend your invoices. I keep in mind all too nicely the frequent requests from F&A, triggered by buyer disputes, asking the R&D group to take their eyes off the innovation ball to provide extra detailed “billing experiences” to defend usage-based invoices.
  • Seasonality and financial cycles drive variability and might precipitously shrink income month over month and, should you concentrate on sure verticals, induce a nasty seasonality in your individual income (e.g. retail).
  • And final, however in no way least: Incentive buildings could be a actual wrestle round usage-based pricing. Do you wish to pay gross sales commissions on signature or go-live on the anticipated quantity however earlier than any income? Or wait till quantity transpires after rollout, probably months and even years later? How lengthy are your account executives keen to attend? What in the event that they depart — otherwise you wish to terminate one? What should you discover they spend all their time shepherding the rollout (and their fee) of that giant deal they bought final yr reasonably than promoting the subsequent? I’ve seen a variety of totally different fashions round this, attempting to strike the perfect steadiness and being truthful to all events. None of them was good, and all of them had been advanced and dangerous.

As you may see, there are vital obstacles to usage-based pricing fashions for B2B SaaS corporations. When it suits, it’s highly effective. However don’t pressure it the place it doesn’t belong.

In abstract, the appropriate pricing technique for B2B SaaS corporations is extremely vital — and too usually neglected or poorly designed. Totally perceive your numerous buyer segments and the way they ascribe worth to your providing. Discover a scaling unit most intently aligned to that worth and use it to ascertain a tiered subscription mannequin that also is simple sufficient to manage. And with an affordable quantity of effort and a focus to it, it’s best to get pleasure from vital constructive influence on annual contract worth, development, and retention.

Andy Stinnes is Enterprise Accomplice at Cloud Apps Capital Partners.

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