43. Is usage-based pricing the answer?
In this episode, we discuss usage-based pricing, seat pricing, maximising margin and customer expansion. We are joined by Mark Stiving, Founder of Impact Pricing.
We chat about:
What is usage-based pricing?
How to correlate pricing metrics with how customers are using the product
How to choose between true usage-based pricing and tiered usage-based pricing
Who should be responsible for pricing and packaging within the company
References
Mark’s podcast, Impact Pricing
Biography
Mark Stiving, Pricing Educator, Coach, Podcast Host & 2x Author. He has driven business initiatives worth hundreds of millions of dollars. He is sought after for his superpower of finding invincible profits in every company he works with.
He is an award-winning international speaker known for helping audiences find hidden value and more profit, immediately.
Mark started and successfully sold three powerful companies in the tech sector.
His forthcoming book is "Invincible Profits: How to Lead a Value Revolution and Dominate Your Market"
Summary
Usage-based pricing with a focus on personalization and avoiding seat-based pricing. 0:05
Bethany shares her recent haircut experience with Brandon, including the surprise of finding a large amount of hair after cutting it.
Speaker discusses usage-based pricing, highlighting its potential cleverness and limitations.
Pricing strategies for SaaS companies, including usage-based pricing and subscription packages. 4:02
Brandon: Value metric should be clear, easy to understand, and tie to usage (e.g., transcription files, contacts in HubSpot)
Speaker 1: Finding a single value metric to scale can be challenging, as customers may not understand usage outside of vendor-supplied calculators
Speaker 1 discusses challenges in customer success with usage-based pricing, including unhappy customers who want to downgrade and the potential for unused value.
Speaker 1 and Brandon discuss the importance of commissioning based on usage and actual money being seen, with a focus on driving the right behavior and predictability.
Speaker 1: Great product + late professionalization = risk (bankruptcy)
Speaker 1: Sales reps should focus on signing contracts, not just selling
Pricing metrics for SAS companies, focusing on value-based pricing and customer willingness. 11:53
Speaker discusses pricing metrics in SAS businesses, highlighting user base pricing as most common but not always best option.
Ideal pricing metric is outcome-based, charging customers a portion of incremental profit created, like credit cards or PayPal.
Speaker 3: Dropbox charges by amount of memory used, maintaining margins despite decreasing storage costs.
Speaker 3: Pricing metric should be highly correlated with value, accepted by customers, and measurable.
Pricing strategies for software companies, including usage-based pricing and tiered pricing. 17:38
Speaker 1: Pricing with customers often, despite seat-based pricing not being best way.
Speaker 3: Metering every feature from beginning helps understand market segments and value.
Speaker considers tiered vs direct usage-based pricing for software, weighing customer perspective and revenue impact.
Pricing strategies for software companies, including usage-based pricing and land-and-expand models. 21:41
Speaker 3 advises companies to focus on solving specific problems for specific market segments, rather than trying to be a platform for everything.
Speaker 3 suggests that even in straight usage models, there are good, better, best options, and the goal is to find the right SLA (service level agreement) for each customer.
Speaker 3 recommends considering good to better to best packaging for both subscription and non-subscription businesses.
Companies should monitor usage and drive usage to expand customer accounts, with compensation depending on the situation.
Pricing and packaging strategies for SaaS companies. 26:48
Speaker 3 argues that SAS companies should pay salespersons based on lifetime value of clients, rather than just initial sign-up.
Speaker 3 believes that commission structure should incentivize salespersons to win deals, rather than just maintain existing clients.
Speaker 3 emphasizes the importance of understanding value to customers in pricing and packaging decisions.
Consultants can be hired to run numbers and provide pricing recommendations, but it's important to consider the cost and potential impact on internal decision-making.
Speaker 3 recommends a usage-based pricing approach that prioritizes client comfort and transparency.
Buyers trade money for value, so it's essential to demonstrate the value of your product.