If you’re thinking about a usage-based pricing model, one of the very first questions you should be asking is, “what am I going to charge my customers for using?” And while the list of things you could be charging for is endless, we’ll take a look at some of the more popular usage-based metrics that other SaaS-based companies are using.
Additionally, while this article aims to provide you with some ideas to get your started, there’s a number of other questions you should be asking to help guide you towards selecting the best usage-based metric for you and your customers. So before we share our short-list of usage-based metrics, let’s start by unpacking additional questions and considerations.
Answer These Three Questions Before Selecting a Usage-Based Metric
1. Does usage align to delivered value?
Arguably the most important question you need to answer when deciding which usage metric to choose is “what usage metric or metrics are tied most closely to customer value?”
It’s likely that a number of your features or services drive usage; however, usage doesn’t always equate to value for your customers. For example, email marketing systems are built to allow customers to send emails. And plenty of emails get sent from these systems. But if the customer can’t show that the emails they are sending are leading to the outcomes they care about like more customers or more revenue, for example, then they can press send until their finger turns red but because it isn’t delivering value, usage-based pricing likely won’t work.
Instead, work closely with your customers to understand what outcomes they care about. Then identify the features in your software that generate those outcomes and value and use this as a starting point for which usage metrics to choose.
2. Can you easily track the usage metric?
Before selecting a usage-based metric, make sure you can easily and reliably track the usage of the feature, functionality, or product you are considering. This may seem obvious, but oftentimes in software development, the priority of the engineering and product teams is on building the new feature until it works as intended for the customer but neglecting building internal systems that keep track of usage. It would be like a car manufacturer building a car without an odometer. Or worse, building a car without a speedometer.
Additionally, the tracking should be reliable. Make sure you’ve properly tested and vetted your usage tracking capabilities prior to shifting to your usage-based pricing model. Undercharging or overcharging for usage both pose problems. If you’re undercharging, you’re missing out on revenue. Overcharging for usage can be just as harmful. Just think of the last time a server added too many entrees or drinks to your restaurant bill. It’s an unpleasant experience and leaves a bad taste in your mouth. The same applies here. Overcharging customers for their usage because of inaccurate tracking is an all but guaranteed way to erode trust.
3. Can customers easily access real-time usage data?
Lastly, you’ll want to make sure your customers can easily access and review real-time usage metrics. The last thing you want to happen is your customers get to the end of their billing period and find they used considerably more than they had planned and budgeted for. In an ideal world, customers would have the option to log in to your software and see update-to-date usage metrics. Even better, allow them to set up automatic alerts when their usage is either pacing behind or ahead of where they expect to be so they can adjust usage accordingly before the end of the period.
If you can answer these three questions, you’ll be well on your way to shifting to a consumption-based pricing model.
Four Usage-Based Metrics to Consider
1. Core product features
If you've done your homework and identified the features that deliver the most value, charging for their usage is a logical choice..What isn’t as obvious is deciding how many features or products you’ll charge for (it can, and likely will be, more than one). Don’t overcomplicate it. Choosing too many features will make it hard for you to track the usage and just as difficult for your customers to interpret their usage. Yet, you don’t want to choose too few. Leaving out products or features that drive significant value for your customers means you might be missing out on revenue.
2. Data processing
With the rise of AI, customers are finding they are able to do more with less. This is a fantastic benefit for customers. But as a result, customers are using their software less often, putting pressure on consumption-based pricing models that are dependent on the usage of core product features. As a way to counteract this shift, some software companies are leaning in to charging for data processing.
This approach works well for both customers and suppliers. For customers, AI promises to generate more value. And for suppliers, it helps to offset the significant costs associated with AI data processing, which is data-intensive.
3. Data storage
The data storage usage-based pricing model was made ubiquitous by cloud-storage companies like AWS and Azure. They charge their customers based on how much data is stored on their servers. Many SaaS companies are doing the same and charging for storage on their platforms. For example, a sales enablement platform might charge for the amount of sales content that is stored in their platform. Or a marketing automation platform might charge for the number of marketing materials stored in their library.
4. API Calls
As integrations become a requirement for many software purchases, many technology companies are charging for the use of API calls to other technologies or systems. API calls require investments in critical infrastructure and engineering resources, so it is a way to recoup these costs. On the other side, customers often derive significant value from integrations and it can be a great way to align usage with value.
Conclusion
Transitioning to a usage-based pricing model requires careful consideration of the metrics that best align with your customers' perceived value and your ability to track usage accurately. By answering the key questions outlined above and exploring the various usage metrics available, you can develop a pricing strategy that benefits both your business and your customers.
Remember, the goal is to foster a transparent and mutually beneficial relationship where customers pay for the value they receive, and your business is rewarded for delivering that value.
