How to Switch to a Usage-Based Model: Insights From Successful Companies and Key Steps for a Smooth Migration
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More and more SaaS companies across the world, including such well-known businesses as Datadog, Twilio, AWS, Snowflake, Stripe, and the like, adopt a usage-based pricing model (UBP). In fact, OpenView revealed that 3 out of 5 businesses are already using or actively testing UBP. Its “pay as you go” concept is quite simple and looks attractive to both users and SaaS companies. While clients pay only for the actual usage, like scheduled posts or issued invoices, businesses deliver real value at little to no cost, leading them to long-term success.
Given the many advantages that the UBP model brings to the table, it’s simple to get why many companies want to switch to it. At Eleken, we work with SaaS companies only and have seen many cases when businesses with a usage-based pricing model achieved great results. But we also know that migrating to the UBP model is far from easy. So, in this article, we’ll focus on effective ways to switch to usage-based pricing and when it makes sense.
3 key steps for a successful transition to a usage-based pricing model
Processes related to choosing or switching between pricing strategies are always hard. Most of them are so complex that may leave your SaaS business vulnerable when done wrong. Plus, users are often hesitant to change. But if done properly, changing a pricing model can deliver significant benefits. Here are some steps for a smoother shift:
1. Conducting research and identifying value
Before switching to UBP completely, we highly recommend investing in thorough research and evaluating if the usage-based model aligns with your business goals and customer needs. The case of Landbot, a no-code chatbot builder, who witnessed a 26% increase in net revenue retention after choosing UBP, serves as an on-point example here.
Landbot initially followed feature-based and tiered pricing models. However, the company clearly understood that these models are not the right choice as a user who generates 100K chats per month and the one with 100 chats per month pays the same amount. So, the company saw UBP as a good option and conducted research that consisted of 3 sprints:
- Validating and refining the buyer persona. The Landbot team already knew who their ideal customer was, but they wanted to get a quantitative understanding of other potential users and avoid the risk of bias. They conducted a price sensitivity survey to get a set of firmographic and demographic attributes of their ideal and secondary customers. This survey included a questionnaire that let the company determine value metrics based on which they can charge (per user, per number of chats, per feature) and users’ willingness to pay to identify threshold pricing.
- Finding out feature packaging and value metrics. The Landbot team wanted to identify whether they should keep feature tiers at all, as well as learn customers’ thoughts on how their pricing should scale. So they used the MaxDiff method, also known as Best-Worst. They asked customers to pick their most and least important features.
These insights helped the company plot each feature onto a 2×2 matrix, representing a differentiator, table stakes, add-on, or trash.
As a result of this sprint, the Landbot team chose “number of chats” as its new usage metric, while maintaining seats and feature tiers.
- Estimating potential usage volume and nailing price points. To find the optimal price range for each tier, the company conducted another price sensitivity survey, namely the Van Westendorp Price Sensitivity Analysis. The Landbot team presented the research panel with feature tiers and asked users about their potential usage volume. Then, the company analyzed the results, determining whether the usage part should be banded (fixed allowance per tier) or continuous (the charge for every X amount of usage).
Finally, Landbot settled on giving users a free allowance but having them pay extra for surplus. The overall research process took the team about three months, after which the shift to a new model started off as an experiment.
But not every company has the time and resources for such deep research. So sometimes, it makes sense just to ask your audience how they prefer to pay. For example, our client, TextMagic, an all-in-one text messaging service for mobile marketing, opted for trusting their clients’ feedback while choosing their pricing strategy. On the company’s LinkedIn page, they asked their audience for help. Thanks to this decision, TextMagic now operates using the usage-based pricing model.
2. Testing and iterating
Once the research is done and you have defined the pricing structure that fits both you and your users (for example, starting small and scaling as the user base grows), the next step is to test your findings. When introducing a new pricing model, you should:
- Clearly communicate the transition to your existing customers and help them understand the reason behind the change.
- Provide proof that this change is winning for them. Though being customer-friendly, the value of UBP may not be the same for different users.
To track outcomes and progress easier, it is good to have a comprehensive testing plan and conduct several iterations to choose the best-performing UBP model. Coming back to Landbot, they had 3 iterations. To achieve the most optimal outcomes, they looked at their monthly recurring revenue (MRR) as a two-dimensional graph:
- The number of paying users
- The average revenue per paying user
This allowed them to identify their personal winning formula that brings the highest MRR growth in the long run. But at this stage, some companies can also introduce UBP as an A/B test, leaving the original pricing model. However, it may take about a year to get statistical results.
3. Making the final decision and implementation
The final step is to identify the way to predict usage, which is rather challenging in the case of UBP. The focus on timely and accurate data is the key. Billing and tracking systems are core mechanisms that can offer a true reflection of your current state, so don’t forget to update them to monitor and manage customer usage more accurately.
Once the new pricing model is implemented, continue to refine it over time. Pure usage-based pricing will not work the same way for all SaaS companies. OpenView data shows that 46% of businesses opt for a hybrid approach, testing UBP with the subscription plan.
For example, for Courier, a multi-channel notification platform, the choice of usage-based pricing was a no-brainer. But the company started receiving feedback from many users who requested more support. The customer insights showed that the UBP model was good for the value a user received, but it wasn’t perfect enough. Implementing blended usage-based pricing along with the “Good-Better-Best” model allowed the company to avoid the mismatch between pure usage metrics and value derived. Courier created plans with minimums to ensure the company offers relevant experience to larger users even if their volumes aren't sky-high.
When usage-based pricing is not the right choice
Usage-based pricing doesn’t actually fit everyone equally. So, how can you understand if UBP is not your go-to? Answer these questions to finally decide whether UBP is worth a shot:
- Can you link the product/service value and potential usage metrics that bring value to both users and our SaaS business?
Clearly, the revenue growth of usage-based companies directly depends on the value customers derive from using products. And the most challenging part here is to identify how to assign a dollar value to usage, as some products/services are too complex to single out the most sought-after and valuable offer.
For example, we at Eleken chose a subscription-based model. As a UI/UX design agency, we help SaaS companies design from scratch, redesign existing products, or create a responsive design for all kinds of SaaS solutions. Our designers work like in-house employees but without the operational burden and extra costs. For us, subscription-based pricing proved to be effective as there are no usage metrics that can measure design services.
- Is your SaaS business ready for revenue fluctuations?
Revenue forecasting isn’t easy with UBP pricing, as accurate MRR predictions are hard to make. Usage-based companies should always have a contingency plan to keep their business running in case of reduced revenue or fluctuations and get back on track. When you’re looking for easy-to-predict revenue, then UBP is not the right choice.
- Can the pricing model changes affect the existing payment infrastructure?
As of now, there are many pricing tech stack options that help businesses offer any type of pricing.
Still, integration failures can occur. So it is important to ask these additional questions:
- What technology stack is suitable for your SaaS product?
- Does your system support UBP billing?
- How long does it take to deploy your product before usage begins?
The answers will help clarify the situation and take the necessary measures.
- Are your users interested in paying based on usage, and do competitors implement the UBP model?
As a rule, usage-based pricing scares enterprise customers and traditional teams off, as they need predictability and control over their corporate budgeting instead of surprise fees and overage bills. Still, there are cases when enterprise SaaS companies successfully adopted UBP. For example, Twilio, a customer engagement platform, provides a larger discount for a bigger commitment, while AWS lets customers commit in advance but pay for usage as it goes.
If there are competitors that successfully adopted the UBP model, it's okay for you to test it, too. But if there aren’t any on the market, it is necessary to consider why they don’t use usage-based pricing.
Usage-based pricing has become mainstream today. Its concept is simple, clear, logical, and quite popular. It has the potential to outrun other pricing models often used by SaaS companies. It’s not without risks as well, and the choice depends directly on the value metrics. But if you have the core research findings and are armed with a well-planned roadmap, moving to this pricing model won’t be that risky.
And if you need help in designing an effective pricing strategy for your SaaS company, Eleken can become your design partner.