Hey Reader,
There’s a whisper we are seeing in SaaS, that improving productivity of your users, or automating functions normally done by users, leads to them buying fewer seats. The irony of building a fab product…. (𝕏)
We are seeing the emergence of usage-based pricing expand beyond traditional models (like API & Platform) into new areas, along with the rise of outcome-based pricing. It’s not universal, it’s not absolute, but it’s not not happening.
If Salesforce is the bellwether for the industry, then this shift is likely inevitable.
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Part 1: How to price your SaaS product: Pricing Complexity
Just get your first wave of customers in the door paying an equitable price, as quickly and simply as possible. No drama. Don’t overthink it.
LETS GET INTO IT:
- Usage-Based Pricing: Pay based on the volume or quantity of resources or services consumed. (API, time, tokens, action, edit, credits)
- Outcome-Based Pricing: Pay based on specific, measurable results or outcomes achieved by the service. (autonomous resolutions, machine, delivery, completed tasks or packages)
- Hybrid Models: Combining elements of seat-based, usage-based, and outcome-based pricing (Seats+PAYG / Human+Machine)
BUT. Keep pricing clear and simple. If your customer has to ask a question, that’s a friction point, and friction rarely leads to conversion. Your customer is likely used to buying a seat – aka “buying access” to your solution.
Whatever model you choose, it’s not about choosing between legacy vs new, but for your customers, it might feel that way. They, like you, need predictability in spend. New models mean new risks, and the biggest challenge is making sure it’s understood.
As you explore alternatives to seat licensing, even in hybrid form, there are merits in using it to get your first customers across the finish line – no commitments, just pay for what you use, give us a try.
The argument for startups could be the lack of early predictability in revenue, unlike MRR where you know exactly what’s dropping on the first.
When done right, despite the variability, usage/outcome pricing can lead to higher overall revenue as customers scale their usage. Growth by increasing ARPU (Avg Revenue Per User). Focusing on extracting more revenue per user rather than solely expanding the user base can help flatten CaC.
There’s also the success paradox that as you start charging for success, and it starts working, customers start to question its value. The better your product performs, the less effort it seems to require. Frame pricing around the value of the outcome, not the effort involved in achieving it.
I am liking the sidecar to your existing seat model. Offering a small “pay as you go” option to test the waters. Model it out, understand the metrics, and get your head around it before going all in. I understand for startups already in market, this move likely has technical and observability costs.
StartUp Pricing Workbook
Why This Is Happening:
Value Alignment: Founders (& Incumbents) are realizing that seat-based pricing doesn’t always reflect the value they provide. For value-driven products, the model is increasingly seen as misaligned with the outcomes they deliver.
Customer Demand: As budgets tighten, customers are pushing for pricing that reflects their actual usage and realized value, No one wants to pay for a dormant seat license or a monthly sub they use 5 times a year.
Competitive Pressure: As giants like Salesforce experiment with usage-based models, it’s creating a ripple effect across the industry. You need to at least be prepared to have a position.
Technical Advances: Better analytics and tracking capabilities make it easier to implement and manage usage-based pricing and provide that transparency to customers.
Why do you care?
- Future-Proofing: Understanding these models now prepares you for potential market shifts.
- Competitive Edge: Being early to adopt could differentiate you in a crowded market.
- Growth Potential: These models can unlock new growth vectors and customer segments.
- Investor Expectations: As the market evolves, so do investor perspectives on pricing strategies.
Customer education is expensive, so any model that’s not seat-based should probably come with a calculator. It likely requires reframing your marketing to focus on the value or job that gets done, not just on what customers are getting.
Don’t jump on the bandwagon. It’s about understanding a shift in the SaaS landscape and being prepared to evolve if and when it makes sense.
The goal isn’t to be cutting edge – it’s to be effective. A model that best aligns with your customers and your startups needs. Win-Win.
For those thinking of leaning in to this new pricing strategy, just remember, it’s all an experiment, you are trying to get more right than wrong. Just try to make an informed decision, not a reactive one.
As always, if I can be of service, feel free to grab time.
LFG.
— James
