Product Led Growth and Usage-Based Pricing are two of the hottest trends in the B2B SaaS and Cloud industry. Annual subscription pricing has been a hallmark of the financial model for SaaS companies. Lately, the move to Usage-Based pricing has attracted investor demand that is pushing Enterprise Value to Revenue multiples up to 15x-25x.
Chris Mele, CEO of Software Pricing Partners discussed the caution around moving too quickly to Usage-Based pricing, and provides advice developed from consulting with hundreds of software and SaaS companies on their monetization strategy....yes monetization goes beyond just pricing!
First, Chris highlights that "Consumption-Based Pricing" has been around for decades, and that there is not one model - there are many gradients of usage variables. As an example, pricing based upon the number of locations or even the number of users are examples of consumption-based pricing, so it is critical to understand how the usage variable selected is directly aligned to customer value received.
Next, we discussed in greater detail how critical it is to ensure that any usage-based pricing model is carefully evaluated and then validated by the customer as to the value they are receiving from the "pricing variable" that you select. Customer Advisory Boards are one great source of pricing model feedback, specifically as it relates to the value they receive. In fact, these sessions will often uncover value nuggets that you were not aware existed.
Chris highlights that when considering a pricing model change, a foundational premise is to do "NO HARM" to your existing customer and revenue base. Even as you test pricing models with existing customer's feedback, ensure they understand that their current pricing will be honored with a grandfather clause IF the new pricing model is deployed.
A best practice is to implement new pricing first with either a new product and/or a new target market as not to do any damage to the existing customer base and their revenue.
As Product Led Growth models continue to evolve, pricing models will be impacted. Pricing is more than a one-time event, or even a single-dimensional subject, as packaging, product functionality, product roadmap, and go-to-market strategy are all impacted by pricing. This is why Chris is recommending the need for a Chief Monetization Officer, who reports to the CEO. It is their primary responsibility to ensure that all cross-functional impacts and requirements of a monetization strategy, including pricing, are considered and understood prior to any decisions or roll-out of a Usage-Based Pricing strategy.
For some companies, the primary responsibility for pricing may reside within Marketing, but in the Product Led Growth economy, Chris recommends that monetization is best positioned within a Chief Product Officers domain if the company decides that a Chief Monetization Officer is not the best path at the present time.
If you are considering a Usage-Based Pricing model, this episode is chalked full of insights and perspectives that can only be gained from the depth and breadth of pricing model experiences that someone like Chris Mele possesses.