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Software Pricing Is Becoming More Complex

Over the past few years, the software industry has adopted Usage-Based Pricing at a growing rate. So much so that 61% of SaaS companies say they use Usage-based pricing or are actively testing it, according to OpenView's study on Usage pricing. This number is expected to grow even bigger to 82% in 2023.

There’s been a lot of chatter on SaaS pricing versus Usage pricing in Software.  OpenView, again, has been leading the conversation on Usage pricing. They say, and we wholeheartedly concur, that the future is neither here nor there. No single pricing method is better than the other. As with everything in life, it’s a tradeoff. The pricing complexity will persist and intensify as companies become smarter about their pricing.

[source: OpenView]

Why Companies Adopt Usage based Pricing 

Usage-based Pricing enables customers to price products and services based on their actual usage or consumption. Well, this model is of course not new, it is the OG of the commerce world. When a business pays for legal services, in most cases it will be for service hours. When we pay an electric bill, we pay for what we actually used. Why is Usage the king of pricing (some might say)? 

Easy to represent value - usage pricing allows you to represent value in the best way. Pricing is to value what inches are for height. Granular pricing units just give better flexibility when you want to represent value. More than that, usage-based pricing gives them the option to consider the attribute of each event. So, for example, you can price not only for an API call, but differentiate between different attributes such as geography, time of day, source of call and so on. 

Customers can start small - usage-based pricing models allow a customer to start with a small budget, without big commitments. This baked-in flexibility attracts more customers. These can be SMBs, but these can also be individual users at big companies who do the initial adoption independently, aka, the dubbed product-led growth. 

Growth incentives - usage-based pricing allows pricing scheme flexibility, due to the granularity of the value unit. Due to that fact, companies can provide incentives to grow in the pricing structure. A great example for that is Tiered Pricing, where a unit price within each consumption tier is priced differently, or Volume Pricing, where the price for the whole volume changes with consumption. With both these schemes, you can quote a lower price per unit in the upper usage tiers, as the consumption grows. This adds another customer facing mechanism to increase usage and use cases. 

Which market pressures are affecting this trend now?

Current market conditions affect companies’ commercial strategy, it goes without saying. We have seen this impacting the way companies and CFOs are doing their pricing strategy. How is it changing the Usage and SaaS balance? 

Customers Demand Flexibility - in these economic times, Customers are more cautious about SaaS spend and payment terms. Buyers don't necessarily want to pay all the Software cost upfront. Customers who want to hedge their Software spend, ask for a pay-as-you-go model, instead of paying the whole contract up-front. Usage allows companies to provide flexible models that derisk their SaaS spend. We see this mainly with midmarket and small customers, it’s less of a consideration for Enterprise customers.

Investors Demand Stability - companies that were exclusively Usage-based, are seeing investor demand for more revenue stability. Investors look for at least 60% recurring revenue, so pure Usage companies are adding SaaS to the pricing mix, while still serving legacy customers. This shift is easier operationally, as Usage is much more complex to operate, but creates much more friction with Customers, and brings a communication and churn challenge. 

SKUs & Channel Salad - as retention and renewals are taking a hit, mid-market companies are seeking to increase their customer base by expanding their offerings and opening new channels. This creates a plethora of pricing models, each with its own unique logic. Adding distribution channels, for example, creates a unique billing challenge where the value chain, pricing, and SKU management need to be carefully managed.

With Received's complex billing system, you can mix any pricing model. We tackled the most complex pricing model monsters head-on, and won. Want to see for yourself?