Usage-based Pricing: What it is and what it's not?

With 2x adoption within B2B SaaS space, usage-based pricing is becoming very common and is not just true of infrastructure companies.

Here’s some stats from Openview:

Let’s dive in:
What is usage-based pricing?
- A usage-based pricing model doesn’t limit the number of users who can access your product.
- It is also known as consumption-based pricing, value-based or pay-as-you-go pricing

What is it not?
- subscription-based pricing
- seat-based pricing
- user-based pricing

Pricing is based on the product’s value metric that:
- Aligns with product value
- Is flexible, scalable and predictable for customers
- Is feasible to measure for the product

Products with usage-based pricing have seen:
- Scale at a growth rate of ~106% y-o-y (Snowflake)
- Best-in-class Net Dollar Retention (Datadog, Twilio, Algolia, HubSpot, Confluent)

Can your product switch to a usage-based pricing model overnight? Probably NO.

Biggest challenges:
🚨 Communicating and migrating existing customers
🚨 Restructuring internal billing and invoicing systems
🚨 Deciding new discounting and couponing rules
🚨 Recalibrating sales compensation based on consumption and not commitment.
🚨 Educating Customer Success on the new way to drive engagement - Updating financial forecasts, revenue recognition, cash flow and reporting

Should you switch to a usage-based model? Probably YES.

IMO, this seems like not a question of IF, but rather a question of WHEN you hit a particular growth ceiling.
✅ It allows the customers to start at a low-cost, minimizing friction to adoption
✅ More users in an account to discover and adopt product features as the business scales
✅ Leads to better customer experience, increases stickiness, and improves LTV
✅ Allows for easier land and expand leading to enterprise sales
✅ Eliminates the need to repackage, test and increase the price every few months to reflect the increase in value per seat

Is your product priced by usage or seats? Are you thinking about transitioning?