Why and How to Use the Consumption Model of Pricing for SaaS and Cloud Services
Pricing using the consumption model is well-established in many industries and benefits both vendors and customers since it ties cost to use.
- Overview
- The Advantages of Consumption- or Usage-Based Pricing
- Getting Started with Consumption-Based Pricing
- Resources
Overview
Pricing using the consumption model is well-established in many industries, including public utilities, logistics and ride-sharing. It benefits both vendors and customers since it ties cost to use. Let’s take a look at consumption-based pricing for SaaS and cloud services as well as the advantages of the consumption model and how to implement it.
What Is the Consumption Model of Pricing?
The consumption model of pricing, also known as usage-based pricing or consumption-based pricing, operates on a pay-as-you-go approach. Unlike subscription-based pricing, which charges customers a set rate for a certain number of licenses or seats, usage-based pricing charges customers only for the resources they actually consume. For SaaS and cloud services providers, pivoting to a consumption model is an increasingly popular choice because of its many advantages over other models.
The Advantages of Consumption- or Usage-Based Pricing
Usage-based pricing strengthens the provider-customer dynamic in ways that other pricing models can’t. Let’s explore the advantages of the consumption model for vendors and their customers.
Benefits for the vendor
For providers, usage-based pricing may be the best way to launch and sell a sustainable solution. Here’s why.
Frictionless sales process: With no need to make a substantial up-front investment, customers can try out the product with a single use case or workload before expanding usage and committing significant resources. This eliminates one of the primary roadblocks to a smooth sales process. Additionally, the consumption model empowers sales reps to focus on the best use cases for deploying the product.
Effectively communicates the value of the solution: When pricing is tied specifically to solution usage, sales teams are motivated to form strong relationships with their customers. Usage-based pricing creates a dynamic where sales reps become customer advocates, incentivized to help them optimize for efficiency and do more with the solution.
Enables deeper understanding of customer behavior and usage patterns: Implementing usage-based pricing generates data that SaaS and cloud services providers can use to deepen their understanding of how customers use the product or service. With this information, sales reps can engage customers in conversations about how they use the product and which additional use cases might benefit them. It can also help product and engineering teams discover, prioritize and build product enhancements that align with real-world usage and need.
Benefits for customers
Usage-based pricing allows customers to experiment and innovate risk-free. Here’s how the consumption model helps customers get the most from their software and cloud services.
Aligns interests: The consumption model brings the vendor and its customers onto the same team, creating a relationship focused on the customer’s success. The provider is more motivated to help customers get to production faster, do more with the solution and succeed.
Enhances education: With increased usage as the goal, the provider is incentivized to fully educate customers on how to get the most value out of the solution, providing resources for quick implementation and ideas for new use cases.
Reduces the risk involved in trying a new solution: The primary risk for implementing any enterprise solution is high up-front costs, especially if the solution ultimately delivers low long-term value. The consumption model significantly reduces risk by tying pricing to usage, allowing customers to experiment with new solutions to find those that best meet their needs.
Provides cost savings: Usage-based pricing can result in substantial cost savings. The flexibility to pay only for the resources the organization consumes allows businesses to control costs.
Getting Started with Consumption-Based Pricing
Pivoting to usage-based pricing requires careful planning, especially for providers currently using a subscription model. The following best practices will help streamline the transition.
Pick a value metric
A value metric communicates the primary value of your solution to customers. When choosing a value metric, ensure it is concise and easy for customers to understand. The value metric you choose should clearly convey how your solution helps address the challenges and use cases that customers are trying to solve. It should also be appropriate to your delivery costs and scale with your customers. For example, the value metric for a data storage solution could be the amount of data stored per month.
Modernize your sales process to align interests
Consumption-based pricing is a new revenue model that requires reorienting sales incentives in a way that ties them directly to the customer’s use. Implementing the consumption model involves a significant mindset shift for sales reps. They must move from thinking about the number of seats or licenses to building long-term relationships with customers to helping them achieve the full value of the solution.
Account for the variable nature of consumption
One of the most challenging aspects of usage-based pricing is accurately forecasting revenue. Consumption is rife with variability and requires both quantitative data and qualitative inputs to account for unique customer behavior. Successfully managing these complex financial calculations requires cross-team collaboration. Data scientists can be embedded into your finance team to build dynamic models that deliver immediate feedback for forecast enrichment. Sales reps and sales leaders can provide input needed to adjust sizing based on the unique aspects of each customer. Product development teams can help resource planners better understand how upcoming product improvements may affect customer usage.
Help customers predict and optimize spend
Customers want to understand the details of their usage and how credits or dollars are spent relative to their contract. Predictability, visibility and cost transparency are core tenets of the consumption model; customers must be able to clearly understand and track usage and spend. Prepare for customer overages to help them better scope and plan their usage.
Leverage data by unifying it
The main requirement for a consumption-based pricing model is accessible data. Without it, there is no way to reliably understand your business, test your value metric, assess and compensate sales reps, deliver financial metrics or track customer usage. You can only use data to your greatest advantage when you have efficient access, a centralized source for truth, and sufficient scalability and flexibility.
