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Questions to Ask Before Adopting Usage Based Pricing

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Re: Questions to Ask Before Adopting Usage Based Pricing

#11

Post by PaulWaldman »

ghaff wrote: post #7
PaulWaldman wrote: post #2

Something that is missing from this article: Do your customers understand the metrics their usage is based on? If not, you're going to have trouble selling your product on a usage model.

I think that's sort of covered by "Is usage predictable for the customer?" The problem is that I'd probably argue that something like AWS at least somewhat breaks this question (and others). Unless you're only using AWS for something like S3, it's mostly only predictable by trial-and-error and billing alerts. Heck, there are consultants whose full-time job is helping clients with AWS bills. OK, maybe the big cloud pr…

>I think that's sort of covered by "Is usage predictable for the customer?"

I initially thought this too, until reading the content of that point. The emphasis is really predictability in this section, even if usage is consistent, customers will have a hard time trusting it if they don't understand what it is based on.

Cloud providers are generlaly selling to technical customers. But you need to make sure you pick metrics that your customers understand. If you were selling a recipe system and your target market is restaurants and chefs, would you charge for PostgreSQL table usage or the number of recipes that can be stored?

Saying you can store 100MB of table data, but that should fit for your 100 recipes, is different than directly specifying that your plan includes 100 recipes. Even if the customer plans on never actually having more than 80 recipes.

Re: Questions to Ask Before Adopting Usage Based Pricing

#12

Post by runako »

ezekg wrote: post #5

Last time I dealt with usage-based pricing, I racked up a $13k bill for an APM service. I wasn't aware it was even happening until the attempted charge at the end of the month. No warning emails we sent to me. Thankfully, they let me off the hook as I had been a customer for years before they moved to usage-based pricing. But I'm no longer a customer, because that event made me reevaluate if the service was really ev…

That shouldn't be a knock against usage-based pricing per se, that's a knock against usage-based pricing that fails the predictability test (#4).

Products aimed at other parts of the enterprise (e.g. Sales, HR, Support, etc.) frequently meter on the # of seats. Since a "seat" usually maps to an employee, this has the benefit of being predictable as well as proportionate (to the overall cost of the employee).

Re: Questions to Ask Before Adopting Usage Based Pricing

#13

Post by k__ »

gizmo686 wrote: post #6

Another thing to consider: does your usage based pricing reflect your costs. If so, usage based pricing can allow you to offer a significantly cheaper product as A) expensive users no longer need to be subsidized by cheap users and B) users are incentived to use less resources. This approach has some results that directly contradict what the article says: > Question #1: Does value increase with usage? > Pricing shoul…

"If there is not sufficient margin between the business value and the cost to provide, then maybe the sale shouldn't happen."

I had the impression, when people talk about value based pricing, they assume that the value is higher than the cost.

The idea being, the customer pays more without you ending up with higher costs.

Re: Questions to Ask Before Adopting Usage Based Pricing

#14

Post by thebean11 »

ghaff wrote: post #10
bluGill wrote: post #9

Missing: what is the customer break even for unlimited. If I buy a word processor for $.01/word, I can buy one for $100 - then I only need 10000 words to break even. You can play with different pricing schemes, but you need to ensure that enough people will find value in your scheme to pay you, because there is always the option of someone else's unlimited plan. Even if all your competitors are also on some sort of u…

That's the general issue with subscriptions too. I'm fine with paying Adobe a subscription for a program that I use on a regular basis. I'm not fine with paying Adobe a subscription for a program that I might pull out to do something with once or twice a year.

Wouldn't that be an issue with a $500 photoshop license too? You'd only get to use it a handful of times before the software stops being compatible with your OS (probably).

Subscription seems better because you can just subscribe multiple times for shorter periods.

Re: Questions to Ask Before Adopting Usage Based Pricing

#15

Post by ghaff »

PaulWaldman wrote: post #11
ghaff wrote: post #7

Earlier quoted context omitted.

I think that's sort of covered by "Is usage predictable for the customer?" The problem is that I'd probably argue that something like AWS at least somewhat breaks this question (and others). Unless you're only using AWS for something like S3, it's mostly only predictable by trial-and-error and billing alerts. Heck, there are consultants whose full-time job is helping clients with AWS bills. OK, maybe the big cloud pr…

>I think that's sort of covered by "Is usage predictable for the customer?" I initially thought this too, until reading the content of that point. The emphasis is really predictability in this section, even if usage is consistent, customers will have a hard time trusting it if they don't understand what it is based on. Cloud providers are generlaly selling to technical customers. But you need to make sure you pick me…

I think that's fair but it also depends on the product. Something like Stripe, per transaction is a very obvious variable metric--and, even better more transactions is almost certainly a good thing for a merchant. A metric based on MB transmitted or API calls would be pretty silly.

AWS is inherently much harder to tie to non-technical measures. Yes the customers are more technical but that doesn't mean AWS formulas are necessarily predictable for them.

Re: Questions to Ask Before Adopting Usage Based Pricing

#16

Post by sudhirj »

AWS has what they call a cost-following strategy, where their pricing actually exposes the architecture of the system to the point where you can understand how it's implemented and the data structures used if you look at the pricing.

I've heard it being described as an alternative the kind of speculation and navel gazing that precedes all other kinds of pricing and is ultimately useless anyway. However you choose to paper over your costs with pricing schemes, some customer will have a use-case or hack that blows through it and gives you grief. Or a competitor will do cost-follows and give everyone a reason to switch to them.

The idea is that you figure what your costs are to provide the service, and then add your margins and just charge that. Add as many axes as your customers will bear, and let them make the decision on how to use the tool, even if it seems complex.

Works great for technical tools, but I've always been skeptical about how consumer pricing is done. The Amazon Prime membership itself goes against this principle, of course. Consumers will usually value predictability over analysing ROI, so flat rates might just make more sense there.

Re: Questions to Ask Before Adopting Usage Based Pricing

#17

Post by phamilton »

gizmo686 wrote: post #6

Another thing to consider: does your usage based pricing reflect your costs. If so, usage based pricing can allow you to offer a significantly cheaper product as A) expensive users no longer need to be subsidized by cheap users and B) users are incentived to use less resources. This approach has some results that directly contradict what the article says: > Question #1: Does value increase with usage? > Pricing shoul…

A common scenario I see is "host based pricing". We went from 100+ 2xlarge instances to 10 24xlarge instances for our ECS cluster. This was pretty transparent to our application and team, but it meant that anything with host based pricing was much much much cheaper.

We produced the same data, we got the same value, we probably cost our providers the same, but we saved a ton of money.

Re: Questions to Ask Before Adopting Usage Based Pricing

#18

Post by ghaff »

thebean11 wrote: post #14
ghaff wrote: post #10

Earlier quoted context omitted.

That's the general issue with subscriptions too. I'm fine with paying Adobe a subscription for a program that I use on a regular basis. I'm not fine with paying Adobe a subscription for a program that I might pull out to do something with once or twice a year.

Wouldn't that be an issue with a $500 photoshop license too? You'd only get to use it a handful of times before the software stops being compatible with your OS (probably). Subscription seems better because you can just subscribe multiple times for shorter periods.

Certainly. Although, in my experience, you can usually keep older software running for quite a while. Maybe you even use a VM.

Re: Questions to Ask Before Adopting Usage Based Pricing

#19

Post by sudhirj »

thebean11 wrote: post #14
ghaff wrote: post #10

Earlier quoted context omitted.

That's the general issue with subscriptions too. I'm fine with paying Adobe a subscription for a program that I use on a regular basis. I'm not fine with paying Adobe a subscription for a program that I might pull out to do something with once or twice a year.

Wouldn't that be an issue with a $500 photoshop license too? You'd only get to use it a handful of times before the software stops being compatible with your OS (probably). Subscription seems better because you can just subscribe multiple times for shorter periods.

Yeah, this doesn't take into account the fact that you can activate you subscription only on the months that you actually use it. This is super-easy on iOS, buy YMMV on other platforms and payment methods.

Re: Questions to Ask Before Adopting Usage Based Pricing

#20

Post by foobiekr »

thebean11 wrote: post #14
ghaff wrote: post #10

Earlier quoted context omitted.

That's the general issue with subscriptions too. I'm fine with paying Adobe a subscription for a program that I use on a regular basis. I'm not fine with paying Adobe a subscription for a program that I might pull out to do something with once or twice a year.

Wouldn't that be an issue with a $500 photoshop license too? You'd only get to use it a handful of times before the software stops being compatible with your OS (probably). Subscription seems better because you can just subscribe multiple times for shorter periods.

I don’t want the mental overhead of this. Not to mention the dark patterns for cancellation that are prominent outside the iOS subscription ecosystem.
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