Questions to Ask Before Adopting Usage Based Pricing
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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
#2Something 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.
Re: Questions to Ask Before Adopting Usage Based Pricing
#3Is Slack's active user pricing actually usage based pricing?
Re: Questions to Ask Before Adopting Usage Based Pricing
#4Something 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.
Good point.
A few days ago I read, many companies prefer cost predictability to cost efficiency.
Re: Questions to Ask Before Adopting Usage Based Pricing
#5Last 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 even worth it at that point in time.
Suffice it to say -- as the owner of an SMB, I despise usage-based pricing.
Re: Questions to Ask Before Adopting Usage Based Pricing
#6Another 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 should always align with business value.
No, cost to provide is relevant as well. If there is not sufficient margin between the business value and the cost to provide, then maybe the sale shouldn't happen. That is not to say you should never make such sales, as they might enable other more profitable sales (either directly, or by virtue of having a more popular pricing model).
> Question #2: If the customer throttles usage, is the value reduced?
If a customer can throttle usage without decreasing value, and the service has a non-negligible cost, you have a great candidate for usage based pricing. The customer looses nothing while your costs go down. You can even pass the saving onto the customer in the form of lower prices for those customers that choose to throttle.
> A customer could temporarily cache the result of an API call in memory
Caches are a good thing that can significantly reduce your hosting costs.
Re: Questions to Ask Before Adopting Usage Based Pricing
#7Something 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 providers are outliers, but they don't even allow you to put caps in place aside from billing alerts and building your own triggers.
Re: Questions to Ask Before Adopting Usage Based Pricing
#8Something 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.
Good point. A few days ago I read, many companies prefer cost predictability to cost efficiency.
Well, people are generally fine with variable pricing efficiency. They just don't want it to exceed some budget cap.
Re: Questions to Ask Before Adopting Usage Based Pricing
#9Missing: 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 usage pricing, I can hire a bunch of developers to write me a custom an unlimited version, and maintain it - at some usage this is worth it.
Of course not everything is so easy. My company pays AWS because it is cheaper to do that than to buy and upgrade all the servers we need. Our usage has busy months where we use 10x as much as the slow months, if we had consistent usage it might be cheaper to have our own servers, but we don't pay AWS for the non-peak months even though they have the servers. (I don't know how AWS handles this, that is their problem not ours)
Re: Questions to Ask Before Adopting Usage Based Pricing
#10Missing: 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.