Beyond Per-Seat: Exploring Alternative SaaS Pricing Models

Keith P · 2024-06-18T12:47:08+00:00

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The per-seat pricing model has been a cornerstone of SaaS for a long time, but there's a growing trend towards exploring alternative models. Factors like feature usage and customer value are gaining traction as potential pricing metrics.

What are your thoughts on this shift? Have you seen success with alternative pricing models in your experience? For example, have you tried usage-based pricing or tiered plans? What benefits and challenges have you encountered moving beyond per-seat pricing, particularly for customer success teams?

Would usage-based pricing require a different approach to customer onboarding and education? Looking forward to your insights!

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Comments

DbradyScaledCS

Hey @Keith P !

A follow up to my earlier post using real-world scenario re: consumption-based.

How to manage customers who are inefficient with their consumption?

Take it or Leave It

My customer consumes a large chunk of the available web traffic for their vertical. They pay based on consumption — in our instance, that's through cost-per-click. We are in negotiation at the moment and the customer believes the value of our clicks is 50% of our estimation. They cite how many clicks have converted traffic. We may ask them to "take our price or leave."

The customer does not well manage their data and is not interested in adopting best practices. As a result, they don't know how many clicks they receive, when they received them, or how well those clicks perform. They don't accept our data - which includes dates, times, activity, etc. It's our perception that this customer is not transforming the web activity into anything productive and as a result, we see lots of waste — a resource that could have been used by someone else had it not been wasted.

Why take it or leave it? Because web activity is a resource, like fish in the sea, and because the customer is overfishing and not productively using the resource, it's better for us to charge a premium for overconsumption and underproductivity, make a limit, or ask them to leave.

How to tie this SaaS?

SaaS customers may over or under utilize and they could do either at varying levels of efficiency. Besides goldie oldie techniques like throttling, tier based pricing, and the like… firms could also deploy incentives for efficient use. Example: credits or discounts for customers who optimize their usage.

In my instance, we're exploring preferred pricing based on efficient consumption going forward.

Keith P

Thanks so much for your detailed reply @DbradyScaledCS

I love your adobo analogy—it’s such a clever and relatable way to explain consumption-based pricing to your team. It really drives home the point that higher usage reflects higher value. I understand the challenges of setting up the backend for a consumption-based model and your metaphor-based training model sounds effective. I appreciate the input.

DbradyScaledCS

Usage/Consumption Based

I am navigating the firm I'm at to a consumption-based model. I like it because consumption is a strong economic indicator of perceived value. High consumption levels of anything typically suggest that people find significant value in the thing they are purchasing — product, feature, time, leisure, etc.

Challenge:

operationalizing our backend to make this happen — we're not set up to track and charge in this way… yet.

Training:

it is easier for the team to wrap their head around this model. If you use more of something, you should pay more. I started with a metaphor of eating adobo (my team is based in the Philippines): the more adobo you consume the more you will likely have to work out to burn the calories. I then said, we want our customers to eat more adobo, and in the same way we have to work out to burn the calories, as our customers consume more they'll pay more. It clicked. At that point, I simply shared how we intend to operationalize it.

Price-Based

I am navigating to the consumption-based model from a priced-based model. We upsold clients by increasing the value of the goods they paid for. We showed that the customer lifetime value-acquisition cost ratio of consumers acquired through our service outperformed other acquisition channels and made the case to consolidate their spend through us.

Challenge:

I developed a strong partnership with my counterpart in sales. Our ability to have a price-increase conversation post-sale was a function of his team's ability to get information pre-sale. He and I spent time over-communicating the importance of discovery questions like: what is a new client worth to you? How much do you spend to acquire new clients? What is your most efficient channel of customer acquisition? How do you measure that efficiency?

Training:

This falls into the challenge category too — many of the CSMs I encountered did not have experience with this growth-by-price models; engineers and people with supply-chain backgrounds seem to latch onto this model right away.
I trained with metaphors — the cost of buying apples that will be converted into apple pie. The training goal was to train theory first and then show the applications of that theory. CSMs learned how to ask these pricing types of discovery questions during renewal motions AND then execute a price increase pitch.
To get the CSMs to pitch on price, I had to get them to understand lifetime value (LTV) and acquisition cost (CAC) and how to quickly see the LTV:CAC ratio from our service stacks up against the client's next best alternative.

Outcomes

Price-based model worked; however, our successes were not repeatable due to product>sales overestimating delivery — which has since been corrected.
Price-based model was good for keeping saving at-risk accounts. While we may clients may have renewed flat, they renewed because they perceived the economic efficiency of our service.
Usage-approach, customers repeatedly tell me "I'm happy to pay for what I use". I interpret that as a signal that there's demand for this type of approach for the firm (we do growth marketing). I also believe this is how more of our competitors operate.

Learnings:

I wish I used a price-based model at a firm I once worked at — SaaS that built a agency-management software that included a lead gen/quoting/CRM component. My hypothesis is that the LTV:CAC storytelling framework would have led to more SMBs renewals. The reason is, most people don't stop to think about the long-game… so there's a strong opportunity cost play there: "why would you give up the potential for long-term benefits for short-term and more-risky gains?"
The usage-based approach (which I've done twice) is the model I love most because it directly maps to consumption which is a strong economic indicator of perceived value. At one firm, we did a usage-price-tier model.

Hope these ideas are helpful! Feel free to ping me if I can create more clarity or share more thoughts… or, if you have critiques or thoughts for what I might reconsider — I enjoy making Bayesian-style updates to my worldview.

Thanks for the prompt, @Keith P !