What Startups Should Know About Usage-Based Pricing
September 7, 2022
When it comes to pricing, should you charge by consumption based on usage—or stick to more commonly used subscription plans? How do you introduce your sales teams to new pricing models? Which team should own pricing anyway?
We recently posed these frequently asked questions to a roundtable of experts, including:
Check out these four takeaways from our conversation:
If your company’s target customers range from individuals to startups and SMBs, you may want to keep your usage-based pricing tied to something that’s easy to measure—and easy to understand.
Rather than tying your pricing model to the value that the customer is receiving, consider keeping your pricing aligned to the costs instead.
Aim to keep it simple. For example, “if they consume a minute of voice, we charge a minute of voice,” says Twilio’s Glenn Weinstein.
And make sure the customer understands the levers of consumption tied to your pricing. “It's an internal decision related to the sales culture you are trying to push: ‘What is that unit of measurement, or what's that metric from a sales side that also corresponds to the customer's journey?’” says MongoDB’s Sean Heneghan.
Should pricing decisions stay in finance—or do they belong in product or on another team? According to most of our experts, product is the ideal home for your pricing team. Your startup may also benefit from a cross-functional council that includes stakeholders from sales, product, marketing, and the pricing team.
Whether pricing decisions live within product, finance, or are part of the go-to-market team’s remit, there’s one thing our panelists all agree on: Don’t overlook what it takes to operationalize pricing decisions.
If a team wants to launch new pricing constructs or measurements, for example, you could wind up in a situation where “your billing platform can’t actually charge in that capacity,” says Stripe’s Jeanne DeWitt Grosser.
Adds Twilio’s Glenn Weinstein: “You've got to price in a way that suits all of these different needs. Your billing platform's ability to actually meter those types of usage, your sales comp team’s ability to comp on that usage, your customers’ ability to monitor their own consumption—these all lead you to trying to keep it simple and granular.”
So where do customer commits fit into consumption-based pricing models? Some companies have found that when customers have the option of commits (perhaps due to wanting to stay within a predefined budget), they’ll actually wind up underestimating their consumption levels.
In other cases, a sales team can spend months trying to close a million-dollar deal—only to discover that their customer prefers to start at a six-figure price point and they could’ve closed this sized deal much more quickly. An alternative recommended by our experts is to get your customer to consume your product right away, which can then quickly lead to the “hockey stick of growth,” says MongoDB’s Mike Twitty.
Though your sales org may not be ready to abandon the legacy practice of signing up customers to commits, it could be the optimal time to introduce your team to the benefits of pure consumption-based pricing.
If you’re exploring new pricing models, several panelists also recommended examining your sales org structure. For example, consider creating new roles with different compensation models that are based on landing workloads instead of the customer’s overall spend.
An added bonus could be that sales reps in these new roles may discover a different career trajectory, which can help with talent retention. As MongoDB’s Mike Twitty says: “We do a lot to try to get the reps to buy into that journey of not only making a lot of money but a journey of their career development within the organization as well.”
