Get a free demo
Data for subscriptions podcast - Episode #27

Getting Started with Usage-Based Models

Guest

Kyle Westra

Kyle Westra
Pricing Strategy Leader, Maxar Technologies

Listen
Watch

Episode description

Getting Started with Usage-Based Models

Kyle Westra, Pricing Strategy Leader at Maxar Technologies and author of The New Invisible Hand: Five Revolutions in the Digital Economy, anatomizes the practicalities in getting started with usage-based models. In this episode, we discuss the decision process in moving to a usage-based model, customer segmentation and pricing strategies, aligning value, cost, and growth with pricing, the revenue management tech stack in subscription models, how to pitch usage-based pricing to a reluctant CFO, and more!

Highlights

Most, if not all companies, should have a usage-based offering, and we know that that’s not the case. Why not?

The devil’s in the details. A part of what comes what must come with usage-based models, is very, very careful consideration and understanding around exactly how you are creating value, exactly how customers are using your product, and figuring out the right pricing metric to tie that all together. And that’s much easier said than done. A lot of companies lack understanding of how exactly their products are going to be used. Maybe they don’t understand their cost basis, so they risk having a pricing metric that suddenly gets out of whack in terms of their value delivered and their cost to provide. It might be confusing for customers too. It’s not something necessarily common in every industry. So, whereas there always has to be a first mover in an industry, that can be a painful process in terms of customer education. Thinking about, for instance, Uber with surge pricing, right? It’s something that customers didn’t bat an eye about in an airline context. But as soon as you brought that context into another industry, it was years of difficulty in terms of explaining what exactly was going on. Now, that’s not exactly a usage model, but the same concept applies in terms of how we best educate our customers. How do we design these systems to make it easy to buy, easy to stay with us, easy for our salespeople to explain. And there’s just so many moving parts between all of those that it’s not necessarily the right answer for every company by far.

You’ve launched usage-based pricing models before? What was the decision process for that?

With one company I worked with in the past, they had a usage-based model. It was a per-page-view model, but they recognized that it wasn’t very value aligned. There were certain customers who had methods of using their product very highly without necessarily triggering page views. It wasn’t very cost aligned in the end as well, (already referenced how) it wasn’t objective or necessarily transparent in terms of how that was metered. That company had a subscription portion of their business as well. So basically, like an entrance fee for that product and then metered on top of that or usage on top of that. So, where we worked together on was finding a better pricing metric that that addressed some of those issues that I talked about before. Something that would help to align the value provided to customer growth that would be easy to understand for the industry. All those things that we mentioned and, long story short, what we figured out was per-API was actually a better metric. With that said, there were still a lot of work to do internally and externally to validate those thoughts, to get a sense of how that would be accepted by the marketplace, how that would be accepted by our own internal sales people, what kind of talk track did we have to have to enable those migrations, how we could design the pricing models and the price points to make sure that customers didn’t feel like there was a bait-and-switch when they were migrated, and suddenly they have an astronomical bill if that’s not appropriate. While on the other hand, those customers who were abusing the previous system, how do we make sure that those new contracts are right sized while making them understand that there are routes by which they could reduce their usage, reduce their bill, and we both could be better off that way.

How would you pitch a usage-based pricing model to a CFO considering their typical preference of more predictable and structured pricing arrangements?

There can be value, internally, in a financial sense, but also for your customers in terms of how you can add some more predictability to the usage model. And maybe that’s a hybrid approach of subscription and usage. The subscription is relatively predictable, the usage, perhaps less, so the different weights that you give to each of those can be a lever by which you can control the predictability, and then there are other ways that you risk as well, to make, even if you can’t directly address the predictability, you can reduce the perceived or psychological cost of unpredictability by saying you know, hey, if you don’t use all of your credits, some amount of them roll over at the end, and just being really clear in that conversation that customer success is what’s important to you, right? And that taking on some of that risk, again, with how you treat credits at the end of the year with dashboarding and reports throughout the year, making things predictable and structured for customers is important, just as it is internally for our own teams.