Pricing in the Modern World

In the ever-evolving landscape of software selling, pricing strategies have become pivotal in determining the success and sustainability of businesses. Today, companies face a multitude of choices and challenges when it comes to pricing their products or services in a way that aligns with customer value and market demands. Pricing is becoming more multi-layered and value-aligned, with the most successful companies leveraging hybrid pricing; a mix of subscription, seat based, and usage based pricing.

Hubspot strategically blends subscription and consumption based pricing, using the former as an accessible model for its core modules, whilst leveraging the latter to monetize further when utilisation for specific services exceeds package limits, such as additional email sends, number of contacts in the CRM or usage of specific advanced tools beyond the basic subscription. Intercom just launched their much tested pricing combining 2 different seat types (regular pay-per-seat and packaged lite seats), fixed price add-ons and a number of usage based items (emails, SMS, Whatsapp and the newly launched AI bot).

Every pricing model choice will have a different impact on customer growth and revenue. For example,  SaaS powerhouse Zoom, adopted seat-based billing early on to align with their product-led growth strategy, allowing them to immediately capitalise on a 30x demand during the pandemic.

Pricing and packaging is integral to a product’s success, influencing user behaviour, customer expectations, engineering decisions and product marketing. A free tier could speed up customer acquisition but leave revenue on the table. Bundling could expand value creation for customers by packaging multiple products together, but create other trade-offs for the sales team and customers. 

Pricing is never finished and evolves considerably as companies learn more about their market and customers, expand their product range and go international. The importance of being flexible and adaptive with pricing through the scaling journey can’t be overstated.

Companies need flexible billing infrastructure, revenue operations and team coordination to implement pricing changes smoothly without distracting teams, creating costly infrastructure changes or breaking back office operations.

Usage-Based Pricing: A Competitive Edge in Fintech, Infra and AI

According to Open Views’ most recent usage-based pricing report, compared to the broader SaaS index, companies adopting usage-based pricing outperform their peers by a whopping 31% on revenue growth rates, with NRR being 9% higher than the overall index. Many of the most successful software companies in the game recognize this such as Snowflake,who have led the charge in consumption-based billing for a decade now, and still hold the title for best-in-class net revenue retention at 158%.

The fintech industry has been an early-adopter of usage-based pricing, evident in approaches such as fraud detection companies charging per API call and payment companies applying tiered volume-based fees. Adhering to established pricing structures familiar to customers within an existing market—be it platform fees, usage, or seat-based models—proves intuitive and minimizes friction for buyers. Staying aligned with market expectations avoids confusion and facilitates a smoother understanding of pricing distinctions among competitors.

In a recent Webinar we hosted, Sam Blond, the former CRO of Brex, stressed the importance of keeping pricing simple:  “Innovate on your product, not your pricing.” At Brex, each product was tethered to a single value metric comprehensible to customers, streamlining their pricing structure for clarity and ease of understanding. Seeing the growth numbers of many fintech players may tempt businesses to dabble with usage-based pricing models – but the model can easily fail if it doesn't make sense in your industry.

The emerging AI industry is also leveraging UBP for a plethora of reasons. There’s a close parallel with the wave of usage based pricing models driven by cloud providers (GCP/AWS); when the infrastructure layer is priced based on usage, companies building on top of that are incentivised to do the same to keep their margin. With cost structures in AI infra evolving rapidly, usage based models allow companies selling AI based products to adapt their charges and maintain cost plus margins if usage far exceeds what they anticipated.  Prepaid credits provide a way to capture upfront revenue and prevent unexpected usage surges, and thresholds enable companies to mitigate the risk of fraud.

With usage based pricing, determining the right value metric is pivotal. It should be easily understandable, align with perceived solution value, and consistently scale with customer usage. A recent study by mostly metrics pulled out the value metrics deployed by leading SaaS companies across industries. 

PLG, SLG and Something in Between 

Pricing choices are inextricably linked to the choice of go to market motion. There has been considerable hype around Product-Led Growth (PLG) as the holy grail go-to-market strategy for software companies. This has rarely proven to be a long-term sustainable strategy and we see the next generation of B2B companies combining PLG and Sales-Led-Growth (SLG), resulting in a ‘Product-Led Sales’ strategy.  While many companies appear product-led from the outside with free trials, public pricing, and the like, the reality is in many cases that the majority of their revenue comes from transitioning self-serve customers to sales-led upsells. For example Github operates a freemium pricing model, offering a range of services for free to individuals and small teams whilst providing advanced features like storage and advanced security under tiered paid plans that are determined by usage levels.

Which of these go to market strategies a company deploys has numerous downstream implications for sales, finance and product team operations.  For example, a sales led company is likely to leverage custom deal levers including free periods, ramps, trials and discounts to demonstrate value and secure customer commitments. When enterprise contracts enter the mix, a billing engine needs to allow for the seamless integration of custom price changes into the plan and the numerous implications on invoicing, revenue analytics, and other financial operations.  If a company implements a pricing strategy with usage allowances, this will create a need for engineering teams to track usage on all potentially monetizable features, and to implement entitlements into the product. Pricing model changes or deal levers should be implemented to maximise revenue or customer growth, not to fit within the constraints of the existing product and billing infrastructure. 

 A recent report by Vendr showcases the top commercial levers used in new and renewal conversations.

Collaborative Pricing: The Key to Success

Pricing cuts across multiple teams in the company. While determining the right pricing strategy is essential, it comprises only a fraction of the overall effort—about 20%. The remaining 80% involves securing cross-functional buy-in and execution across teams like Sales, Ops,  Strategy and Finance. It's crucial for Finance to engage in customer interactions to understand how pricing resonates and where customers attribute value. Similarly, Sales need to be aware of margin constraints in custom deal structures.
Aligning the entire organization behind a pricing strategy is vital. 

‍

Infrastructure to Meet the Modern Pricing World 

In the modern world, businesses need robust infrastructure to accommodate the evolving pricing models and commercial levers a tech company might deploy through their scaling journey. Distinct pricing plans have numerous downstream implications on tracking and managing revenue, usage tracking, billing, invoicing and sales commissioning. The complexity amplifies when considering add-ons, contract changes, renewals, and other mid-cycle alterations within a customer's commercial lifecycle. In a landscape where pricing innovation and commercial levers are pivotal in closing deals, a rocketship company cannot be constrained by the limits of a billing system. 

Teams also need effective workflow coordination to implement pricing successfully across the organisation. For example, sales need to be notified about usage thresholds being breached and finance may need to approve deal structures to ensure they meet margin requirements. 

Sequence has designed infrastructure to meet the demands of a modern pricing world and collaborative cross functional teams, with in-built workflow automation and data synchronisation across the tech stack. Our mission is to empower companies to scale with lean finance teams and without diverting their engineering resources towards building this critical infrastructure in house. 

References:

https://offers.openviewpartners.com/state-of-ubp-second-edition

‍https://www.vendr.com/insights/saas-trends-report-q3-2023

https://www.mostlymetrics.com/p/your-business-model-drives-your-measurement-4c2