Stop leaving money on the table: How subscription + usage pricing boost revenue

Introduction

In our webinar with Chargebee, we talked about how subscriptions for B2B are evolving - we’re seeing the emergence of a ‘Subscription 2.0’ model.

‘Subscription 2.0’ is a trend towards hybrid pricing which fuses the features and benefits of subscriptions and usage-based pricing (UBP). This new model combines the stability of recurring subscription revenue with the ‘right-sizing’ and transparency of usage-based pricing.

With over 60% of B2B SaaS businesses deploying some elements of UBP - many are deploying a hybrid pricing strategy to help capture more revenue and grow faster.

During the webinar we were asked some great questions - the most popular of which was

We wanted to help, so we are sharing our mini playbook for deploying hybrid pricing in SaaS.

In this blog I’ll cover common patterns our team is seeing when helping businesses implement an end-to-end solution for Pricing and Billing Operations with hybrid pricing.

Mini Playbook for Deploying Hybrid Pricing

Many B2B SaaS businesses deploy a classic three-tier subscription pricing model often referred to as ‘Good, Better, Best’. I’ll use this model as a reference point for this guide - and if you are reading this and have some input or responsibility for pricing in a SaaS business you will recognize it - it’s practically a cliche!

It doesn’t really matter what flavour of 3-tier structure you have - whether the first tier is “Freemium” and/or “Pay-as-you-go”, and the last one is “Enterprise - Call Us”. Typically they’re primarily differentiated on a feature and performance matrix. This is where evolving ‘Good, Better, Best’ into a hybrid pricing model starts to diverge from Subscription 1.0.

Firstly you’ll need something to measure product usage on and make that consistent across all your tiers. You may even want to start tuning down the feature differentiation and let product usage move customers up through your tiers.

Step 1 - Plan

Like any other project - start with a plan - if you’re still working out your hybrid pricing strategy why not check out

• Is usage based pricing right for my business?
• The SaaS Pricing Spectrum
• Usage-based Pricing in 2023: Growth and Adoption in a Changing Landscape

The most important decision you will make in blending elements of usage to your subscription will be your metrics. Before you go further lock down:

1. Your core value metric for usage - this may take a while, and we’d strongly recommend discussing this with customers and advisory boards, and look around your industry.
2. Any fencing metrics you want to add  - this usually is only relevant if your COGS scales with usage and you need some cost protection measures in case of very high usage.

Now work backwards from your main objective in evolving your pricing strategy. What are you solving for?

• Growing revenue faster - if you feel you are under-pricing especially.
• Right-sizing customers usage - if you have loss-making customers because your pricing model does not reflect value delivered.
• Opening up your TAM/SAM - especially if you are missing out on the lower-end customer because your entry price is too high.

It is unlikely one change in pricing strategy and structure will solve for all three of these at once, prioritize!

Step 2 - Experiment

Get into your “pricing lab” and run internal experiments by modeling out your existing pricing with the addition of usage allowances, overages and tiering to your subscription-based pricing model.

Remember:

• Usage allowances = limits on how much a customer can use a product or service within a given period, such as the number of users, data, features or transactions. A natural consequence of allowances can be ‘overages’ or automatically moving tiers.
• Tiering = a way of grouping customers into different levels based on their usage, needs or value, and charging them accordingly.

The combination of allowances, overages and tiering should have the following effect. Run experiments and stress-tests to see if it’s having the right effect on cohorts of customers:

• Better aligning price with value: customers are charged based on their actual usage or perceived value and you capture more revenue from high-value customers and avoid underpricing or overpricing for most customers.
• Encouraging upselling and cross-selling: set the expectation that your customers can move through your tiers sides and up and down on usage. By getting creative with tiering on a combination of usage, benefits and features, you can incentivize customers to upgrade to higher tiers or add-on products or services that enhance their experience and satisfaction.
• Reducing churn and increasing retention: flexible and transparent pricing options, plus the option to move tiers, should mean reduced customer frustration and dissatisfaction, and increase customer loyalty and lifetime value.
• Optimizing costs and resources: By setting usage limits and monitoring customer behavior, you can optimize their costs and resources, and avoid overprovisioning or underutilizing infrastructure or staff.

Step 3 - Customer Research

When you have a model that works in the lab, do your customer research - engage existing customers about your future model transparently and honestly, and what the outcome for them could be. 

If it is looking like everyone is going to be paying more (because that is why you are evolving your pricing strategy), make sure you go into those conversations with an understanding of each customer’s usage and the value they are getting. If your customers value your product and need it to do their business, they will want you to succeed - there’s no point in them getting a below cost bargain if you have to fire them! 

If the alternative is that you simply put up prices across the board, then the more usage elements you blend into your hybrid model, the more fine grained control you give to your customers about how much they will spend - while also maximizing revenue for your business.

Step 4 - Operationlize

Get operationally ready! You would be amazed how many people do steps 1-3 above and announce an amazing new pricing structure that most customers will be very happy with - but have no operational or data infrastructure automation in place to make it work painlessly. 

Look at your end-to-end Revenue Generating Platform from quote - / commerce to cash - identify the gaps and fill them. If this is part of a wider transformation linked to your continued growth, then this may be the right time to replatform for the future.

And it’s not just about tooling, think about the impact on teams across your business:

• Customer Success and Sales - there is increasing pressure on Sales and CS teams to drive consumption. They will require significant up-skilling and change in posture.
• Product - greater pressure on Product to reduce complexity, and guide customers through complexity i.e. Product-led sales customer success.

Step 5 - Launch (slowly!)

Generally I would not advocate a big bang approach - think in terms of product families, and especially workflows related to your sales channels. Pick the ones with least variation and edge cases to do first.

In green field scenarios (like launching a new product) where you are not migrating customers there’s typically less risk so you can move faster.

Pace yourself in ‘brown field’ scenarios where you may be migrating existing customers from previous pricing and simultaneously making platform changes to accommodate the new pricing. Plan for at least 1 month (and ideally 3) of parallel running and reconciliation. Your new data infrastructure and automation may throw up some surprises.