Why are database companies moving toward usage-based pricing?

Database companies are having a moment. Recent years have seen vendors become more flexible, agile, and innovative. And now they’re one of the industries leading the charge toward more modern, value-focused pricing.

While many database providers have made the move to a SaaS model, usage based pricing (UBP) is the next step beyond that – and it’s becoming increasingly common. Over 55% of respondents from OpenView's 2022 SaaS Benchmark Report have at least tested UBP and seen higher median NDRs. (It’s also one of the big factors that is increasing flexibility and agility across the industry.) 

Becoming a SaaS company enables companies to deliver the infrastructure with better economics – some sort of pay-as-you-go that isn’t as tied to legacy licensing. UBP moves a business from flexibility around infrastructure to super flexibility around pricing, lowering the cost of entry for customers and giving more options to scale.

Let’s dig into the reasons why database companies specifically are a perfect fit for UBP, and the common pain points that UBP (and m3ter) can help solve. 

Why is UBP inherently a good fit for database companies?

The key factor that makes UBP a good fit for database companies is variability – particularly in areas such as storage, compute resources, and backup requirements. For a SaaS database company, the flexibility and agility of UBP makes it easier (and more impactful) to meet the variable needs of its customers.

• Storage – Databases require storage, and storage is a cost to the customer. Because the consumption of storage is a clear usage metric to track, it works especially well with UBP, typically with some sort of tiered pricing, overages, etc.
• Compute resource – If a customer needs X amount of compute resource on demand to deal with a particular workload, the last thing you want to do is artificially constrain them within a particular commercial tier. UBP allows them to scale up their usage as required for the workloads they need.
• Backup requirements – Different customers will have different backup requirements for their databases. UBP allows database companies to better support a whole range of backup options. 

Many of the products and services sold by database companies lend themselves to a usage-based pricing model. But the match is optimal for other reasons, too. 

Pain points for database companies with legacy pricing – and how UBP and m3ter can solve them

Many of the pain points that database companies face with their legacy pricing models can be alleviated with usage-based pricing. And although the flexibility offered by UBP does lead to complexity in pricing, m3ter can support database companies (and all SaaS businesses) to deploy and manage usage-based pricing. Here’s how: 

Legacy pricing pain #1: Complexity

While UBP does add its own complications to a pricing strategy, the complexity of legacy pricing runs deep. 

Maybe you’ve had early-stage customers being grandfather-ed in with their customized pricing. Or your sales team has continued creating unique deal terms to win customers during a push for growth. There are any number of ways that legacy pricing may have become more convoluted over the years – and your customer success teams are likely dealing with the challenges that creates.

How UBP solves it: But the great thing about UBP is that it aligns with what customers want – value – while actually reducing the complexity of understanding your pricing. It’s simple: they pay for what they use. And with database companies, in particular, this perfectly lines up with the variable products offered (e.g. storage and compute resource).

Legacy pricing pain #2: Scale

Another pain point for database companies is the scale being dealt with daily. The company isn’t just submitting “how many people have purchased X” – we're talking about thousands and thousands of transactions. 

If the company was just managing one big transaction at a time, it would be easier to calculate; but since it’s in real time, it becomes extremely difficult for them to manage it internally. This typically goes one of two ways: 1) They build a homegrown system, which is usually expensive, hard to maintain, and rarely has everything they want; or 2) they're opening up Excel and manually processing transactions, using up countless man hours and increasing the likelihood of mistakes.

How UBP solves it: As you scale, it’s crucial not to leave money on the table. But if you have a manual or homegrown system that’s not properly maintained, it will become even harder to capture all revenue as your customer base grows. UBP is built for situations like this – it can flex up to meet high transaction volumes and, with proper management, can offer real-time pricing. 

Legacy pricing pain #3: Agility in enterprise-level agreements

Most database companies offer standardized, out-of-the-box pricing for smaller buyers, while their enterprise-level agreements tend to have unique pricing models and custom deals that only affect the larger customers. 

This complicates the billing process. When it comes time to calculate monthly bills, Billing Ops must go into the pricing folders for specific customers to do it manually, rather than just using the standardized pricing. This makes billing extremely time-consuming for your teams, leaving them vulnerable to inaccurate customer bills and putting customer trust at risk.

How UBP solves it: There still may be customization at the enterprise level with UBP, but as long as you have the proper platform – like m3ter – metering, pricing, and billing will be much simpler and automated.

Legacy pricing pain #4: High cost of entry for customers

Legacy licensing – especially in the case of database companies – is notorious for large, upfront costs based on forecasts of usage that can be hard to get right. This creates a barrier to entry for potential customers, who need to make a large commitment without knowing if their estimates will be correct (or if they’ll overpay for storage they don’t need). 

AWS is a leader in the SaaS database field, and some of their customer stories showcase how impactful lowering the cost of entry can be. According to AWS, in less than 18 months Samsung managed to profoundly reduce costs after migration to their usage-based service, because the company was able to free itself from the restrictive licensing costs of its on-premise legacy database. 

How UBP solves it: Usage-based pricing offers a low cost of entry for most customers, because they're paying for what they use rather than paying a high subscription fee for things that they may not need.

How database companies deploy UBP with m3ter

61% of companies adjusted their pricing this year, and we expect to see this number continue to grow in 2023. Database companies are no exception, and the shift to usage-based pricing will become pivotal. m3ter was built for this exact reason - to help companies deploy and manage usage-based pricing through metering, rating, and analytics. We work with numerous database companies, enabling them to transition from legacy and manual billing operations to automated bill calculation for pricing of any complexity. 

So, how does it work? m3ter starts by ingesting high volumes of usage data. By applying logic and calculations at the point of ingestion, m3ter saves your engineering team the pain of maintaining the necessary infrastructure to do this in your own system. On top of this, your billing team is saved hours of manual work around invoicing and billing.

Once the data has been ingested, m3ter supports pricing logic of any complexity: Volume-based, tiered, stairstep, combination with subscriptions, and complex credit-based systems such as those used by Snowflake. m3ter also supports comprehensive billing logic that allows you to apply, for example, minimum commitments, discounts, prepayments, and complex parent/child account structures. We see a variety of these used across database companies. 

We know that you have existing quote-to-cash tooling, so m3ter is designed to seamlessly integrate. Native integrations allow easy setup and maintenance of bi-directional connections to leading tooling such as Salesforce and NetSuite.

Finally, analytics power the backbone of your business. m3ter surfaces metrics in easy-to-consume reports that help you power your UBP business. And in the future, we will be developing algorithms and applying them to your data to surface advanced analytics such as cost allocation, forecasting, and pricing recommendations.

Interested in how m3ter can help your company transition to UBP? Get in touch here to chat with our database UBP specialist.