Why do we hear so much about usage-based pricing, anyway?

Hey folks! Kristina Frost here, I’m writing a guest blog series for the m3ter team about the move to usage-based billing and why, if you’re worried that it’ll be a nightmare, that it can be better than you dared to dream. I have 15+ years of experience holding a variety of strategy, operations, and technology roles at companies like Salesforce and Elastic, and I’m an adjunct at the University of Denver, where I teach courses like Business Essentials and Technology & Innovation Management.

USAGE-BASED BILLING: HOW DID WE GET HERE?

If you’re reading this blog, then I imagine that you’re representing an organization working to shift your pricing and packaging strategy to a consumption-based model, extending ideas that were first popularized by AWS, GCP, and Azure to all kinds of software services. This is easier said than done, considering how daunting of a task it can seem to be when it comes to accurate and automated billings on real-time, highly granular event feeds. Whenever I’ve spoken to my students about this movement, I usually walk them through what I jokingly refer to as the “Idiot’s Guide to Software Licensing,” which is worth a revisit: 

While the early years of SaaS created nice, predictable subscription revenue, I’d like to posit that moving to usage-based pricing is about something else: removing friction in the buyer experience whenever your customers look to grow their footprint or advance their feature adoption. 

I’m sure we’ve all heard this before:

This is a consumer mindset that is bleeding into our business expectations — like unbundling our cable, we want software that strikes the right balance of our actual usage to our received value. The last eight years of my career have involved this kind of “smart unbundling” — striking the balance of what features to present, and what minutia to hide. But it offers more than just that — those unbundled offerings typically change from seat subscriptions to feature adoption — they transform into usage. With the right terms, your users will never need a contract vehicle again to try out a new feature — they simply start adopting it, and you start metering and charging them. This is the true beauty of usage-based pricing: it removes barriers. 

When even your packaging is about giving your customer the greatest degree of flexibility, what we’re really talking about is Product-Led Growth. When I started my career in this space, Customer Success was the buzzword, in part due to work done by Salesforce in its early days to save its business by improving its renewal rate.

However, no group of humans, no matter how customer-obsessed they are, can ever be as scalable as a product experience that delights its users. 

Wait, Kristina: aren’t you forgetting something? There’s this little thing called revenue recognition, and it sounds to me like usage-based billing would make that harder. You’re not wrong, my friends! ASC 606 directs entities to recognize revenue whenever services are delivered to the customer — something any finance professional will tell you sounds way simpler than it actually is. It immediately introduced complications with implementation (very hard) and a lack of readily available, plug-and-play solutions means that many of our friends in finance are still living in spreadsheets. I’ll write about this more in my second blog, which will show how m3ter can simplify that process, but for now, I’ll agree that the need to recognize revenue is the third fundamental force we all have to consider in this moment of convergence. 

Simply put, here are our three assumptions: 

1. Customers should pay for what they use in a scalable way
2. Product-led experiences are best for customers and companies, and 
3. Revenue must be recognized on delivery

The solution market forces have adopted to meet these three principles is usage-based billing.  Usage-based billing puts the choice about what to use, and when, in the consumer’s hands. The reduced friction of this model lets customers experiment and grow on their own terms, leading to happier outcomes that take less time in the negotiation and in contracting. And even though it might be daunting to figure out how to source the details of usage, it becomes a direct input to revenue. 

Now that we’ve laid down these fundamentals, let’s take a look at how we get there — and how your implementation can exceed your own expectations with new capabilities that m3ter unlocks for your business. In my blog next week, we’ll be taking a look at the trade-offs between building your own usage-based solution and buying one, and then I'll outline how you can use m3ter to get to a robust usage-based solution in just six weeks.