A Framework for Evaluating the Right Strategy for Your Startup by @ttunguz - Deepstash

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Price per seat or user?

Madhavan Ramanujam, board member and Partner at Simon-Kucher & Partners (a global strategy consulting firm) answered this question during Office Hours at Redpoint in Aug 2021. He is the author of Monetizing Innovation.

Massive companies have been built using both pricing structures: Salesforce and Adobe bill per seat while Snowflake and Twilio charge per use. Deciding which to use involves considering factors such as customer preference and competition.

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When to use per seat pricing

If your customers demand predictable bills, then per seat pricing is the way to go. The question is do they prefer it or do they demand it? Most customers will prefer predictability, but won’t necessarily demand it. Would they switch if the pricing weren’t predictable? That’s a question worth examining in your pricing research.

If you would like to create switching costs, per seat pricing with annual contracts establishes some lock-in. Usage pricing provides more flexibility to customers to try alternatives.

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When to use usage based pricing

If your costs scale with usage then usage based pricing aligns your costs with your customers' spend. This prevents very large customers from being your worst customers, by generating lots of revenue, but costing you money because the account is gross-margin negative.

If you are pursuing a two step go-to-market strategy with which the first user has a low willingness to pay, but the ultimate buyer has a larger budget, consider usage pricing. This is a land-and-expand motion. 

If customers use the product intermittently and the value is intermittent, usage based pricing works well.

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The most common pricing mistake

Madhavan tells that the most common pricing mistake in a land and expand motion is to cede too much value in the free/lesser product, scuttling any expansion opportunity.

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The hybrid approach

There are many companies who employ a two-part tariff: a base platform fee and an ongoing usage fee to capture positive aspects of both types of pricing strategies. Segment is a good example of this.

The platform fee establishes a stable relationship and the usage pricing enables the customer to scale up or down as a function of their traffic which might vary throughout the year.

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liviu

My interests are many and eclectic. Product guy.

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