Learn more about business with this collection
How to start a successful business
How to build a strong team
How to market your business
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.
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.
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.
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.
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.
More like this
3 Ways to Employ Complex Usage-Based Pricing
Subscription Pricing Models
Explore the World’s
Take Your Ideas
Just press play and we take care of the words.
No Internet access? No problem. Within the mobile app, all your ideas are available, even when offline.
2 Million Stashers
This app is LOADED with RELEVANT, HELPFUL, AND EDUCATIONAL material. It is creatively intellectual, yet minimal enough to not overstimulate and create a learning block. I am exceptionally impressed with this app!
Don’t look further if you love learning new things. A refreshing concept that provides quick ideas for busy thought leaders.
Great interesting short snippets of informative articles. Highly recommended to anyone who loves information and lacks patience.
Best app ever! You heard it right. This app has helped me get back on my quest to get things done while equipping myself with knowledge everyday.
Even five minutes a day will improve your thinking. I've come across new ideas and learnt to improve existing ways to become more motivated, confident and happier.
Brilliant. It feels fresh and encouraging. So many interesting pieces of information that are just enough to absorb and apply. So happy I found this.
I have only been using it for a few days now, but I have found answers to questions I had never consciously formulated, or to problems I face everyday at work or at home. I wish I had found this earlier, highly recommended!
Great for quick bits of information and interesting ideas around whatever topics you are interested in. Visually, it looks great as well.
Read & Learn
Access to 200,000+ ideas
Access to the mobile app
Unlimited idea saving & library
Unlimited listening to ideas
Downloading & offline access
Supercharge your mind with one idea per day
Enter your email and spend 1 minute every day to learn something new.
I agree to receive email updates