Before You Announce: Planning a Successful Usage-Based Pricing Launch
This is the first in a three-part blog series on launching usage-based pricing. Check back in the coming weeks for additional installments.
You are ready to announce your usage-based pricing launch. You have studied the available resources, like the Usage-Based Pricing Playbook, investigated the usage patterns of your current customers, and worked with your team to get strategic alignment with the transformation. Your new pricing model includes a usage-based metric and packages have been redesigned to include the metric.
What comes next?
You could put the new pricing up on your website and see what happens. Maybe even throw in some A/B testing to get a better feel for how potential customers are responding. After all, speed is life and the faster you start learning, the faster you can improve.
But buyers are conservative. They don’t like change and when change comes to them, they want to understand the reasons. “Usage-based pricing is on trend” is not a reason buyers will accept. Before you move, you need a plan. Without a plan, you are likely to stumble out of the gate and learn more slowly than you need to.
What can go wrong when you introduce usage-based pricing models?
Your billing system gets in the way
Some of the most common challenges when navigating a usage-based pricing launch are around basic hygiene. In some cases, the billing system is not set up to handle the usage metric. This seems obvious but many of the current billing systems struggle to implement the usage-based metric. One does not want systems limitations to determine the pricing model, but on the other hand, a price that you cannot bill for is problematic. Modern product-led growth companies rely on their billing systems for accuracy and speed. And billing is not the only problem. Revenue recognition can be an issue as well. How will your accountants look at usage-based pricing revenues, and how will they want to allocate them over time?
New buyers need to connect usage to how they get value
You can generally handle internal challenges like billing and revenue recognition. More important is how new buyers will react. If you take your current pricing and just layer a usage metric on top of it, buyers will see this as a surcharge and competitors as an opportunity to undermine you. Buyers have to see the value of your solution and that how you price is part of that value.
The current customer base needs to believe this aligns with their growth
And then there are your current customers. Will you bring them along into the new pricing model? Product-led growth companies need to be able to move quickly and having a set of legacy customers with a different pricing model can be a drag on growth. If you have a solution that delivers value, and the usage-based pricing aligns with that value, then it is in yours and your existing customers’ interest to move to the new model. Don’t leave them behind.
There is an old joke, “How was God able to create the world in seven days? There was no installed base.”
So how do you go about introducing a usage-based metric during your usage-based pricing launch?
Begin with value.
Marketing is based on communicating the value drivers
Design a marketing program that underlines how the usage-based metric tracks the value that you are providing. Then explain how this aligns with the value your solution delivers. There are several ways to do this.
Consider both emotional and economic value. Emotional value matters in B2B sales and usage-based pricing is a good opportunity to connect to your user’s aspirations. The best B2B companies help people achieve self-actualization. Think about how HubSpot created a whole set of careers in content marketing or how Snowflake has brought together the people across an enterprise into a data community. ‘Collaboration’ is called out across Snowflake’s website as part of how it creates value.
Economic value drivers are critical in B2B, and if you have done a good job designing your usage-based pricing, it will track value. If it does not, then you may want to go back to the drawing board.
The best way to align usage-based pricing with economic value is to price the completion of value paths. A value path is a series of actions that users take on your platform that end with something the user values. For HubSpot, this could be a new sales qualified lead. For Pendo, it could be a product qualified lead. For the innovation management platform IdeaScale, it could be an ‘idea’ that gets selected for further development.
Align around the value cycle
You will need to show how your new pricing metric aligns the interests of vendor and client.
This goes beyond just marketing messages and sales playbooks. Customer success needs to be focused on supporting the usage metric and making sure customers are getting value. Customer success should mean that the customer is made successful. Or, as Ed Arnold, advisor at Ibbaka, said in his recent presentation on value storytelling, “The hero of the customer journey is your customer, not your solution.”
The product team should be shaping innovation to increase the value created for the customer relative to their alternatives. A well designed usage-pricing metric means that more value leads to more use, which leads to more revenue. That is the ultimate goal of the value cycle. Create, communicate, and deliver value, document the value you have delivered, and then capture enough of the value you created so that you can go on, continue to innovate, and create more value.
Here are some tactical ways your team might achieve value understanding at every stage:
- Value creation: Identify value paths with a cross-functional team.
- Value communication: Build marketing on value drivers.
- Value delivery: Customer success needs to make sure value is delivered.
- Value documentation: Customer success needs to document the value.
- Value capture: Pricing is based on how much value is being delivered to the customer across the customer journey.
Build a risk map before you launch
Ultimately, all of your value building and exploration should lead you to identify risks and mitigation measures ahead of your usage-based pricing launch.
The below represents an example of what your team might arrive at, although every company is different, of course.
In our next post, we will focus on how to bring your current customers over into the new pricing model. This needs to combine a structured series of messages, segmentation of the current customer base and (only if necessary) an inventive program to abandon the old pricing.
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