The Rise of Hybrid Pricing Strategies in SaaS
SaaS companies implementing usage-based pricing strategies continue to outperform others in customer success measurements. For customer-focused SaaS companies, a hybrid pricing strategy using both billing methods will be key going forward.
The pricing model is shifting in the software-as-a-service world. Subscription plans are stalling in the eyes of consumers, while usage-based pricing models are quickly gaining the attention of customers and SaaS providers alike. The disruption to the standardized way of pricing is causing quite a stir, empowering providers to re-evaluate their billing best practices and adopt a usage-based (or consumption) model that customers are demanding. Microsoft, Slack, Datadog, and Snowflake are some of the industry’s early adopters with many more SaaS companies soon to follow suit.
Adapting to meet your customers’ demands is good business practice. However, there’s a lot of hesitancy and concern when it comes to adjusting your billing strategy after several years of success. Providers are advancing their strategy beyond usage-based pricing and incorporating a hybrid model approach to their business. It’s called a usage-based subscription model and provides invaluable services for SaaS companies adopting consumption billing into their business and organically grow by making customers more successful.
With subscription-based pricing, customers pay a recurring fee for a product or service regardless of how often they use it. You might see this referred to as pay-as-you-go.
- Simplified pricing for users
- Easy to forecast revenue
- Improved customer success measurements
- Customers don't feel nickel-and-dimed by multiple forms of charges
- Offers flexibility for customers who can add or remove users as needed
- Significantly better customer retention rates and lifetime value compared
Usage-Based Pricing (Consumption Billing)
Rather than maintaining cost control, companies shift that control over to the customers in usage-based pricing. Customers are billed for what they consume, avoiding added costs for services and features they do not use.
- High-use customers accounted for in vendor billing/revenue
- Grow with your customers -- their growing invoice is an accepted part of their success
- Value-based pricing creates trust in the customer
- Attracts new customers with low usage that can scale over time
- Land-and-expand opportunities
Usage-Based Pricing in SaaS: How We Got Here
Usage-based billing is gaining popularity among users and providers in the SaaS community. While it’s not so much of a “new” strategy, the demand for it grew significantly since the height of the global pandemic.
As businesses experienced more irregularities in their service volumes, a push for something more flexible was brewing. The software as a service industry is always evolving, and that can be said for the way providers are pricing out their products.
The general interest is motivation enough to think about how one might implement a new pricing strategy into the core business, but how one does so effectively with an established subscription model in place is the big question.
How Subscription Became the Standard
The start of the cloud era was also the launch of subscription plan pricing. At its inception, subscriptions became the standardized method of pricing various software services. Cloud technology was transforming the way companies have been doing business for years. With new players emerging into the market and a breadth of new tech stack layers, providers were able to price their offerings together to pull in recurring monthly revenue.
Sounds nice, right? Companies continue to use the mainstay pricing way as it offers a value of:
- Predictable revenue
- Faster revenue growth for startups
- Significantly increase in customer lifetime value
Usage-Based Billing in SaaS
More recently, usage-based pricing has piqued the interest of SaaS customers from all over the world. Seeking a strategy that accounts for their own product consumption creates value and trust, which can lead to scalable services over time. With the possibility of more revenue down the road, why hasn’t the industry popularized this model sooner?
Good question. The perceived challenges associated with usage-based pricing have kept this model in the shadows of subscription plans:
- Revenue harder to predict
- Metric reporting challenges
- Metering and billing disputes
- Most enterprises at the time preferred a predictable budget plan than pay for usage
Key Learnings from Early Adopters of Usage-Based Pricing
- Their customers love them. Companies with usage-based pricing typically have higher NPS and CSAT scores compared to the broader SaaS index.
- Better long-term performance. These companies see most of their growth later as they scale. As their customers grow, they grow, in turn driving longer lifetime value.
- Communication companies are a natural fit. Communication companies like Twilio and AVOXI have had the most consistent success with these models. Additionally, SaaS and telecom recovered faster in 2020 than any other subscription sector, according to the Subscription Economy Index.
- Usage works best with subscriptions. Most usage-based SaaS companies also use subscriptions as part of a hybrid pricing strategy. This provides the benefits of both without as many drawbacks as you get with either one on its own.
Adopting Hybrid Billing Strategies
Hybrid billing has taken off in the SaaS industry, and we’re not looking back. This strategy has led several to several customer success measurements at AVOXI as well as other leading brands. Customers are loving the additional billing structure, and providers are seeing that love reflected in their performance scores:
- 7/9 with best NDR have usage-based pricing as part of their billing strategy - a sign that customers are staying with them longer.
- OpenView found that product-led growth companies boast higher NPS scores.
Why do these PLG companies score well with customers?
There are likely a million reasons why a product-led growth company outperforms others. The most important ones to AVOXI are listed below:
- Organic growth. The same pricing plan can work across a wide range of use-cases and package sizes.
- Value-based pricing. Define what the metered measurement is so customers can associate their higher bills with personal success.
- Reduced barriers to entry. Here you should also define what the metered measurement is. This can be something like a free trial so customers can try it before they buy!
- Creates great incentives. Aligns the company and customer better on average than previous models could.
Example of Hybrid Pricing in SaaS
At AVOXI, a hybrid pricing model has been crucial in setting our customers up for success. Looking at our service offerings, you can see the marriage of both usage and subscription model elements.
Our staple voice package, Jetpack, uses a hybrid pricing model where customers choose a subscription package. They are tiered off of call volume (a usage-based value metric), and the service switches to a metered pricing plan for additional calls rather than cutting off our users. That overage mechanism safeguards customers from downtime, and makes it easy to scale the usage plan at any given time.
AVOXI Flex, a service available to CCaaS and UCaaS partners, that follows a hybrid model leaning on consumption-based billing, allowing us to provide a better solution for partners that will have better success with a metered plan. TrueLocal, our most popular outbound service, follows a similar hybrid billing structure.
The AVOXI Contact Center uses a per-user subscription model tiered on available features. While it doesn't follow a hybrid price model directly, it plays a role in our overall hybrid pricing strategy:
- Contact Center's subscription model provides more stability in our billing trends.
- Most users also implement voice services, creating a horizontal growth path within our base.
- Contact Center drives more users on the platform, giving us more opportunities to create value.
Best Practices of Hybrid Pricing
- Choose a value-based billing metric. The measurement you charge your customers must be something they associate with success. It should also be adjustable, simple to understand, and repeatable at scale.
- Experiment with your pricing structures. Get creative with plans and incentives for your customers. You can offer discounts for larger commitments. Companies that update their pricing every 3-4 months perform better on average.
- Invest in forecasting tools. Predictive modeling is a huge challenge as you scale, so ensure your accounting team has the technology and team needed. Chief Financial Officers using these pricing models generally focus on revenue, RPOs, billings, net expansion rate, and active customer accounts.
- Prepare for backloaded growth. Usage-based solutions don't drive immediate revenue as effectively as subscriptions, but they scale faster in later stages of growth. You can make things easier for yourself with an effective hybrid billing plan that drives some subscription revenue.
In the early days of usage-based pricing, you really aren't getting paid until the customer is launched and succesful. As hard as that first million is to get, increasing your revenue incrementally down the line becomes effortless. Most of that later growth is not a function of your distribution efforts, it's a function of the distribution of your customers. Particularly for these API-type businesses where you're being fully integrated into the products your customers are building.
- Patrick Malatack, Partner @ Matrix Partners
SaaS Pricing Glossary & References
Customers are charged for the number of “seats” or user licenses on the account.
- Simple, fixed pricing is understood by consumers.
- Vendor revenue scales with more user adoption.
- Easier for a vendor to forecast revenue than with usage-based pricing.
- Discourages widespread adoption across enterprises and may lead to licensing sharing.
Brands: AVOXI Contact Center, Asana
Software companies with two+ packages that unlock features as they move up plans have entered into a tiered pricing model. Each tier is tailored for a specific buyer persona and includes features and services that buyer needs to do their job effectively.
- Provides flexibility and scalability with the option to upgrade or downgrade as needed.
- Price points for multiple personas.
- Better targeting leading to higher conversions and maximizing revenue.
- Each tier increases in value and easier to upsell.
- Too many tiers can be confusing for customers.
- Not all SaaS companies tier their features the same way.
- Customers may pay additional fees for services not offered in any tier plan.
Just as the name suggests, customers engaging with a flat-rate pricing model will pay one price each billing cycle for all features and levels of access. Basically, everyone is on the same plan.
- Simple pricing for customers to understand.
- Vendors can simplify the accounting process and better predict revenue.
- Vendors can focus on acquisition and retention instead of a tailored pricing strategy.
- Fees and pricing are transparent.
- Harder to grow account revenue.
- Potential to lead to lower quality of service.
- Off-putting for customers who want customization.
While a similar layout to a tiered pricing model, customers only pay for the functionality they require. When they need to extend the scope of their functionality, they pay more.
- Customers pay for what they need.
- Pricing is straightforward.
- Software trials help new customers familiarize themselves with the product/service.
- Natural upsell opportunity.
- Impressive features allow vendors to market what a target customer may be willing to pay.
- Consistently innovating and troubleshooting to add value to new and existing products.
- Impossible to know exactly what every customer needs at what tier.
- Redundant features at every tier need to solve a distinct problem.
Brands: Quickbooks, Unbounce