How pricing models impact growth rate
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talio.
Your pricing model has a big impact on revenue growth. And as the business environment changes the pricing model should change too. The Maxio Institute has recently published its 2023 Growth Index Report and there are some important trends here for SaaS pricing.
Usage based pricing has been a popular theme for the past few years and many SaaS companies come to Ibbaka to ask for help in designing usage based pricing models. We almost always recommend that companies use some form of hybrid pricing. Hybrid pricing is when one uses two or more (but hopefully no more than three) pricing metrics to better align price and value. As we said back in 2021 …
Usage-based pricing a complement and not a substitute
Why not just use straight usage based pricing? It is simpler afterall, and one could argue that without use there is no value being generated.
The Maxio report shows that a hybrid approach is needed to optimize performance.
When the economy changed, usage went down and the contribution of usage to the revenue mix with it.
Of course these are average numbers, and we know that averages are deceiving. See In pricing it is the distribution that matters (averages are not your friend) .
The lesson here should not be to reject usage based pricing. Companies that combine usage based pricing with a subscription metric are best positioned to weather economic change and to grow with their customers. Having a usage based component can help SaaS companies …
Reduce churn as the cost to the customer has some flexibility, with a subscription only model the customer may have no choice but to cancel
Align price to value as a well designed usage based pricing metric will help correlate value to customer (V2C) with customer lifetime value (LTV)
Grow as the economy recovers - the slowdown may well be short term (we appear likely to avoid a serious contraction) and SaaS companies with hybrid pricing models are likely to grow faster than those that rely on a simple subscription
Segment your customers by how each price metric is contributing to growth.
You need to treat each of these segments differently. Each may warrant a pricing action, but they don’t need the same pricing action. Your goal is to get to a two stroke growth engine where both subscriptions and usage are driving revenue growth and Net Dollar Retention.
You need to go even deeper than this to avoid Simpson’s paradox. Within each of the revenue performance segments there are going to be subsegments you want to identify. You are looking to see if the finer grained segmentation finds subsegments with different revenue performance characteristics, different value drives and differing willingness to pay.
In a tough economy, you need to take targeted actions.
