New Skills for Usage-Based Pricing
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Usage based pricing is getting recognition as a key aspect of SaaS pricing models.
Kyle Poyar at OpenView Venture partners has written extensively on this. Ibbaka identified usage-based pricing as an important part of the pricing response to the Covid-19 Pandemic.
Billing management companies like Logisense and Zuora have reported that companies that include a usage-based component to their pricing models grow faster than companies that do not take this approach.
As a result, we are getting a lot of inquiries about how to adopt usage-based pricing.
The design of usage-based pricing models is an important topic, something that we actively research and that we will write more on. See How to introduce usage-based pricing and Value paths are the key to usage based pricing. But we know that just changing your pricing model is not enough. Pricing and value communication does not end at the sale.
What are the new skills you will need to adopt usage based pricing?
New pricing models can require new skills. The shift to usage-based pricing is a bigger one than most and requires new skills (for some of us) in three critical areas:
Prediction
Value Paths
Customer Success
To be confident of success with usage-based pricing, you may also need to think about the skills that your customers need to (i) accept usage-based pricing and (ii) to use your offer successfully.
Prediction
One of the reasons usage-based pricing was not more widely adopted in the past was uncertainty. Buyers like to know how much something they are buying will cost. Sellers want to have predictable revenue. Usage-based pricing seems more uncertain than a pricing metric based on something that can be known in advance, like the number of people or the number of access points to be protected.
The solution to this is prediction. The current version of AI, deep learning, is mostly about pattern recognition and prediction. One of the better books to be written on this subject is Prediction Machines by Ajay Agarwal, Joshua Gans and Avi Goldfarb. The subtitle is ‘the simple economics of artificial intelligence’ and the book asks what happens when prediction becomes much, much cheaper.
One of the answers is usage-based pricing.
What will you need to get better at prediction?
Data. You have to collect and organize data on past and future use of your offer and use this to build predictive models. Ibbaka has referred to this as ‘Predictive E’ and ‘Predictive V.’ The E is for engagement; the V is for Value. (The post if from way back in 2016 but the core concepts are still relevant.)
Machine Learning. The data alone does not give the answer. You will need to apply some form of machine learning to begin to make predictions. Fortunately that has gotten a lot easier over the past couple of years. All of the gig infrastructure vendors have machine learning as a service that you can leverage. There are great upper level tools (our favourite is Keras) and open source libraries to accelerate development.
Model Building. Data and machine learning will get you a long way but they won’t really help you make decisions or set a direction. You will need to develop models of why people are using your offer, how that is giving them value, and what would give them more value. In other words, you need value models informed by deep customer understanding. See Your pricing model needs a value model.
Value Paths
In the context of pricing, not all usage metrics are equal. You are concerned with the usage that is associated with your customer achieving something of value. At Ibbaka we call these the value paths. There are four basic types:
Supports a process
Creates a report (that provides an insight)
Enables an action
Generates a result
We have discussed this more in Value paths are the key to usage-based pricing and we are currently formalizing approaches to discovering value paths.
Customer Success
Customer success is considered by many, including the team at Ibbaka, to be the key business function in the subscription economy. It is the business function that is accountable for renewals, which are central to the subscription business model. If customer success is central to subscription pricing it is critical for usage-based pricing. No usage, no payment. That is the harsh truth of usage-based pricing. To win use the use needs to deliver value. That is the new directive for customer success, connect use of our solution to value.
In fact, at Ibbaka we were introduced to value paths by our customer success manager Brent Ross.
Customer success is so important that we have chosen it as one of our first three Open Competency Models along with Design Thinking and Pricing Expertise.
Skills on the Customer Side
One of the big insights we have had over the past couple of years working with our customers is that it is not just our own skills that matter, it is the skill growth we support at our customers.
One of the first things that happens in an Ibbaka engagement is a knowledge transfer session. This is a two way conversation where Ibbaka builds a deep understanding of the customer’s business and its customers while helping the customer understand the critical ideas in the value-based approach and how to apply them across the customer journey. Afterall, pricing and value communication does not end at the sale.
When you adopt usage-based pricing, it is important to look across all of the customer touchpoints and ask
What skills does my team need at this touchpoint?
What skills does my customer need in order to drive usage (and complete value paths)
How am I going to support my customers in gaining these skills?
The answers to these questions will depend on the solution in question. An Internet of Things solution for precision agriculture will require different skills than a supply chain management system for transportation and warehousing; the skills needed by the customers of an innovation management platform are not the same as the skills needed by a company creating breakthrough innovations in natural language processing and mobile technology. (These are all customers with whom Ibbaka is currently engaged.)
On the other hand, there are certain skill sets that cross all of these different industries and solution categories. Customer success skills are critical to any company adopting usage-based pricing. So are data and predictive analytics skills. Design thinking is broadly applicable anywhere a human-centric solution is needed to a customer challenge.
Adopting usage-based pricing requires more than just a new pricing model and billing system. It requires building the critical skills needed for execution.