Value Paths are the Key to Usage-Based Pricing
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Usage-based pricing is an emergent theme in the pricing world. It is attracting attention as it offers a direct path to better aligning buyers and sellers. Assuming that use has some correlate with value one can see usage-based pricing as a step towards outcomes or results-based pricing. Research by Zuora has found that companies that include a usage component in their pricing (which is not the same as going all in on usage-based pricing) outperform companies with straight per user subscription models.
Modern SaaS platforms are heavily instrumented. They collect a lot of data and have sophisticated ways of processing that data and turning it into insights. They are supported in this by companies like Pendo that help with the data collection and analysis.
With so much data available, what should be used for usage-based pricing?
The simple answer is ‘the usage data that best tracks value to the customer.’ OK, but just what data is that?
For most B2B software, this will not be a counting of clicks. Most B2B software does one of the following things:
Supports a process
Creates a report
Enables an action
Generates a result
Many B2B SaaS applications will do all four of these things. There is at least one path through the software. Completing the path, getting to a destination, is what creates the value.
We call these value paths. Ibbaka Manager of Customer Success Brent Ross came up with this notion for us and has been defining the value path for the Ibbaka Talent Platform (that is the platform you can use to make sure your team has the skills they need to deliver your value propositions and that your customers have the skills they need to realize the value you promise.
Let’s look at an example. I will use the blogging platform that I am writing on for this.
‘Support a process’ value path
The process I am in right now is writing this blog post. It will take many clicks. And several different people will touch it before it is published (but that does not make number of users a good value metric). This process is complete, at least for this piece of software, when the post is published. The value path is all of the things that I do, together with my collaborators, that lead to publication.
‘Create a report’ value path
Just publishing a blog post is not all that valuable. Knowing how many people are reading it, and how they are finding it, are important. Accessing reports on number of hits, search terms, where the people came from, what company they are with … these are all of great value. A usage metric that is tied to how successful the blog post was in attracting views would be very interesting to me. It would reinforce the value propositions of the site and bring the platform providers and me into better alignment.
‘Enable an action’ value path
In this particular case, the ‘enable an action’ value path and the ‘support a result’ value path are the same, but the actors are different. I ‘enable the action,’ you take an action (I hope) that generates a result that I value.
‘Generate a result’ value path
The results I am looking for in this set of value paths are subscriptions to this blog, survey participants, or people reaching out to contact us. Each of these is of value to me.
Now this particular platform does not monetize any of these value paths. Could it? Yes. Should it? Well, that depends.
Value is always relative to the next best competitive alternative. There are several blogging platforms available (or more accurately website design, development and hosting platforms as our entire website is here), and so far as I know none of them have usage based pricing. That makes the introduction of usage based pricing tricky in this space. Tricky, but not impossible.
Remember that usage-based pricing is not an all or nothing proposition. One way that blogging platforms can introduce usage based pricing is for special functionality that targets a specific value path. To do this, product development needs to think in terms of value paths and personas, and then in invest in the value paths that create value for the persona. They also need to be able to collect the data to track the path taken, where the blockers are, and when a value path is completed. This new functionality could then be priced on usage and even better, on usage directly associated with value.
The beauty of value-path pricing (as a type of usage-based pricing) is that it aligns buyer and seller.
I would happily pay more for functionality that improved any of the above value paths. In fact, I do pay for some of this functionality, I just don’t pay the blog platform. Instead we have integrated a number of other pieces of software which give us better analytics.
Value streams
The ideas for value paths and value-path pricing have been influenced by the value stream movement. From Wikipedia,
A value stream is the set of actions that take place to add value to a customer from the initial request through realization of value by the customer. The value stream begins with the initial concept, moves through various stages of development and on through delivery and support. A value stream always begins and ends with a customer.
Analyzing your customer’s value streams is a good way to find your own value paths and to get to meaningful usage based pricing.
Experts in value-based pricing may say there is nothing new here. Value-based pricing has always been about understanding the impact your offer has on your customer relative to the next best competitive alternative. That hasn’t changed. What value paths add is that they clarify the processes by which your customer uses your software to create value for themselves. It identifies these pathways and how to know when one is complete. It is at the completion point, and for the completion, that you want your usage-based pricing to kick in.
Putting the pieces together.
Define the value paths and end points. A value path is a series of steps that results in value for the customer or end user. Different user personas may have different value paths.
Align packaging with the value paths. Value paths and usage-based pricing combine to create offers targeted at specific personas.
Use these value paths to design usage-based pricing. Good usage-based pricing reinforces the connection of price and value.
