Griffin Parry has seen a sea change in the way software-as-a-service companies charge their customers. As he sees it, more and more suppliers are considering price as a strategic lever as they compete for business in a crowded marketplace. In particular, they are adopting usage-based pricing models rather than charging fixed subscriptions based on an agreed number of users. “The problem is, doing usage-based pricing is difficult,” he says.
Parry – along with partner John Griffin – is the co-founder of M3ter, a London-based startup focused on usage-based pricing. In the year Launched in 2022, the company has raised $14 million in Series A funding to expand its operations in the US and introduce new analytics-based decision-making features.
And you can see that this is a bold move. The concept of usage-based pricing has gained a lot of attention over the past couple of years, and M3ter isn’t the only platform provider in the pricing game. But Parry sees a rising tide of interest and demand for workable solutions and creates opportunities for unique startups.
In a September 2022 report, consultancy Bain & Company said usage-based charging instead of subscription is “creating the fastest-growing, highest-value SaaS companies,” with Snowflake, Datadog and Twilio among those cited in the report. .
It’s a simple enough concept. Traditionally, software-as-a-service has been sold on a subscription model, with the price fixed, unless the plan changes. A usage-based approach model allows more flexibility for users. This could mean cutting costs if usage is down, or conversely, the ability to maximize their software usage – and pay a bit more – when it’s needed.
Now that sounds pretty easy. After all, it is a model we can get used to as consumers when we pay for metered water, electricity or telephone. So why does this growing market offer opportunities for startups like M3ter?
Parry says there are some significant tailwinds in the market.
Product leader development
“Increasing productivity-driven growth is helping,” he says. Over the past few years, it has become easier – although by no means easy – for sellers of all sizes to find corners of the enterprise willing to try a product to sell to enterprise customers, often on a free trial or freemium basis. The idea is that once some people start using it, others in organizations will follow. A usage-based pricing approach can be beneficial, not least because it allows end users to increase usage relatively easily.
Then there is the macroeconomic situation. We are living in difficult economic times. Buyers of software products are looking closely at price. In particular, they are looking for pricing models to meet their needs.
But here is the question. Given that usage-based pricing is not a new concept in itself and that the utilities mentioned above have been around for years, why don’t SAS companies develop their own billing systems?
Parry acknowledges that there is more than one way to create a usage-based discount. “You can build your own platform or do it using a spreadsheet,” he says. “And in the past, companies had to do it for themselves.”
But, he contends, getting it right isn’t easy. While running a previous company – Gamespark – Parry, he and co-owner John Griffin doubled down on usage-based pricing, but it was difficult to do. He worked in AWS (Amazon Web Services) when the company was sold to Amazon. Again, he said he saw problems in implementing a usability-oriented approach.
One of the main challenges, he said, is making sure everyone has access to the usage data. This includes not only billing departments but also customer-facing staff. “Anyone talking to customers needs to have the data in their hands,” he says. It should also be clear to customers. If you don’t know why you’re paying a certain amount, you might not be happy. Therefore, any system must combine usage and cost data and distribute it to what it wants and needs. “If you make mistakes, you get revenue fraud and a poor customer experience.”
Of course, there are non-technical challenges around pricing. Be that as it may, a seller can pay based on usage, but is that what most customers want? A subscription-based approach can be a bit of a vague tool, but it is predictable. Finance department employees can sleep easy knowing that costs won’t jump due to user congestion.
A Bain report found that 80 percent of users believe that usage pricing provides services that match the value they receive in terms of value. But it is important to get the model right. That can be as simple as pay-as-you-go or a model that moves the end user through payment tiers based on activity.
For his part, Parry admits he’s not a strategic pricing expert. The role of M3ter and its competitors is to align pricing to their customers’ needs and requirements. Clients include Stedi, Sift and Clickhouse.
Parry also saw an opportunity in data. Class A funds will be spent to add analytics features. As he sees it, customer usage data can be deployed to power a large amount of automated decision-making around pricing.
Usage-based pricing is on the rise. Parry says 34 percent of software companies will use the model by 2020. Today it has reached 61 percent. Adoption has been driven in part by the economic environment, which has forced consumers and suppliers to focus on the cost equation. However, as the world economy improves, he believes the trend will continue.
For start-up companies operating in the software arena, the concept can help them with their product-led growth strategies. It also creates a growing market for flexible pricing providers.
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