Why is Usage Based Pricing (UBP) so popular these days? Should I change my product's pricing to UBP?

The short answer is: think really hard about your buyer. 

Usage-based pricing makes a huge amount of sense for small teams who want to experiment. 

Hence why you see startups moving fast with dev on AWS or engineers coding on Twilio. 

What do most UBP products have in common? The thing you're counting is easy to understand and scales with value. That's why you see so many CIOs loving UBP (remember that advice about the buyer?!). 

Counting data, integration points, servers, storage, compute, etc. is pretty easy for those teams.

You know who it's super tough for? A VP of Sales. Not many of them want to count the # of opportunities in their Salesforce instance. What they do like to count are people in their org. That's a big reason why Salesforce charges per user.

Often I'll see lots of creativity around usage (# of emails! # of workflows (huh?)! # of API calls). 

These can work great! Just remember that if your buyer can't count it easily it's unlikely to be effective.

So ask them! 

1. Usage Based Pricing is popular for many reasons. I don’t have the exact answer but my hunch is that there are more and more products built to be use by broader swaths of users than there used to be. In this world, a software bill can often get bloated with folks who signed up or got added to a software system once, but never logged in again. Having usage based pricing ensures folks are only being charged for the users that actually get value from their product. This helps customers get over the fear that they’ll be paying for folks who don’t use the software and makes them more likely to add more users to the tool. It’s attractive for customers who are good at keeping active usage high as they’ll often see a high NDR (net-dollar retention) from customers expanding their usage. It can be risky, however, if your company sees inconsistent active usage from your base.
2. I’d say switching pricing determines on how folks use your product and what your priorities are (cost per user versus volume of users).

Usage-based pricing (UBP) has gained popularity for several reasons. It allows for a customer to only pay for what they use, which makes it a very attractive and fair when creating an appealing price to value equation.

1. Value-Based Pricing: UBP aligns pricing with actual usage or consumption of a product or service. This pricing model is often perceived as fair because customers only pay for what they use, creating a direct correlation between value received and price paid.

2. Scalability: UBP is particularly attractive for businesses that scale their usage up or down based on demand. It allows customers to start small and only pay for what they need, as their needs grow they can move into a higher price point.

3. Transparency and Efficiency: UBP offers clear visibility into the cost implications of their actual usage, as well as incentivizes customers to being more efficient to optimize their usage to lower costs. This can lead to more responsible consumption patterns and cost savings for both customers and providers.

4. Customization and Flexibility: UBP allows for customization based on individual needs and usage patterns. Customers can choose pricing plans that best fit their usage, leading to a more tailored and flexible pricing structure.

While there are many favorable reasons to move to UBP to appeal to prospective customers, there are a few things to be mindful of before deciding to make the switch. Implementing and managing usage-based pricing models can be complex, requiring new billing systems and processes to accurately track usage, charge customers accordingly. Also, it does not always lead to more favorable business outcomes. Usage-based pricing can be perceived as more complicated and less transparent than flat-rate pricing models. Customers will always evaluate your product or service based on the perceived value it provides them, through the lens of their usage. The beauty of subscription models priced based on customer complexity or needs (such as insurance) versus usage, are that customers pay a flat price no matter their consumption. In fact, you are not trying to incentivize usage on a regular basis through some other pricing models.

Net, ultimately your pricing construct depends on the product or service that you provide, as well as the make-up of your target audience. Hopefully the information above provides things to consider when evaluating your pricing structure.