In B2B SaaS, pricing and packaging strategies can be the difference between growth and stagnation. Yet, many companies struggle to use those levers effectively.

This article is based on a conversation with James Wood, VP of Product at M3ter, and it explores the evolving landscape of SaaS pricing and packaging. With a deep background in consulting and operating at companies like Segment and Insight Partners, James has a unique and actionable perspective on overcoming the common pitfalls and maximizing the potential of pricing and packaging initiatives.

James’s journey from consulting at Simon Kucher to leading product initiatives at Segment and M3ter has given him a front-row seat to how SaaS pricing has changed over the years. His experience spans the early days of implementing value-based pricing strategies to navigating the complexities of modern, usage-based models.

"Usage-based pricing is here to stay." - James Wood

Key Takeaways

• Usage-based pricing isn’t simple: Companies are moving beyond blunt usage-based pricing models to more nuanced hybrid models, but fail to internalize and operationalize the cultural change associated with it.

• It’s not one-size-fits-all: You can support multiple models, and often it’s useful to only deploy usage-based models to a subset of your customer base.

• Continuous iteration is necessary: Regular, small-scale pricing iterations can drive significant revenue growth without the major re-engineering efforts.

The Reality of Usage-Based Pricing

Usage-based pricing has long been touted as the future of SaaS-based pricing. It is an attractive pricing model because it directly aligns how much something costs with the value derived from it (when it’s properly implemented!). While attractive for its flexibility and alignment with customer value, it presents significant operational challenges for small and large businesses alike. 

Companies often struggle with manual processes, such as using Google Sheets or pulling usage directly from the product, leading to revenue leakage and compliance issues. Ultimately it becomes a customer experience challenge, eating into any benefit derived from the model in the first place.

Effectively supporting a usage-based pricing model requires a real investment in systems to manage data infrastructure and ensure accurate billing. It also requires organizational commitment to managing the business differently – moving from more predictable ARR to some degree of spikiness as consumption might change month over month. Implementing intuitive processes and control is crucial for making usage-based pricing as manageable as traditional models. Your pricing and packaging model should be a balance between customer flexibility and the operations your business can support.

Strategically Deploying Hybrid Models

One strategy to deploy a hybrid-model is blending usage-based and subscription pricing. This allows companies to cater to customer segments appropriately without sacrificing predictable revenue streams and totally upending their existing operations.

In reality, usage-based pricing is not a fit for all types of customers. For instance, enterprises often prefer predictable pricing, and shy away from pure usage-based pricing models because of the potential to overshoot a set budget.

The rise of AI in SaaS products introduces an additional layer of complexity, as AI-driven offerings often come with significant costs associated with them. AI-driven pricing models must reflect both the value delivered and the associated COGS to maintain healthy margins. This alignment is critical to avoid potential margin erosion and to ensure that pricing strategies remain sustainable over time.

Continuous Pricing and Packaging

Tight operations and systems aren’t just important to support the practice of usage-based billing, but it’s also necessary to optimize it. You won’t get it right the first time, but a practice of continuous iteration will help you arrive at a model that truly aligns your business with customer value. Regular, small-scale pricing adjustments driven by a pricing committee can drive material revenue growth without causing too much organizational churn.

When James was at Segment, transitioning to a more upmarket pricing model resulted in a significant revenue inflection point, demonstrating the long-term impact of strategic pricing changes. Similarly, at Atlassian, incremental shifts from tiered to per-user pricing aligned customer incentives with usage growth, showcasing the benefits of phased pricing adjustments.

Conclusion

By investing in systems and infrastructure and committing to regular, small-scale pricing iterations, companies can realize the full potential of pricing and packaging and drive substantial revenue growth.

Here are four lessons to keep in mind:

1. Establish a pricing committee that meets quarterly. The committee should review existing packaging and propose incremental changes for specific customer cohorts. Someone in that committee should have a pulse on what features are driving sales, what the highest ACV deals have in common, etc., to objectively inform those decisions.

2. Invest in regular, small optimizations. Large changes require an investment in enablement, systems, and product that can and should be implemented with care. Small optimization can have a relatively high impact, and create a growth-oriented culture that realizes most or more gain. 

3. Avoid thrashing with A/B tests and frequent, large changes. Businesses get caught up in the notion of experimenting to learn what works and what doesn’t, but that doesn’t work well with pricing & packaging for a couple of reasons: 1) it’s unfair to customers, and 2) it creates tension internally.

4. Invest in flexible systems. Hybrid pricing models are infinitely harder to deploy and maintain without systems that can support them. We wrote about how to think about those components here.