How to find the best pricing metric for your offering
A pricing metric is the unit by which buyers acquire your offering. It also represents the unit-of-measure that a buyer uses to estimate the benefits and value of your offering. Examples of a pricing metric includes per user, per usage, per month, per year, per quantity of consumption etc. The right pricing metric aligns your revenue growth with how and how much different types of buyers benefit from your offering.
For example, consider an app that helps businesses with their employee management. If a customer with USD $1 million/year revenue is priced similarly as one with $100 million/year revenue, then a per user pricing metric may not be the right one for this app even when the customers use the solution for employee management. In most cases, the $100 million business doesn't have 100 times more employees than the one with $1 million revenues, and most likely it has additional needs and workflows that you can monetize to manage a larger staff.
Price metrics are powerful because product owners can pick from many metrics available for a specific type of offering. They can even structure their pricing using multiple metrics at a time. The most commonly found pricing metrics are
User-based: By the number of concurrent users, teams etc.
Activity-based: Number of activities or conversion paths completed, the types of features and attributes included in the plan, etc.
Business scale: Volumes of output delivered to business' audience, the number of contacts, etc.
Outcome-based: Against an agreed-upon performance outcome.
For a pricing metric to be an effective it must include the following criteria. The right pricing metric
1. Aligns with the value dimension and represents the unique benefits that different types of buyers receive
For example, consider the buyers of endpoint security software solutions that monitor and detect security gaps on each device on a given network. The benefits that these buyers accrue increase as the number of devices on their network increases. Ultimately, end-point security technologies make sure the security protocols apply to each and every device, therefore, removing the risk of security breaches a device at a time. A unit based price metric suits these types of solutions because it aligns with the benefit that it provides to the buyers.
However, an opportunity to consider might be the risk profiles of different types of buyers. For example, the security breach risk for an insulin pump at a hospital device is significantly different than that of a point-of-sale device at a retail location. This is where a secondary pricing metric might introduce additional monetization opportunities from different types of customers.
2. Scales with future growth and enforces the buyers who benefit more to pay more
The case of building automation software that delivers energy efficiency benefits is a good example of this criterion. As the size and contents of a building envelope vary, the number and types of equipment that impact the quality of the indoor environment (HVAC units, PCs, production equipment, industrial equipment, etc.) also vary. Building automation software delivers value by optimizing the energy consumption for criteria such as its location, seasonality, efficiency goals, the number of tenants, use of the building, peak power demand management etc. Therefore, in general, building automation software providers price their solutions commensurate with the amount of energy savings that their solution is estimated to provide on an annual basis.
3. Simple to explain, monitor, and forecast the benefits and the cost
This is where most enterprise software solutions rightly struggle in the face of more complex deals. The most common reasons are first, most enterprises use legacy metrics and they haven't innovated their metrics as fast as they innovated the benefits they provide. Second, there are way too many metrics and too many conditions to be met and they haven't figured out how to package and/or bundle their offering more effectively.
Tactics such as switching from an annual price to a monthly or daily price that is charged annually have proven successful in simplifying the pricing metric. Transitioning from version pricing to subscription pricing has also proven helpful. However, these common tactics may not be sufficient to better align your metric with your customers' revenues, in your specific space. Each space requires its own approach to reduce complexity and improve revenue alignment.
4. Accounts for the value of the product and services roadmap so as to realize the upsell and cross-sell opportunities through the product life cycle
This is particularly advantageous for multi-tiered pricing structures as product owners can build fences, caps, and triggers so as to move lower-end segments to higher paying tiers as their usage and needs change. The right pricing metric is critical when targeting growth in a certain segment as most multi-tiered plans can indeed fuel growth in one particular segment by structuring the two adjacent segments sufficiently different in the amount of value they each deliver.
5. Flexible for future price adjustments, and product and service bundles
Your pricing must be as dynamic as your market, buyers, and the ways in which they benefit from your offering. Most pricing metrics are inherently static and they miss opportunity to monetize buyers better as their needs and benefits shift. As providers accumulate data in key feature adoption, engagement, and conversion metrics, they can better estimate their customers’ future needs and units of purchase. This is valuable information when making product development trade-off as each of the revenue scenarios is influenced by both the estimated adoption and the specific metric to monetize it.
6. Distinctly identifiable by different types of buyers
For example consider an education technology platform for conducting and managing complex research. In this space, buyers do not necessarily self-identify by the number of users but by the number of studies because that’s how social research is funded. While the comparable products such as Qualtrics and Survey Monkey may price on a per user basis, it actually doesn’t make sense for a research platform to price on a per user basis as it may not truly reflect how distinct buyers are benefiting from the solution differently.
The Golden Question to Find the Right Pricing Metric
The golden question to finding the right pricing metric that is right for you is:
“What’s the dimension along which your revenues would grow as your customers’ revenues grow if you acquire no new customers?
Answering this question is not that easy, it turns out, because first and foremost there are many metrics to consider and evaluate. And the criteria we laid out above may be helpful to vet the alternative options. And, as always, we’re here to help.
Ready to begin your own pricing innovation?