In a recent article explaining the use of consumption pricing as a pricing strategy, we mentioned the increased attention being given to Consumption Pricing—a licensing model where software is sold based on use. On the surface, this usage-based pricing model seems to offer advantages that can benefit both the software company and the customer, such as making it more affordable for low utilization customers to buy; or encouraging retention by enabling customers to manage their costs by controlling their use.
But dig a little deeper and it becomes clear that consumption pricing is not for every software company. And even for companies where the strategy fits, careful planning and execution are necessary to make it work.
Listen To Chris Mele Explore A Consumption-Based Pricing Strategy
The producers of the popular podcast Metrics That Measure Up recently invited Software Pricing Partners Managing Partner Chris Mele to share his thoughts on the issue with their audience of software executives and investors. It was a great session that provides insights to companies looking for better ways to structure and manage their pricing models.
What factors should you consider when implementing a consumption pricing model?
On the podcast, Chris talks with host Ray Rike about a range of factors that must be considered before taking on a consumption model, including:
- How consumption pricing can penalize customers for using more of your software, which may impact customer retention and growth.
- How consumption pricing can be an obstacle to large use customers and lead to profound discounting. “The problem with consumption is that if you get into some really large deals and count the wrong thing, then the sales rep is going to say ‘hey, that’s $17 million a month’ and someone on the buying side is going to laugh you out of the office.”
- The critical importance of protecting legacy revenues during a pricing model transition and how to use pilot programs to do so.
- The two main points to focus on when considering consumption pricing as one of your pricing strategies.
Chris and Ray also have a great discussion about managing the pricing function inside the software company structure. They explore the best department to manage pricing and the need for a Chief Monetization Officer.
For anyone thinking about a consumption or usage-based pricing strategy, this podcast will provide helpful insights and perspectives to keep you on the right path.
Is a consumption pricing model right for your company?
Listen to the full podcast here and learn if a usage-based pricing model may be the right choice for you or if there’s a better way to structure and manage your pricing models. Also, be sure to read It’s Wise to Question the Big Assumption about Consumption Pricing to learn what no one tells you about a consumption-based pricing model that you really need to know.