There’s no doubt that consumption-based pricing models are a big trend in businesses today. According to new research from Zuora’s Subscribed Institute and Boston Consulting Group (BCG), nearly half (46%) of companies analyzed implemented some form of consumption-based pricing in the last three years. And hybrid consumption models, businesses that drive both recurring and usage revenue, increased almost 3X (from 9% to 26%) between 2020 and 2022.
This research also shows that if companies with at least some mix of consumption experience a higher rate of growth.
As a product leader, you’ve surely wondered how you can get in on this action. When you consider incorporating consumption pricing into a product, it’s important to get two things right: pricing and packaging.
In this article, we’ll tell you what effective consumption with pricing and packaging looks like and what tools your business will need to help achieve success.
Consumption models are built around both pricing and packaging. Pricing is your price points and pricing models, while packaging is how features are bundled. Together, they are what enable the value and flexibility your customer expects and the predictability and strategy your business requires.
Let’s dig a little deeper into both pricing and packaging to better understand how they constitute the framework of consumption.
Usage-based pricing is at the core of any pure consumption business model. Providers must be able to measure how much product a customer uses in order to bill effectively. This concept may be referred to as a “value metric,” “unit of measure,” or “pricing basis.”
Your value metric is a usage attribute your company can track that also satisfies value alignment, leaves room for growth, and offers predictability for both the customer and your business. Common metrics are value-based, measurable, and controllable, such as number of users, amount of data consumed, or number of events.
After selecting a value metric, the next step is to determine a price per unit of consumption. This “rating logic” can be as simple as a flat price per usage event (like an API call) or as complex as multi-dimensional algorithms (like a combination of compute and storage).
Another critical pricing component is the notion of time — when a customer agrees to pay for their consumption of a product. Some of the most successful consumption businesses have no more than 25% of their total revenue coming from usage models. They anchor pricing on a value metric first and then grow that pricing by combining pay-as-you-go models (low risk) with pre-paid models (high predictability), thereby driving recurring growth.
This is where packaging comes into play.
To stay competitive, businesses must continuously innovate their products and go-to-market strategies. They’re no longer delivering new products annually or even twice a year but are releasing new products quickly and often, refining them as they go. A fast-paced world requires businesses to develop fresh approaches to pricing and packaging.
Packaging allows businesses to quickly address market changes and shifting customer preferences without tinkering too much with pricing.
For example, when customers are first trying a product, they don’t yet have experience with it and want flexibility, so a pay-as-you-go package is a good offering for them to try different options. As they grow more confident using your product and see value, customers’ willingness to pay increases and they desire more predictability.
This evolution of packaging benefits businesses too. As you onboard customers and support a product-led growth (PLG) strategy with simpler pricing tactics, you can encourage commitment and recurring contracts by packaging multiple pricing models.
The industry conversation around pricing and packaging has recently added an important consideration: experimentation. While everyone would love to say they have great pricing, the reality is businesses are always tinkering, thinking, “What can I do here? What can I do there? Are my customers really receiving value? Am I capitalizing on that value? Do they feel good about paying for the value they receive? When is the last time we’ve tinkered with pricing? How does that compare to our competitors?”
These questions are great starting points for building experiments around pricing and packaging to discover combinations and approaches that make sense for both your customers and your business.
You also need executive buy-in when it comes to technology that supports rapid experimentation with mix-and-match pricing and packaging, as well as leadership that encourages cross-functional collaboration between teams.
Surfacing offers is one example of pricing and packaging experimentation. Historically, it’s been focused in the media space — like going to a newspaper’s website for their premium articles and then hitting a paywall after a certain number of visits. But these strategies also exist for SaaS businesses, such as a free product trial that the company then attempts to convert into a paid subscription or an upleveled service.
Dynamically surfacing offers is just one method of pricing and packaging experimentation that can lead to increased revenue and improved customer service.
Read more about how to accelerate iteration on pricing, bundles, and promotions.
Experimenting with pricing and packaging has helped many businesses become better at consumption-based pricing. Here’s an idea of what continuous fine-tuning looks like:
Nailing pricing and packaging for consumption requires both a smart tactical approach and the right technology to support it.
Whether you’re just starting to test consumption or you’re fine-tuning your strategy, you need a proven solution that provides a variety of out-of-the-box models — like pay-as-you-go, pre-paid with drawdown, minimum and maximum commit, and pooled usage pricing.
This will let you experiment with and iterate on pricing and packaging models without relying on developer support and delaying product rollouts.
As you look for the right toolbox for your consumption approach, consider the following capabilities as mandatory elements for your success.
Your business has to have the ability to price in all sorts of different ways. From one-time or recurring charges to usage or tiered charges — and everything in between — you need a solution that can be as basic or as sophisticated as your innovations demand. A flexible platform will have no problem executing whatever combinations of pricing and packaging you throw at it.
Before selecting and implementing a consumption pricing plan, you need to consolidate and meter usage events. Like the electric meter on your house measures your power usage and turns it into billable kilowatt hours, a mediation engine measures each of your predefined consumption value metrics so you can bill appropriately.
Once you’re able to ensure pricing and packaging flexibility, you need to know these elements are going to then translate into charging customers. Your solution should provide a clear, end-to-end connection — between extreme flexibility, pricing and packaging, and your business processes — so you can collect cash and recognize revenue in your business.
The ability to take customers or prospective customers from anywhere — the web, a sales-assist team, wherever — means product-led growth is entwined with your pricing and packaging. An effective solution allows you to take care of customers no matter how they show up and what needs they present.
For example, being able to present a prospect with a variety of consumption pricing and packaging options may just be the deciding factor that enables sales to close a deal.
Putting multiple pricing models together often results in manual workarounds. Without a flexible solution that automates the processes your models, customers, and business requires, you’re increasing risk and potentially losing revenue. Be sure you’re using a solution that can easily and accurately bill for the nuances any of your pricing models present.
Pricing and packaging are critical to winning with consumption. Zuora has been helping businesses think — and rethink — about usage-based pricing for years. From software to media, healthcare to fintech, we’ve worked with all kinds of companies with all kinds of approaches to consumption.
Explore the strategies from successful consumption businesses and delve into the ways in which they are addressing potential drawbacks in this future of consumption webinar.