I was speaking with an entrepreneur recently about usage based pricing. Here were a few areas we discussed on that pricing model.

Start with value

Pricing should first start based on value, then the construct (i.e. per month, per transaction, flat fee, etc.), then lastly the actual price point. You really have to understand the value your service is delivering to price effectively. A $10 product could be expensive or a $1,000,000 product could be cheap based on the value delivered. This also really focuses the discussion on the problem and customer situation. I am a big fan of using an ROI calculator during the sales process to tune the value discussion.

Knowing your costs

In a usage based model, the more the customer uses the product your costs will go up. In a pure software model this might not be a big deal, but if you are producing widgets or have high compute costs per use, you need to understand the impact. Make sure to do some quick math to understand what your cost to deliver the solution is at various usage levels. Then ensure your pricing model covers that. Tiers, caps, and the actual price point can all help solve this challenge.

Not discouraging usage

Philosophically, there is something to consumers loving “unlimited” options. Even if their usage will have a ceiling, feeling like they can use it as much as they want can be a positive thing for customers. In a usage based model, the customer may often have to pay every time they use the product. This can sometimes lead to feeling “nickel and dimed.” If the usage based pricing actually discourages the customer from using your product more, be careful. If customers feel the product can solve their needs, I want them to use it as much as possible to generate customer loyalty.

Usage based pricing is just one model. Be sure to start with value and then evaluate the pros and cons of different constructs and price points. Remember, pricing is easy to test and iterate versus needing the perfect answer.