Usage-Based Pricing: A Market Area of interest For Startup Tech Corporations?


Griffin Parry detects a sea change in the best way software-as-service corporations charge their customers. As he sees it, increasing numbers of vendors regard pricing as a strategic lever as they compete for business in a crowded marketplace. Particularly, as an alternative of charging fixed subscriptions based on an agreed variety of users, they’re adopting more flexible usage-based pricing models. “The issue,” he says, “Is that usage-based pricing is difficult to do.”

Parry – together with partner John Griffin – is co-founder of M3ter, a London-based startup specializing in usage-based pricing. Launched in 2022, the corporate has just raised $14 million in Series A funding to expand its operations within the U.S. and introduce recent analytics-based decisioning features.

And you could possibly see it is a daring move. The concept of usage-based pricing has gained traction over the past couple of years M3ter is just not the one platform provider within the pricing game. But Parry sees a rising tide of demand and an appetite for workable solutions and that creates opportunities for specialist startups.

Market Tailwinds

In a report published in September 2022, consultancy Bain & Company noted that charging based on usage reasonably than subscription was “fueling a number of the fastest-growing and highest-value SaaS corporations,” Snowflake, Datadog and Twilio were amongst those cited within the report.

It’s a straightforward enough concept. Traditionally, software-as-service has been sold on a subscription model, with the worth staying fixed, unless the plan is modified. The usage-based approach model allows users more flexibility. This might mean cutting down on costs if usage drops or, conversely, the flexibility to scale up their use of the software – and pay a bit more – when required.

Now that sounds pretty straightforward. In spite of everything, it’s a model we may be accustomed to as consumers once we pay for metered water, electricity or phone calls. So why is that this a growth market, providing opportunities for startups akin to M3ter?

Parry says there are some helpful tailwinds out there.

Product Led Growth

“The rise of product-led growth helps,” he says. Over the past few years, it’s turn into easier – although on no account that easy – for vendors of all sizes to sell to enterprise customers by finding corners of the organization which can be willing to check out a product, often on a free-trial or freemium basis. The concept is that when some people start using it, others inside organizations will follow. A usage-based approach to pricing might be helpful, not least since it allows end users to scale up usage relatively easily.

Then there’s the macro-economic situation. We reside through difficult economic times. Buyers of software products are looking more closely at pricing. Particularly, they’re in search of pricing models to suit their needs.

But here’s the query. On condition that usage-based pricing is just not in itself a recent concept and that aforementioned utilities are amongst those that have been doing it for years, why don’t SaaS corporations simply construct their very own billing systems?

Pain Points

Parry acknowledges that there’s a couple of approach to create a usage-based offer. “You possibly can construct your individual platform or do it using a spreadsheet,” he says. “And up to now corporations have needed to do it for themselves.”

But, he argues, it’s hard to get right. When running a previous company – Gamespark – Parry says he and co-owner John Griffin dabbled with usage-based pricing nevertheless it was difficult to do. When the corporate was sold to Amazon, he worked at AWS (Amazon Web Services). Again, he says he saw difficulties implementing a usage-focused approach.

Certainly one of the main challenges, he says, is to be sure that everyone has the usage data. That features, not only billing departments but in addition customer facing staff. “Anyone who speaks to customers must have the info at their fingertips,” he says. It also must be transparent for patrons. Unless they know why they’re being charged a certain quantity, they will not be completely satisfied. So any system needs to mix usage and price data and distribute it to whoever wants and desires it. “Should you make errors, you get revenue leakage and a poor customer experience.”

Strategic Pricing

There are after all non-technical challenges around pricing. It may be the case, a vendor can charge on a usage basis, but is that truly what the majority of shoppers want? A subscription-based approach could also be a little bit of a blunt instrument, nevertheless it is predictable. Finance department personnel can sleep easy knowing that costs aren’t going to leap due to a spike in users.

Bain’s report found 80 percent of users saying usage pricing delivers services which can be higher aligned in price terms to the worth they receive. But it’s important to get the model right. That might be easy as pay-as-you-go or a model that moves the top user through tiers of payment depending on activity.

For his part, Parry acknowledges that he is just not an authority in strategic pricing. The role of M3ter and its competitors is to supply their customers with the means to align pricing with the demands and requirements of users. Customers include Stedi, Sift and Clickhouse.

The Data opportunity

Parry also sees a knowledge opportunity. A part of the Series A money shall be spent on adding analytics features. As he sees it, the client usage data might be deployed to underpin an enormous amount of automated decision making around pricing.

Usage-based pricing is on the up. Parry says that in 2020, 34 percent of software corporations used the model. Today it’s 61 percent. Uptake has been partially driven by the economic environment which has forced each users and vendors to deal with the associated fee equation. Nonetheless, when the world economy improves, he believes the trend will proceed.

For startup corporations working within the software arena, the concept may help them with their product-led growth strategies. It also creates a growing marketplace for flexible pricing enablers.


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