Pricing science is evolving with the emergence of new business and revenue models. The past ten years have focused on subscription pricing as a new source of revenue and growth. The focus was to move from pure ownership model for products, solutions, software, and equipment, to a subscription model where consumer and customers enjoyed the benefits of these offers without the burden of owning them. Today, the subscription world is still growing but reaching saturation levels in some markets. Consumers experience subscription fatigue. The B2B SaaS market is well penetrated, saturated, and highly competitive. As a results, new business models based on usage are now emerging as the next competitive advantage.
Over 40% of SaaS companies have already moved to a usage-based business model or a hybrid between subscription and usage. At the same time, modern technology is emerging to manage the unique needs and requirements of advanced consumption-based revenues model especially in industry verticals where usage is king (telecom, high-tech, banking for example). But it is now inevitable that usage-based business models are going to become the prominent way of doing business in the SaaS world.
The transition towards pure or hybrid usage-based business models has profound implications across the board. I will address them over time in future blogs. Today, I want to focus on the implication of that transition on the pricing role. Traditionally, in the SaaS pricing world, pricing professionals would focus on value management, packaging, price modeling, and structuring the pricing tactics. They might get involved in other critical areas with sales, finance, and revenue ops. With the emergence of pure, and sometimes complex, usage-based business models, the role is changing drastically. Pricing professionals must now function as monetization professionals and manage the 360-degree monetization spectrum. It explains why some companies have already moved away from pricing titles and embraced new monetization titles (Microsoft is a good example of that).
A focus on 360⁰ monetization means the management of the entire workflow chain which is extremely critical in usage-based pricing and billing. Monetization experts are accountable for each of the four buckets and must interact with the relevant stakeholders to ensure proper design, quoting, billing, and predicting of their revenue models. Of course, pricing remains a big part of the role.
Price modeling: designing proper usage-based pricing model requires the understanding of value and pricing metrics and the agility to design multi-metric models to focus on monetization optimization. Usage-based pricing requires a deep understanding of the customer operations and what metrics drive their revenue streams. These in turn becomes the metric used to align with the customer value metrics. Alignment in the design of pricing models is essential. You grow when the customer grows!
Contracting: the monetization team must also leverage technology to manage multi-year usage contracts with potential upgrades, up-sell, and changes in metrics during the contract duration. That technology must be able to manage these changes without having to scratch original contracts and/or generating lots of manual calculations.
Billing: complex pricing also means complex billing based on accurate data extraction from the various sources of usage. Traditionally billing fell solely under finance. Monetization experts must work together with finance experts to avoid any billing issues. Pricing and billing are joined at the hip in monetization strategies.
Analysis: Finally, usage-based models require the capability to simulate future usage patterns and trends to create P&L projections but also to give visibility to customers under various scenarios. Predictability is often listed as a barrier to the adoption of usage-based business models. With the right skills and tools, that barrier goes away.
Finally, fully monetizing usage-based business models requires elevated level of data intelligence and advanced data management capabilities to feed the billing engine. That is a must-have to be able to enable 360⁰ monetization and avoid unnecessary manual activities and delays in invoicing. At the end of the day, billing and collecting cash quickly is the name of the game. Without the right monetization engine, usage-based pricing is difficult to execute. The combination adequate technology empowered by monetization professionals will be the key to success of usage-based business models.
The usage economy is now a reality. The SaaS pricing function is dying. Long live the monetization function!
Stephan Liozu (www.stephanliozu.com) is a Strategic Advisor to Monetize360 and a thought leader in digital pricing models, value-based pricing, and monetization strategies. Stephan holds a Ph.D. in management from Case Western Reserve University (2013). He wrote and edited 12 books on the topics of pricing and value management. His latest book published in January 2022 is “The Industrial Subscription Economy” available on Amazon.com (The Industrial Subscription Economy: A Practical Guide to Designing, Pricing, and Scaling Your Industrial Subscription: Liozu, Stephan M.: 9781945815102: Amazon.com: Books). Stephan sits on the Advisory Board of Professional Pricing Society, is a Strategic Advisor at DecisionLink, and a Senior Advisor at BCG.
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