Time to Rethink Per-User Pricing for Your Enterprise Saas?

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Time to Rethink Per-User Pricing for Your Enterprise Saas?

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Companies that don’t broaden their view of pricing metrics may be missing out: When we analyzed participants in our SaaSRadar database, we found that companies with non-user based metrics tend to grow about 40% faster than those that don’t.

The message is loud and clear: In a McKinsey survey of enterprise software customers, more than 75% said they want pricing metrics that are…

  • Easy to understand. Think “number of employees” versus “rate-adjusted user equivalents.” Legacy on-premise software customers have long complained about the complexity of pricing metrics, and SaaS companies are now rethinking those metrics.
  • Aligned with how customers perceive value. Price goes up only when the customer captures more value—such as greater revenue or lower costs. For example, Zuora, a subscription revenue management company, charges based on a customer’s total amount of recurring revenue.
  • Easy to track and predict. Customers can predict the amount they have to pay as they use the software. For instance, Salesforce.com charges based on customers’ number of salespeople, not number of CRM contacts. Number of salespeople is easy to track and control, but number of CRM contacts may shoot up unexpectedly

The most classic software pricing metric is “users.” Sometimes, user-based pricing metrics make perfect sense. At Salesforce.com, the number of users (i.e., sales reps) aligns with Salesforce customers’ perceptions of value, because each additional salesperson will likely bring in new revenue. Other times, non-user metrics (such as “revenue,” “employees,” or “beds in a hospital”) can be easier to understand and can align more tightly with what customers value. (See Exhibit 1.)

Most sales reps still prefer user-based metrics. When we interviewed enterprise sales reps, over 80% said they viewed user-based metrics as easy to understand and sell, while less than 50% expressed enthusiasm about more novel metrics.

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Companies that don’t broaden their view of pricing metrics may be missing out: When we analyzed participants in our SaaSRadar database, we found that companies with non-user based metrics tend to grow about 40% faster than those that don’t. (See Exhibit 2.)

That said, there are still plenty of user-based metrics in the SaaS world: about 50% of our database participants are sticking to per-user as their pricing metric (for instance, $10 per user per month). As much as 27% base their pricing on usage (for example, $10 per gigabyte of data stored), and only about 10% use customer revenue as their pricing metric. (See Exhibit 3.)

What’s going on? Despite customers’ interest in more creative pricing metrics, most legacy sales reps have difficulty understanding and communicating pricing metrics that are based on something other than number of users. That’s especially true when they’re selling to legacy software buyers, such as old-guard procurement professionals vs. newer line-of-business buyers.

Mix it up to grow your ARR

To capture greater ARR growth, companies have to do more than just sprinkle a few novel pricing metrics into their mix. Instead, they need to think strategically about their metrics—and tailor them to the unique circumstances and nature of their business.

Zuora, for instance, links pricing to the amount of subscription revenue the customer has on the Zuora platform. That creates an efficient and optimized billing cycle. Each customer’s value scales with overall amounts billed. For Zuora, pricing by customer revenue aligns tightly with customers’ perceptions of value. The more a customer’s revenue grows, the more it needs a service like the one Zuora provides. And that creates automatic upsell as subscription revenue rises.

At times, using a hybrid pricing model—one comprising both user and non-user metrics—may be the best move. As we noted earlier, Salesforce.com’s pricing per sales rep aligns well with its customers’ perceptions of value since each additional sales rep will probably generate new revenue. But pricing pegged to a salesperson’s productivity would link even more directly to their revenue, making it easier for certain customers to say, “yes.” So Salesforce.com might further grow its ARR by augmenting its per-user pricing with metrics like seller productivity.

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In all of these examples, the non-user metrics are easy for customers to understand, align with what customers value most, and are easy for sales reps to negotiate and sell. Result? Everyone wins.

The upshot

You don’t—and you shouldn’t—have to give up per-user pricing if it aligns best with your customers’ perceptions of value and is easiest for them to understand and track. But to sweeten the odds of growing your ARR, you can—and you should—consider experimenting with metrics that align even better with what matters most to your customers.

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