Aligning Pricing with Customer Value: Transitioning to Usage-Based Models

Welcome to Atlanta – it’s the 30th Annual Spring Pricing Workshops & Conference at the Loews Midtown Hotel in Atlanta with some of our top pricing experts in the Syncron organization to share our insights and learn from others in the industry – and to uncover the expanding scope of pricing today.

It’s Day 1 and we’ve heard from leaders at world-class companies and pricing communities, and first up was Paul Hunt, President at Pricing Solutions Ltd. discussing the 80/20 rule and how to amplify its impact in business by layering and streamlining pricing into processes. Next to the stage was Vishaal Jayaswal, Pricing and Value Leader at Cox Automotive, discussing his version of “The Practitioner’s Guide to Making Pricing Strategy Deliver” and the valuable lessons he has learned (and unlearned) on this quest.

Now it’s time for the breakout sessions, and Jeffrey MacMillan, Director of Business Models at Autodesk, is here to talk about aligning pricing with customer value by transitioning to usage-based models, and how to start your company’s journey to usage-based pricing today.

Step One: Understanding Your Customers

If you take it back to basics, you have three main parts to a software business model. You have the product, a.k.a. what you sell, your business model, which is how you charge for that product, and finally, you have pricing, which is how much you ultimately charge. A typical software business model follows the primer below:

• Perpetual License: large upfront software cost with setup fees and ongoing support costs
• Subscription: clients pay for software on an ongoing basis, e.g. monthly or annually
• Usage-based: client pays fees that are tied to usage, which requires strong reporting but is ultimately good for variable workloads
• Value-based: vendor charges the customer based on the expected value of its services

On this primer, Autodesk strived to solve a few basic customer problems they were encountering as they shifted into a subscription, usage-based model. They needed quick access to new products and additional users, better alignment with usage and spend and a better understanding of overall software usage. Customer interviews revealed a number of unmet needs along the lines of variable workloads, portfolio access, usage reporting, faster time to market, fixed budget cycles and bill back. What ended up happening is their customers were interested in usage models, but they were concerned about cost getting out of control.

Step Two: It’s All About the (Usage) Data

The first thing Autodesk did was analyze the usage data. What they found was that a large number of users were actually using the products on a small scale due to roles, responsibilities and usage needs. Then, they compared customer spend on the current model vs. the usage model. Depending on what their usage was, they had some customers that might end up paying more and some customers that were going to pay less.

Ultimately, deal pricing was customized to ensure acceptable pricing to both sides. Customers were shown usage reporting to feel confident that they were purchasing enough capacity. And, additionally, customer success drove even more usage.

Results and Lessons Learned:

1. Understanding your customers is jobs one, two and three.
2. Aligning the usage metrics with the value a customer receives will remove friction from sales conversations.
3. Vendors and customers need to have clear visibility to usage and spending.
4. One-size-fits-all pricing doesn’t always work.
5. A high-performing customer success organization will pay for itself many times over.

At the end of the day, all industries are undergoing a fundamental shift in which organizations are striving to more closely align pricing strategies with perceived customer value. While many companies have made the shift to subscription pricing, newer companies are going beyond subscriptions, instead transitioning to usage-based pricing models to align value received directly with the price charged. However, successfully implementing this shift is easier said than done. Customers’ usage of products varies. Done incorrectly, this shift can lead to catastrophic revenue loss. Done correctly, companies can increase market share and increase share of wallet.

FOLLOW ALONG!

Join us as we live blog our experience during the performance workshops, interactive working groups, and so much more. With nearly a week’s worth of networking, technology and strategy, we’re sure to come home with some of the best tools in pricing today!