Part 1: Comparison of different pricing strategies
We strongly believe that all software pricing needs to be usage based. Usage-based pricing (UBP) is the only pricing model that is a win-win for both the buyer and the seller at all points in time.
The value that a user/company gets from using a software is not apparent on day 1. It always takes time to derive value.
- Users don’t know how to get the best use out of the product and there is a learning curve
- The product itself has an evolution and the product creator enhances the product by adding new features
How does pricing come into this value curve?
A look at how software pricing has evolved:
Before 2000 - Software was thought of as a cost center by most companies. It was bought like a hardware - an expensive, one time installation with lots of custom services to tailor the software for the user (company). This meant that the upfront cost was treated similarly to a capital expenditure for an asset with ongoing maintenance fees and additional charges for customization. This was similar to how a manufacturing company built its machinery. This also meant that the upfront cost became a binary output for the perceived value for the cost. It either worked or it didn’t. Hence, the buying process was extremely slow and companies were hesitant to take decisions that could only go one of two ways. This meant that the buying decision was based on a ‘Win or Lose’ outcome.
2000-2020 - Software became value-adding as opposed to cost-reducing. With cloud adoption, this also meant that software can be used over a publicly distributed network and not contained to an in-house installation. This moved the high upfront cost and re-distributed it over the lifetime usage of the product, similar to amortizing an intangible asset. This also meant that the value-price discovery was not a binary outcome anymore. There was a significant time when the user will be out of the money (value < price paid) and then eventually reach the inflection point post in which the value > price paid. This is a situation where there is a win-lose situation on one side that flips to the other side after some time. There is also a scenario where the user does not reach the inflection point and stops using the software which is the worst possible outcome in this model.
2020s and the way forward - The ideal solution involves minimizing the gap between the value and price at every point in time (value > price, by a fixed quantity would be the equilibrium as usage of product goes up) and this by default, implies a pricing model that is based on consumption of metrics that drive value for the user (buyer). This model gives a very low friction for the product to get started (even free), and then scales the pricing as the usage of the product grows (with the implication that value derived out of the product grows, since usage will stop or reduce, if value does not grow). This creates the ideal win-win scenario for both the buyer and seller of the software product since it also increases stickiness, reduces churn and at the same time maximize value capture for the seller as well.
If UBP creates win-win, why has adoption been very slow and minimal till date?
The answer is simple - creating infrastructure to measure usage accurately and reliably is hard, and no one wants to build that in house. The few companies that have implemented UBP at scale, have huge dedicated teams building internal tooling and metering infrastructure to handle their UBP requirements (eg: AWS, Twilio, Snowflake)
Part 2: What is pricing infrastructure?
We explained the previous part about why UBP is a win-win pricing strategy. But we also understand that UBP is not for everyone. Depending on the business model, domain, type of customers, and value proposition, every startup has its own unique set of requirements for a pricing strategy. Pricing infrastructure is the set of tools that helps you implement your pricing strategy. Software companies also have strategies that keep changing dynamically and the tooling that works today for one specific strategy might not work tomorrow for another. Implementing a pricing strategy also involves multiple facets - monitoring, measuring, aggregating, analyzing, gatekeeping, and experimenting. Pricing infrastructure is that tooling that can solve all of the above not just for today, but for all possible future scenarios in changes to a SaaS company’s pricing strategy.
Also Read: We Have Great News! Togai Secures $3.1Mn Seed Funding
This leads to our vision - “End-to-end pricing infrastructure for SaaS”
The 1st step to building an end-to-end pricing infrastructure is monitoring and measuring - this means acting as the source of truth for all data - either usage-based or non-usage-based that have the potential to be monetized. Our first step 1 is building this highly reliable and accurate event processing infrastructure that can be used to create a price plan for a SaaS company’s customers.
By doing this, Togai helps SaaS companies access their monetizable data from a single place and then eventually be able to bill their customers for any pricing strategy that they prefer. This means that such a system is mandatory for the following customers in sequential order of timeline -
- SaaS companies that already do UBP
- SaaS who know they have to try different pricing strategies
- All SaaS eventually they recognize the need for flexibility in their pricing and find their current ad hoc system acts as the bottleneck to trying a new strategy
Mission: To make pricing a growth lever for SaaS
We are not in this business for the short term. We are truly creating a new category in SaaS. Until now, SaaS GTM has primarily focused on product, place, and promotion while ignoring pricing as a growth lever (the 4 Ps of marketing). While the tooling and categories for product, place, and promotion exist, pricing has not been thought of as a growth level till now due to the lack of tooling and relevant infrastructure. This is because -
- There were other low-hanging fruits of an operational nature that needed to be solved (eg: payment processing), and are solved today
- SaaS and cloud adoption have made granular tracking a need rather than a want
- Building end-to-end pricing infrastructure is complex and time-consuming
‘Pricing’ is a new function that SaaS companies are creating right now because they understand how significant it is to move the needle for their business. Pricing managers are a new role that is being created and they need the right tooling to analyze and make decisions. Similar to how marketing and product analytics tools led to the creation of ‘data-driven’ product marketing managers, our mission is to make pricing a growth lever for SaaS companies by enabling them to make data-driven decisions about their pricing.
