Hybrid Pricing Models

Let’s talk about SaaS pricing models, and in particular, the potential for hybrid pricing.

There has been a lot of noise about the shift from seat-based to usage-based pricing. Most of this noise is (1) a misrepresentation of the facts and (2) steering people in the wrong direction. It’s time to set the record straight.

Seat-based pricing isn’t dead and anyone who is claiming otherwise is either chasing clicks or simply leaving a ton of cash on the table.

It’s true that usage- and outcome-based pricing models are growing in popularity, but that’s mainly because AI companies have been overrepresented among startup entrants in the last two years.

The real opportunity isn’t about moving away from seat-based. The real opportunity is about combining models to maximise your annual contract value (ACV).

Note to reader: this article is mainly for SaaS companies with an ACV >€1,000.

Comparing pricing models

Why are hybrid models the real opportunity? Because every pricing model directly impacts (1) the earning potential per customer, (2) the ease of selling, and (3) your company valuation. To explain that, we first need to examine the pros and cons of the most popular pricing models in SaaS today: seat-, usage-, and outcome-based.

Figure 1 provides an overview of the pros and cons of each pricing model. There are undoubtedly more, but these are some of the most impactful ones.

Seat-based pricing: perhaps the single best pricing model to increase the predictability of your revenue and, in turn, boosting the multiple on your valuation. However, buyers are tired of paying for unused seats and the large upfront investment is slowing down deal cycles.

Usage-based pricing: if you want to shorten your deal cycle, usage-based might be your best option. The barrier to entry doesn't get lower than this. Customers can start without any upfront investment (solution-dependent). On the flip side, users are aware that every activity increases the final bill. It can discourage usage.

Outcome-based pricing: few things can eliminate doubt about you or your solution faster than outcome-based pricing. "No cure? No pay." B2B buyers love to de-risk any purchase and are even willing to pay a premium for this. The only problem: it might take weeks or even months to get paid depending on the problem you solve.

Figure 1: Overview Pros & Cons SaaS Pricing Models

It's clear that each pricing model has its strengths, but it's also undeniable that each has serious weaknesses.

To make a more accurate comparison, I've scored each model based on seven variables that directly impact (1) earning potential per customer, (2) the ease of selling, and (3) your company valuation (see Figure 2).

Figure 2: Scorecard SaaS Pricing Models

As you can see, seat-based is great for you as a vendor. However, it's clearly not the best option for buyers or users. Usage- and outcome-based might improve your earning potential and ease the sales process, but they generally increase your own risks.

So, that leaves the question: why settle for just one model and its inherent drawbacks when you can combine them and get the best of both worlds?

When Should You Consider Hybrid?

Hopefully, I've convinced you at this point that sticking to a singular pricing model means settling for less. But when do you actually know whether you should add another layer to your pricing strategy?

Let's go through some of the most common signals I encounter when helping SaaS companies.

Example 1: Large clients are demanding heavy discounts on your seats. If this is the case for you, adding a layer like usage-based or even just a flat fee (i.e. platform fee) allows you to discount the licenses while increasing the actual deal cycle through the 2nd or 3rd layer.

Example 2: Your hosting costs are going through the roof for some clients. The first option is to simply include a Fair Usage clause in your contracts to avoid any damaging situation. However, you can also introduce usage-based and monetise this usage (or even invoice your cloud cost with a markup).

Example 3: Your leads keep telling you they're not sure whether or not it'll benefit them. This is the perfect motivation to look for an outcome-based pricing layer. No cure, no pay. In turn, you can increase the price by 60 to 100% to compensate for the risk you're taking.

Example 4: You're an AI company with a usage-based offering, but the seasonality of the usage is repelling investors. Well, if you store data for your users or they expect a company environment, you can introduce seats or a company license.

I can keep going, but here are some rules of thumb:

• Seat-based: to increase predictability and to stimulate usage.

• Usage-based: to lower the starting barrier or all things automation.

• Outcome-based: to lower the buyer's risk and to maximise revenue.

For now, I'll let you reflect the pros and cons of each pricing model on your own. In the next edition I'll present a case-study on how to transition from a singular pricing model to a hybrid model.

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