Excellent article summarizing the pro and cons of UBP vs Saas license-based pricing. It’s not always a all-or-nothing. Saas companies on license seats may be better off using an hybrid model based on use cases and competition. Another factor slowing down UBP adoption is the fear from Leadership to lose revenue. It is a hard sell and nobody is incentivized to put their head on the line... As you said, UBP can be cheaper for customers with shelfware license seats, thus a swap is an obvious play for customers. Still, I agree with the long-term view that UBP seems superior. Once all your competition sells that way, you find yourself at a competitive disadvantage in deals, with analysts, SIs (higher commit spend), etc.
UBP core strengths are that they align with vendor costs in a world of cloud platforms. This generally means that you are basing your pricing model on cost+, which is a commodity game.
Not all software, even SaaS, should be cost+ pricing model. The beauty of subscription based pricing is it is predictable to your customer.
As a customer of AWS/GCP/Azure, for example, you almost certainly would know the pain in doing AWS cost forecasting. Building a financial plan like this is impossible. One new feature can have massive unforeseen costs that do not align with the value it provides in anyway.
Imagine paying for corporate or personal email service based on usage?
Imagine paying for your credit card fraud prevention system based on usage?
Bottomline, for me UBP is great for commodities but not for many scenarios when value is logically correlated tightly to use. Forcing customers to think about use every time they use your product often works against optimizing value creation.
A trend I’m finding interesting right now is the shift to hybrid pricing models that combine subscriptions & UBP in novel ways (ex usage based expansion). I expect to see more of that in the market as new innovations tend to be around either AI, automation, or APIs -- all of which are challenging to price on a seat-based sub model.
One of the hidden, albeit profound advantages of UBP is that it drives spectacular operational efficiency. This is an aspect less talked about but there is credibility to this statement if we look at companies who are leading with UBP. They not only are clocking in higher NRR, as you called out, but are also innovating faster. One can argue that higher NRR leads to a virtuous cycle of growth so net, net UBP is that lever. I personally saw this firsthand at AWS.
The concerns often cited - lack of forecasting, inadvertent spend, etc. are well intentioned but are mostly coming from the quarters where they have not actually lived or implemented UBP, but are pondering. And therefore, the concerns are warranted. But the data speaks otherwise. Companies leading with UBP are only further doubling down on it - no matter what kind of product, application, or service. Pain points cited are simply a function of not having the right tooling or infrastructure in place to operate UBP, they are not limitations of the UPB model itself.
I love your quotes, and this is one for the books -
"...in fact, just this morning I exported a list of all our Salesforce licenses, filtered by last login, and vomited into my Mostly Metrics yeti."
It is a fallacy to think that the model of counting seats upfront is a superior model because the customer does not have a choice to dial it down midstream, and therefore the vendor is better off. The reconciliation is going to come due - no matter what. Better to align with customer's needs and usage patterns (giving customer a choice), rather than the excel model.
And while we debate, the UBP pioneers and leaders continue to eat their subscription counterpart's lunch...
A Primer: Subscription vs Usage Based Pricing Models
Excellent article summarizing the pro and cons of UBP vs Saas license-based pricing. It’s not always a all-or-nothing. Saas companies on license seats may be better off using an hybrid model based on use cases and competition. Another factor slowing down UBP adoption is the fear from Leadership to lose revenue. It is a hard sell and nobody is incentivized to put their head on the line... As you said, UBP can be cheaper for customers with shelfware license seats, thus a swap is an obvious play for customers. Still, I agree with the long-term view that UBP seems superior. Once all your competition sells that way, you find yourself at a competitive disadvantage in deals, with analysts, SIs (higher commit spend), etc.
UBP core strengths are that they align with vendor costs in a world of cloud platforms. This generally means that you are basing your pricing model on cost+, which is a commodity game.
Not all software, even SaaS, should be cost+ pricing model. The beauty of subscription based pricing is it is predictable to your customer.
As a customer of AWS/GCP/Azure, for example, you almost certainly would know the pain in doing AWS cost forecasting. Building a financial plan like this is impossible. One new feature can have massive unforeseen costs that do not align with the value it provides in anyway.
Imagine paying for corporate or personal email service based on usage?
Imagine paying for your credit card fraud prevention system based on usage?
Bottomline, for me UBP is great for commodities but not for many scenarios when value is logically correlated tightly to use. Forcing customers to think about use every time they use your product often works against optimizing value creation.
UBP FTW 🙌
A trend I’m finding interesting right now is the shift to hybrid pricing models that combine subscriptions & UBP in novel ways (ex usage based expansion). I expect to see more of that in the market as new innovations tend to be around either AI, automation, or APIs -- all of which are challenging to price on a seat-based sub model.
One of the hidden, albeit profound advantages of UBP is that it drives spectacular operational efficiency. This is an aspect less talked about but there is credibility to this statement if we look at companies who are leading with UBP. They not only are clocking in higher NRR, as you called out, but are also innovating faster. One can argue that higher NRR leads to a virtuous cycle of growth so net, net UBP is that lever. I personally saw this firsthand at AWS.
The concerns often cited - lack of forecasting, inadvertent spend, etc. are well intentioned but are mostly coming from the quarters where they have not actually lived or implemented UBP, but are pondering. And therefore, the concerns are warranted. But the data speaks otherwise. Companies leading with UBP are only further doubling down on it - no matter what kind of product, application, or service. Pain points cited are simply a function of not having the right tooling or infrastructure in place to operate UBP, they are not limitations of the UPB model itself.
I love your quotes, and this is one for the books -
"...in fact, just this morning I exported a list of all our Salesforce licenses, filtered by last login, and vomited into my Mostly Metrics yeti."
It is a fallacy to think that the model of counting seats upfront is a superior model because the customer does not have a choice to dial it down midstream, and therefore the vendor is better off. The reconciliation is going to come due - no matter what. Better to align with customer's needs and usage patterns (giving customer a choice), rather than the excel model.
And while we debate, the UBP pioneers and leaders continue to eat their subscription counterpart's lunch...
:)