The Curse of Utility Pricing

Internet services are increasingly being priced based on usage. Whether you call it utility-based billing, on demand pricing, or pay-as-you-go, many applications and services in the Cloud are priced this way.

But when is a customer really a customer, if they are being billed only for usage?

Variable pricing is great for customers (with the exception of some enterprises who require fixed budget amounts, but we won’t go into that). They pay for only what they use, and don’t have wasted costs should their needs change. And many pricing plans automatically give discounted rates as their usage increases. Customers just pay for the number of Emails, API calls, server instances etc. that they consume.

As an entrepreneur or sales person, however, you need to know what your customers are doing and what they are paying. If there are no contracts signed for commitment periods, and customers only pay if / when they use your product, do you ever really “have” a customer?

The answer is yes. But you need more visibility into customer usage, all the time.

When you look at an individual customer, you need to be able to see their usage — current, recent, average, trending and all time aggregate. Ideally you can see this data in real-time or with a minimal delay (so everyone on your team can trust it to be accurate). And you want the usage data in the same location as all the other information about the customer.

A best practice is to integrate this data into a CRM system like Salesforce, so that anyone looking at the customer could see their usage and bills, and understand the patterns and trends. If you don’t use a CRM system, then you will need to build a lot of the reporting and alerting logic into your application itself, which can be a distraction from building customer facing product features.

Making the usage data easily accessible, on an individual customer basis and in aggregate, is a key step in getting visibility into your customers. Reporting and graphing usage patterns, and triggering actions based on changes in usage, will allow you to be responsive to your customers

The curse of utility pricing can also be the great opportunity.

Needing to stay on top of customer usage can be a great opportunity however. You can delivery better customer service and drive more revenue by staying in tune with your customer’s usage. Here are 3 key examples:

Preventing Churn
Rather than waiting until the end of a contract to find out that the customer had not used your product in 6 months and is going to cancel, staying on top of customer usage can help you proactively identify potential churn candidates. If a customer’s usage is trending downward, has dropped more than X%, or ceased entirely, you can be alerted and take action to contact the customer and rectify the situation.

Upselling / Preventing Overage
Many billing models offer a hybrid of usage-based with plans that customers commit to in order to get a lower per-unit cost. This can be good for both parties, as you get some guarantee of revenue, while customers who have predictable needs lock in at a lower rate. But if customers have variable needs, or there are changes in their business which cause spikes in usage, trouble can ensue.

If you are closely tracking customer usage, your sales team can use changes in demand to very efficiently contact customers and upsell them to higher plans, resulting in more revenue. At the same time, you deliver a better customer experience, by not blindsiding customers with large overage bills that they feel they should have been alerted to.

Customer Modeling
The final, and perhaps most exciting, opportunity that can come from having visibility into customer usage patterns for utility pricing is the ability to model and segment your customer base by their actual, real-time behavior. For example, once you have identified usage patterns that generally define certain customer types, you can create reports and views in your CRM system that automatically move customers into different target groups as the usage data related to their account changes.

What do the usage patterns, and historical ramp up, of your best customers look like? With this data, it is easy to be alerted to new customers whose usage matches those top $ value customers, and who should be prioritized by sales.

And what do the usage patterns look like for those who stay on a free developer plan, and almost never upgrade to paid accounts? Best to leave those to occasional contact through your marketing automation systems, they probably don’t want to be bothered anyway.

In the end, utility or pay as you go pricing presents both challenges and opportunities. If your user data lives in a silo somewhere, then whether someone is an active customer, and whether they are moving up or moving out, can be something of a black box. But if one integrates customer usage data into a CRM system where it lives alongside all the other data used by sales and marketing teams, then it can be an enabler for better efficiency, happier customers, and more revenue.

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CloudAmp helps software companies centralize  customer engagement, usage and account data in their CRM.

Increase your conversion rates, customer retention, and revenue by gaining real-time visibility into how customers are using your App, directly within Salesforce.

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