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When is transitioning to UBP truly the right move for a company?
In this webinar, we were joined by Madeline Stein, Director of Pricing and Monetization Strategy at Algolia, to discuss implementing usage-based pricing models for revenue maximization.
In the current software industry, it's increasingly common for companies to adopt Usage-Based Pricing (UBP) instead of charging per user.
But when does moving to a UBP model make sense for your company?
Which industry verticals or business models shine brightest with this approach?
From understanding customer value to implementing usage-based pricing, Madeline shared real-world examples and experience-backed insights to optimize revenue streams and drive business growth with effective pricing strategies.
What was covered
- Pricing, packaging, and monetization strategies
- Balancing company goals and customer value perception in pricing strategies
- Metrics to track pricing strategy success
- The nuances of UBP and its implementation
- Challenges and best practices in transitioning to UBP
- + Running pricing experiments and pricing considerations for bundling multiple products
Madeline also clarifies some of the most common questions raised around revenue recognition software and its profound implications for modern business paradigms.
Speakers:
Madeline Stein, Director of Pricing and Monetization Strategy at Algolia
- Two decades of experience in leading pricing transformations
- Formerly worked with HubSpot, Twilio, and SendGrid
Hosted by:
Saurabh Agrawal, Cofounder and CPTO of Zenskar
Webinar Summary
1. What is your approach to developing a pricing strategy?
Pricing strategy goes beyond just setting a price—it's about aligning the company's overall objectives, product strategy, and customer needs. For example, at Twilio, we built a pricing strategy that supported both self-serve and enterprise models, balancing predictable revenue with flexibility. The key is to ensure your pricing strategy supports your customer acquisition, retention, and expansion goals while aligning with your company's financial objectives.
2. How do you balance customer value and business objectives in pricing?
I use a framework where the goal is to align customer value perception with the business’s objectives. At HubSpot, we made sure that our product’s value to customers, like marketing return on investment, aligned with our pricing metrics—whether it was flat fee or usage-based pricing. This approach helped maintain profitability while providing clear value to our customers, ensuring that the business’s margins were protected while delivering flexibility to the customer.
3. What metrics do you use to evaluate the success of a pricing model?
Key metrics like customer acquisition cost (CAC), lifetime value (LTV), and churn rate are central to evaluating pricing success. At SendGrid, we used LTV/CAC ratios to assess whether our pricing was effectively driving sustainable growth. For instance, when LTV/CAC ratios were lower than expected, we refined our pricing to ensure better customer lifetime value without losing acquisition efficiency.
4. How do you decide when to implement usage-based pricing?
A usage-based billing system works when your customers’ value increases with usage. At Twilio, we implemented a pay-as-you-go model because it matched the value customers were deriving from our product. However, if the value isn’t directly tied to usage, it’s better to stick with flat-rate pricing. Usage-based models allow businesses to scale with customers, ensuring they only pay for what they use, which also avoids friction during the sales process.
5. Can you explain the difference between pay-as-you-go and upfront commitment models?
Pay-as-you-go is ideal for businesses where customers scale with the product. At SendGrid, we used this model to allow customers to pay for what they used, which appealed to smaller businesses needing flexibility. However, larger clients preferred upfront commitments, where we could predict revenue more accurately. Deciding between these depends on customer expectations and the business's cash flow needs. The upfront commitment model, while harder to implement, offers predictable cash flow, which is important for businesses scaling quickly.
6. When is it appropriate to transition from a subscription model to a usage-based model?
The transition to usage-based pricing should align with both market needs and your operational capabilities. At HubSpot, when we noticed that a segment of customers was experiencing growth faster than we anticipated, we added usage-based tiers to accommodate this. But, before making this transition, we did extensive customer research and tested the model in select regions to ensure it met customer expectations and supported our financial goals.
7. What are the operational challenges companies face when implementing usage-based pricing?
The biggest challenges are systems alignment and revenue recognition. Billing systems often struggle to support complex metrics like overages and usage tracking. At Algolia, we worked on building internal systems that could track usage data from APIs and product activity in real time. Systems need to handle this complexity without causing delays in billing or inaccuracies in revenue recognition, which can create significant operational friction.
8. How do you mitigate risks during pricing experiments?
To minimize risk during pricing experiments, I recommend starting small with a controlled group of customers. At SendGrid, we ran small-scale experiments before fully rolling out new pricing models. For example, we tested usage-based pricing tools with a limited customer set and monitored metrics like churn and adoption rates. If things didn’t go as expected, we could adjust before affecting the larger customer base.
9. What key factors should be considered when bundling products for pricing?
When bundling, it's important to assess the value each product brings to the customer and how they use it. At Twilio, we bundled products with varying levels of usage to meet customer needs. For instance, we bundled our messaging API with email services, but customers could scale each independently based on their needs. The key is to structure bundles so that customers feel they’re getting value while maintaining profitability for the business.
10. How do you optimize working capital with usage-based pricing models?
Optimizing working capital with usage-based pricing requires balancing flexibility with predictability. At Algolia, we introduced hybrid models, where customers could commit to certain usage tiers upfront, helping us predict revenue while still offering the flexibility of pay-as-you-go. This balance allows for predictable cash flow without sacrificing customer satisfaction.
11. Can you provide an example of when a pricing experiment did not work?
One example was when we introduced a new pricing model at SendGrid without fully understanding the customer’s adoption curve. Initially, customers faced difficulty adjusting to the new model, which resulted in higher churn. We quickly pivoted by introducing a more gradual transition, offering lower initial costs with incremental increases. It showed the importance of testing and tweaking pricing before full-scale rollout.
12. How can pricing models impact customer acquisition?
Pricing models directly impact how quickly you can acquire customers. At SendGrid, we used a hybrid model—offering free tiers for early adopters and shifting to usage-based pricing as they scaled. This made it easy for customers to start with minimal risk, encouraging quicker adoption. The key takeaway here is that a flexible, low-barrier entry model can increase adoption, particularly for smaller customers or startups.
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