As we move through another year in a COVID-19 world, it’s more important than ever that B2B SaaS businesses stay flexible and are able to adapt quickly. Keeping up with market trends is needed for timely adaptation to ever-changing market conditions. Pricing trends are particularly important to keep an eye on as they indicate how the buyers in your market value the types of services you offer. With that in mind, here are the pricing trends I'm seeing in my role at Chargify as the B2B SaaS market continues to evolve.
Many B2B SaaS businesses begin with a set of standard priced packages to which companies can easily subscribe in an automated self-sign-up construct. However, we are seeing more B2B SaaS companies make use of custom pricing models as they grow and as they add higher value tiers to their offerings. By custom pricing, I mean negotiated, individual prices for customers at the subscription, plan, and/or add-on level. In this model, customers may purchase the same product, but at a different price based on their valuation of the product.
Often, this pricing strategy shows up in sales-negotiated contracts. Every business is unique. With this pricing strategy, B2B SaaS companies reach a mutually agreeable price for the value of the services purchased. Your sales team has flexibility to sell products more easily, as customers are more ready to agree to a price they negotiated. Custom pricing also tends to show up when a business is in the midst of refining their pricing strategy, attempting to hone in on the best price for their SaaS product.
It is important to note that custom pricing has historically been difficult to execute due to limitations with the inflexible billing software available on the market. However, as billing software has innovated and adapted to enable more custom pricing models, more merchants are taking advantage of this model.
We’ve seen more B2B SaaS companies wanting to implement custom pricing, and their consumers are asking for it as well. I took a look at our cohort data over the last several years. (These are new Chargify customers who onboarded in a given calendar year.) In 2018, only 3% of our cohort were using custom pricing. However, this steadily increased to 5% in 2019 and 10% in 2020. As I reviewed our 2021 cohort, the number had more than doubled, with 21% of new Chargify customers leveraging a custom pricing strategy.
If this is any indication of what’s to come, the number of SaaS companies implementing custom pricing will continue to grow in 2022.
The second pricing trend we’ve been monitoring at Chargify is fixed-usage billing. We define this as charging customers a zero-dollar base fee and an expected amount of usage. With no fixed fees, everything is priced based on a defined (and expected) value metric.
Ten years ago, it was common in the SaaS space to charge customers a license fee for unlimited use of a product, which wasn’t always ideal for either the end-user or the SaaS business. Fixed-usage billing is putting your money where your mouth is. By not charging customers a base fee, your revenue is based solely on the usage of your services..
It’s important to note that, while fixed-usage billing is similar to metered usage (which I’ll discuss later), there’s a big distinction between the two. For example, with a fixed usage billing model, if a customer pays to send 900 emails but they only use 600, they will still be charged for 900 emails.
Historically speaking, at Chargify the rate of adoption of fixed-usage billing has fluctuated from year to year. In 2018, 19% of our cohort utilized this pricing strategy. 15% had adopted it by 2019, then it doubled to 30% in 2020.
As I prepared to examine our 2021 cohort, we expected that the rate of adoption would likely decrease again as a result of the COVID-19 pandemic. (Our reasoning was that SaaS companies would try to protect themselves in the second year of the pandemic by hedging their bets. Instead of tying their revenue entirely to usage, we expected them to reintroduce some of those base fees.) However, when I reviewed the data, I was pleasantly surprised to see that this assumption was wrong.
In 2021, 39% of our cohort implemented some form of fixed-usage billing. This is great to see, as it further solidifies the SaaS industry’s continued shift to value-based billing, which we anticipate will only increase in 2022.
As promised earlier, the third and final metric we looked at is utilization of metered usage. At Chargify, we define this as merchants pricing and billing off products that are truly variable
Metered usage, in many ways, is the ultimate value metric because your customer is only paying for exactly what they are getting. It doesn’t matter what the customer used last month because their slate is reset to zero for the current month. So returning to my prior email usage example, if I send 600 emails to my customers, I’m only going to pay for those 600 emails, nothing more.
For SaaS businesses, metered usage does introduce some variability in revenue and can be unpredictable. You might have a customer who has very high usage in one month but low usage in the next. Regardless of those elements, the rate of adoption of metered usage in our cohort had been increasing year over year, with just 3% leveraging it in 2019 growing to 12% in 2020.
The cause of the increase is easy to pinpoint. Customers don’t want to pay for things they don’t use. Consumer demand is bringing this mentality to the B2B space, and this is where the SaaS industry is headed as well. Just Google ‘usage-based pricing,’ and you’ll see article after article and study after study that reflects this shift.
Based on this, and on the increase in adoption of prior Chargify cohorts, I expected to see the utilization of metered usage grow with our 2021 cohort. However, I found only 9% leveraged metered usage in 2021, which frankly surprised us all. As I said before when discussing fixed-usage billing, I had expected SaaS companies would try to protect themselves in the second year of the pandemic by hedging their bets and not tieing all of their revenue to usage. While I was wrong in my assumption there, it turns out that this hedging actually did show up. It just showed up in the slightly less predictable metered usage.
So is 2022 the year metered usage fully catches on for SaaS businesses? It’s a powerful revenue-generating strategy, but it does pose some logistical issues. I’m confident saying “metered usage is the future of SaaS pricing,” but the data shows adoption is just not quite there yet. Despite this, I expect to see adoption rise again in 2022, as other signs point to the industry moving closer and closer to value-based pricing each year.
As you map out updated pricing strategies, keep these three trends in mind. First, custom pricing (sales-negotiated contracts) are going to continue gaining traction in the B2B SaaS space. Second, fixed-usage billing (i.e. no base fee) will be a popular SaaS payment model that customers are accustomed to, if not already expecting. And finally, you can expect to see some form of value-based pricing expand across the SaaS industry in 2022.