Value Metric Pricing
When you need this method
Your pricing is a flat rate or a handful of rigid packages. Small customers find the price too high, large ones pay far below the value they receive and there is no built-in reason for existing revenue to grow. Without a scaling price metric, the business model lacks the expansion engine that makes net revenue retention above 100 percent possible in the first place.
Approach
- 1Identify the unit that actually grows with customer value, seats, processed volume, transactions, achieved outcomes.
- 2Check that the metric meets three conditions: the customer understands it, it is measurable, and it rises when the customer gets more value.
- 3Tie the price to this metric and deliberately design a wide spread between your smallest and largest customer.
- 4Survey willingness to pay per segment (for instance via Van Westendorp) and review pricing regularly, driven by data.
Typical application
A typical case: a B2B SaaS in document workflow sells a company license at a fixed price. One large customer now processes many times the volume of the small ones but pays the same. The company switches to a tiered price metric per processed document volume: small customers enter at a lower point, large ones pay in line with their value. As existing customers grow, revenue now grows automatically instead of every upgrade being negotiated one by one.
Limits and counter-indications
A badly chosen metric penalizes exactly the behavior that drives product value, whoever pays per user invites no colleagues. For lender and embedded-finance models the logic does not apply; there, monetization reads as spread or take rate. Migrating an existing base is delicate and needs clean migration paths and communication.
How to measure impact
Net revenue retention and expansion's share of growth; as a supplement, the price spread between the smallest and largest customer as an indicator of whether the metric truly scales.
Related methods
Tools for this
Sources
- 1.Ward S. Bowman, Jr.: Tying Arrangements and the Leverage Problem, The Yale Law Journal 67(1), 1957, S. 19–36 (Abschnitt "Single Product Discrimination, A Counting Device", S. 23–24) (opens in a new tab) · 1957 · academic and scholarly literature · supports the underlying mechanismBowman shows that a seller whose product is worth more to intensive users, but who cannot observe usage intensity in advance, picks a consumable as a counting device and charges through it, with the ceiling set by the saving the product delivers to the user; that is the pricing unit tied to customer value.
- 2.What's going on with pricing this year? A deep dive into 2023 pricing data (opens in a new tab) · OpenView Venture Partners (Kyle Poyar) · 2023-11-30 · investment, consulting and analyst firms, industry bodies and public agencies · provides benchmark figuresQuantifies how widespread usage-based pricing is, drawing on a SaaS benchmarks survey of more than 700 companies: 18 percent price predominantly on usage, 23 percent use usage-based tiers, 42 percent have no usage component at all. The source measures adoption; it does not establish that usage is the metric through which customers derive value.
- 3.Product Pricing for Startups: Value Metrics (opens in a new tab) · Long-Term Stock Exchange (Patrick Campbell) · n.d. · practitioner source · describes the methodDefines the value metric as what a customer pays for and by, and shows with the example of a per-transaction fee how revenue grows with the customer's usage.
- 4.Walter Y. Oi: A Disneyland Dilemma, Two-Part Tariffs for a Mickey Mouse Monopoly, Quarterly Journal of Economics 85(1), 1971, S. 77–96 (opens in a new tab) · 1971 · academic and scholarly literature · supports the underlying mechanismFormalises the tariff structure of a lump-sum fee plus a per-unit price and shows how the usage price extracts consumer surplus; explicitly names Bowman and Burstein as the prior work on the metering mechanism. Covers price level, not choice of unit. Full text read.
- 5.M. L. Burstein: The Economics of Tie-In Sales, The Review of Economics and Statistics 42(1), 1960, S. 68–73 (opens in a new tab) · 1960 · academic and scholarly literature · supports the underlying mechanismEconomic formalisation of tie-in sales as a device for extracting consumer surplus through the tied unit, the economics version of what Bowman set out three years earlier. Verified only via the citation in Oi 1971 (fn. 2 and closing section); no free full text checked.
Origin: Campbell