The first thing to state is that massive companies have been built using both pricing structures: Salesforce and Adobe bill per seat while Snowflake and Twilio charge per use. Deciding which to use involves considering factors such as customer preference, competition, and customer preference.
When to Use Per Seat Pricing
If your customers demand predictable bills, then per seat pricing is the way to go
Competition
Sometimes, entering the market with a different pricing model disrupts incumbents
- Michelin developed more durable tires, but taking it to market with the existing pricing model would have cannibalized sales
- Instead, Michelin transitioned to selling tire miles to truckers who preferred the new model
When to Use Usage Based Pricing
If your costs are material and scale with usage like Twilio, then usage based pricing aligns your costs with your customers’ spend
- This prevents very large customers from being your worst customers, by generating lots of revenue, but costing you money because the account is gross-margin negative
A hybrid approach
Many companies employ a two-part tariff: a base platform fee and an ongoing usage fee to capture positive aspects of both types of pricing strategies
- Platform fee establishes a stable relationship
- Usage pricing enables the customer to scale up or down as a function of their traffic
