10 hours ago
Preparing Finance Leaders For Software Pricing Changes
Scott Woody is the Cofounder & CEO of Metronome, a leading usage-based billing platform.
When companies change how they price their product, everything in the company is impacted—especially the finance team.
In the software industry, usage-based pricing, also known as UBP, is gaining popularity rapidly as AI and other rapidly growing software providers adopt it or offer it alongside more traditional subscription-based pricing models.
With UBP, companies pay for software as they use it. Subscription means they pay per user or a flat fee. Almost half of software-as-a-service (SaaS) providers now use UBP or a hybrid approach, industry research shows. Our own research found that 77% of the largest software companies have some form of UBP.
The first mistake companies can make when switching to UBP is to assume it is a simple change in revenue recognition. Nothing in pricing is simple. If a pricing change is not managed effectively, especially by the finance team, companies can experience increased billing errors, customer distress, missed opportunities and unmet revenue targets.
Here are five key challenges that finance leaders will face during a transition from subscription to UBP, or to a hybrid approach, along with ways to mitigate them.
Many companies still rely on manual tracking and reconciliation processes. This can be especially difficult with UBP. That's because billing amounts can vary by day, week, month and quarter as usage ebbs and flows. Without accurate tracking, revenue leakage and billing errors are more likely.
Solution: Automate revenue recognition to minimize manual processes and reduce human errors. Whether a UBP solution is purchased or built in-house, integrate it with other financial systems to ensure accurate revenue tracking in real time.
With subscription-based pricing, companies have a clear understanding of the revenue they can expect each month, quarter, or year. That enables them to plan ahead on how to invest that revenue and most traditional forecasting methods are built for predictable revenue.
With UBP, revenue becomes highly variable. It depends a lot on the customers using the software, their success in the market, and other factors that the software provider doesn't control.
Solution: To improve a CFO's ability to accurately predict revenue when using UBP, having a single source of truth for data pertaining to revenue and usage will be key. Also, machine learning and AI can help analyze factors that impact revenue, such as patterns around product use and broad economic factors, such as recession threats. Finally, teams need to share insights on the pace of sales, whether customers are expanding or shrinking use and updated forecasts.
Legacy financial systems were probably not designed for high-volume, real-time and granular usage data. This can lead to data silos, reconciliation delays and operational inefficiencies.
Solution: A data-first mindset is critical. Whether you buy it or build it, having data in a centralized warehouse and having standardized data pipelines will help keep financial data consistent and accurate across all teams.
With traditional subscription models, payment is upfront, so the risk to the software provider is low that they won't get paid. With UBP, companies pay after they use the software. That shift in cash flow introduces new risks and requires new safeguards.
Solution: To guard against defaults, consider 'prepaid commit' features so companies pay for usage upfront and then draw down on that usage. If enterprise customers have strong creditworthiness, postpaid commit pricing—which means they agree to spend a minimum over a set period of time—also reduces risk.
In AI-driven SaaS, prepaid models with automatic balance reload mechanisms have also helped prevent service disruptions while protecting against fraudulent consumption spikes.
For virtually any business, products need to be well priced to meet customer expectations for value. Hitting this sweet spot involves a lot of moving pieces. UBP introduces new metrics that teams in finance, sales and product need to understand to keep the pricing/value recipe in sync. Being able to closely tie pricing to value and switch it as the equation changes is one of the big benefits of UBP.
With subscription pricing, a software provider may not notice that their product isn't being used until it is too late to win the customer back. With UBP, falling usage can be spotted immediately. Everyone can be made aware and help resolve the problem.
Solution: Educate all teams about key usage indicators, such as consumption trends and revenue per usage metric, that help align pricing with customer value. The same applies to prepaid commitment pricing, which can be strategically offered to enhance engagement. Also, clearly define KPIs and review cycles to keep your pricing in sync with customer value.
Pricing can be a make-or-break moment for companies. The finance team plays a crucial role in ensuring success. By aligning financial operations with real-time customer data, companies can successfully navigate the shift to UBP, ensuring financial stability, customer trust and long-term scalability.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?
