Your Guide to Pricing Metrics

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Jan 12, 2023

Let’s start with the definition...

A pricing metric is a unit of something that measures how much each one of your customers is going to pay for your product (e.g. number of “seats”).

There is another related pricing term, called a value metric. These terms are related. A value metric measures the amount of value your product is generating for customers.

They can be the same (e.g. pay per lead) or different. There is an excellent article by Steven Forth on this topic here, if you’re interested in more details.

Most SaaS companies have a pricing metric as part of their monetization model, but it’s not a requirement.

The main benefit of having a pricing metric is that it gives you the ability to charge customers different amounts for the use of the same product to avoid leaving money on the table.

Example - Factorial HR

Pricing metrics can be pretty much anything. In this example Factorial HR uses Employees as their pricing metric.

For HR software, it makes sense to price per employee, as it’s a good proxy for value the customer gets from the product (always a good thing in SaaS pricing).

See Top 10 Pricing Metrics...

Choosing the Pricing Metric

In general, a good pricing metric is:

Simple to understand and explain
Easy to measure
Scales along with product consumption
Correlates to value

Let’s take at a look at a couple of examples…

Example - Shopify

The “unit of something” in case of Shopify is revenue. Customers with small amount of revenue will pay Shopify less, than customers who have lots of revenue.

Now, let’s test it out in terms of best practices:

Revenue:

✔️ Simple to understand - every retailer knows how much they make

✔️ Easy to measure - yup, al the data is flowing through the Shopify platform, as they collect payments

✔️ Scales with consumption - it works, assuming that the more money you put through the system, the more you use the product.

✔️ Correlates to value - it’s a fair proxy for value, assuming retailers see Shopify as ‘cost of doing business’.

Overall, Shopify has done well choosing revenue their primary pricing metric. Now, I say “primary”, as Shopify has what’s known as secondary pricing metrics.

Shopify’s secondary pricing metrics are “staff accounts” and “inventory locations”

As a best practice, you should avoid having multiple pricing metrics, as they add pricing complexity.

In case of Shopify, the pricing team now has additional work as they need to decide whether Basic/Shopify/Advanced users can buy additional staff accounts or inventory locations, the price per additional location or staff account, volume discounts, etc… you can see how this starts to complicate things quickly.

The only time this additional complexity is justified is when you have a very diverse set of customers and you think that you will be leaving significant money on the table (i.e. primary pricing metrics does not let you subsegments customers sufficiently).

Example - 7Shifts

The “unit of something” in case of 7Shifts is locations. The more restaurants you have, the more locations you have, the more you pay.

I would think this works well for 7Shifts for the most part.

Per location pricing is easy to understand and measure. The pricing metric also correlates to value, as the more restaurants you have, the more complexity you have to manage.

The one shortcoming is “scales with consumption”. Imagine a single restaurant with 50 employees vs. 5 restaurants with 10 employees each. The first is free, the second one pays 5 x $29.99. They might be leaving some money on the table here.

I am sure there were a lot internal of debates around using employees vs. locations as their pricing metric, as they are both good candidates.