Hybrid Pricing

What is Hybrid Pricing?

Hybrid pricing is a unique pricing model that combines fixed-rate and usage-based pricing. It gives businesses the flexibility to charge customers for both a monthly subscription fee and any additional product or service usage.

Subscription businesses using a hybrid pricing model typically use some or all of the following:

• Flat-rate pricing — The customer pays a fixed fee for access to the product or service.
• Tiered pricing — Customers pay a higher or lower monthly rate based on which version of the product or service they use.
• Feature-based pricing — Businesses offer different service features, and pricing depends on the distinct features a customer selects.
• Pay-as-you-go pricing — The customer pays a fixed rate for each unit of product usage (e.g., GB of storage), but their monthly bill fluctuates depending on how often they access it.
• User-based pricing — Businesses charge a fixed or variable rate on top of the flat fee for each additional user they add to their subscription.
• Freemium pricing — Companies offer a free version of their product with limited features, which users ideally upgrade from after trying the product out.

SaaS is the most common example of hybrid pricing in practice. Most SaaS companies offer a flat monthly rate (e.g., $49/month) and then add a per-user per-month cost (e.g., $10/user/month after 5 users). When signing up to use the product, buyers choose between an entry-level tier (typically a low-cost or freemium option), a middle tier, and a feature-rich enterprise tier depending on their needs.

Synonyms

• Hybrid billing model
• Hybrid pricing model
• Hybrid pricing strategy

Why SaaS Companies Use Hybrid Pricing and Billing

The beauty of hybrid pricing is that it gives businesses flexibility in how they charge customers and allows for greater scalability. It plays to the advantages of the SaaS business model — a SaaS can effectively be deployed to any size customer and scaled up or down depending on features and usage needs.

Combining fixed-rate subscription-based pricing with usage-based pricing also allows SaaS companies to offer higher levels of service and convenience to their customers, which are also growing businesses. For example, the ability to add additional users to an account after reaching a maximum amount means companies don’t have to worry about their subscription running out of users and having to pay more for a higher tier product.

Customer-Centric Approach

Although revenue maximization is the main benefit for SaaS companies, their decision to adopt hybrid pricing and billing benefits the customer tremendously.

• Using a tiered pricing model means customers needing fewer features and functionalities don’t have to worry about overspending and underusing a service.
• Leaving room for customization means enterprise customers can pay a higher rate and get everything they could possibly need out of their product experience.
• Flat rates are easy to budget for, but customers generally expect to pay more for more features. This makes a hybrid approach more reflective of their value perception.
• By coding their services to be usage-based, SaaS companies can accommodate customer growth with ease and without increasing pricing out of proportion.

Ultimately, hybrid pricing is a great way for SaaS businesses to strike the right balance between offering competitive prices and maximizing revenue potential.

Flexible Pricing Strategies

From a customer standpoint, hybrid pricing is a lot easier to manage. Instead of having to stick to a single pricing model, they can opt for different options based on their needs and budget (which will almost certainly change over time).

Let’s say a small business purchases the low-end tier of a software product. This works for them at the time because they only had five employees.

By the same time next year, they were running a 30-person office. Several people were using the system. And they used it for a lot more business functions (some of which, they didn’t even require before).

Since they can upgrade their service to another tier or add more users, they can keep working in the same UI without disrupting their workflow. Since the higher price proportionally reflects the additional value, they’re still happy with what they’re paying.

The same goes for customers who downgrade. Although less revenue from a customer isn’t ideal, it’s better than churn.

When a subscriber removes a user or moves down a tier, they see an immediate cost reduction on their next bill. The ability to configure this with just a few clicks means they don’t have to unsubscribe and move to a different service.

Provides Additional Pricing Metrics

Tracking customer behavior and service usage on a per-user basis is helpful for SaaS businesses because helps them understand who their customers are, how often they’re using the service, and which features they like to use most.

This data helps SaaS companies optimize their services and overarching pricing strategy based on actual customer behavior. Using it, they can add more value by introducing new features, adding upsells/cross-sells, and removing unnecessary components.

Accelerated Revenue Growth

With additional pricing metrics and customer data, price optimization is a lot easier to achieve. Dividing a SaaS into multiple product tiers means multiple types of customers can use the product, even though the company doesn’t need to introduce any new products to serve them.

The ability to tap into a considerably larger market share and offer them a price they perceive as fair pushes conversion rates through the roof. Thanks to their product and pricing flexibility, SaaS companies using hybrid pricing achieve faster revenue growth and higher customer retention rates because they can maintain their relationship with customers while they continue to scale.

Challenges in Implementing Hybrid Pricing

While it helps organizations maximize their revenue potential and raise customer satisfaction levels, the only way to implement hybrid pricing at scale is to use advanced subscription management software.

• Hybrid pricing is complex to configure. The biggest challenge with implementing a hybrid pricing model is its complexity. It’s not like a simple flat-rate price. It isn’t like a completely usage-based pricing model, either.
• Customers might have trouble understanding multiple pricing models. If pricing structures don’t make sense to the end user, customer acquisition efforts suffer dramatically.
• Hybrid-priced products are tough to configure. Sales teams typically have a hard time bundling services and quoting customers based on potential number of users and feature requirements.
• Each customer has to be billed differently. Accurately calculating the cost per user or per additional feature is impossible for a human. It requires specialized software that tracks usage within the product and automatically syncs it to the billing system.
• Some customer segments are price sensitive. Determining the right balance between subscription and usage costs can be difficult. Overpricing or underpricing either component can lead to lost revenue and missed opportunities.
• Product usage is inherently unpredictable, but pricing can’t be. Companies need to keep flat-rate pricing the same to maintain their predictable revenue. Changing pricing too often frustrates customers, as does billing them at an unpredictable rate or amount each month. If they can’t strike the perfect balance between flat-rate and usage-based pricing (and get the numbers right), customer satisfaction and profitability take a hit.

Best Practices for Adopting Hybrid Pricing

Hybrid pricing offers untold benefits in the form of greater profitability and a better customer experience. But it’s highly complex to implement and even harder to get right.

To navigate the above issues, companies need to follow these best practices:

Use CPQ, subscription management, and billing software.

Three types of software support hybrid pricing: CPQ, subscription management, and billing.

• Configure, price, quote (CPQ) — CPQ software holds all the data related to the features and pricing of a SaaS product. Sales teams use it to bundle services, create discounts, and generate quotes for current and prospective customers. It eliminates all the hassle associated with giving buyers accurate pricing estimates with such complex pricing models.
• Subscription management — This software handles subscription orders, provisioning services, payment collection, usage tracking, customer communication (e.g., invoicing), and analytics for product usage and engagement. It can automatically calculate a customer’s usage-based charges and issue accurate invoices.
• Automated billing — Billing is often built into subscription management but is also available as a standalone product. Subscription services have to bill customers automatically. Manual billing processes are error-prone and impossible to scale. Automated billing handles the flat-rate and usage-based billing aspects of a hybrid model without human intervention.

Don’t add too many variables.

Customers have extreme difficulty understanding more than three elements of a product price (and three is even pushing it sometimes). If they dont’ understand it, they’ll never buy it. You should be able to describe your hybrid pricing model in one or two sentences max.

A few examples of common (and successful) hybrid pricing models include:

• Feature-based tiers — Customers see three or four price tiers, each with a list of features. They can see the logical progression from one tier to the next. And they can easily understand what they get for their money.
• Overage — Businesses set a flat rate for a given amount of usage (e.g., a phone carrier with a data cap or a cloud services company with a storage limit). If customers exceed the limit, they pay an additional fee for their additional usage.
• Flat-rate plus per-user — This is common with SaaS companies, which charge a flat fee for their service and then have an additional per-user cost after a certain number of users.
• Pure pay-as-you go — Companies offer access to their service at a flat rate for a certain amount of time (e.g., one month), paid upfront or after the billing period. After that, customers are only charged based on their usage.
• Subscription + one-time fees — SaaS companies frequently charge implementation and setup fees when they implement an enterprise and/or custom-coded solution and deploy it across multiple business units. The same is true for difficult or large-scale integrations that require complex IT infrastructure.

Make hybrid billing as consistent as possible.

Some types of hybrid billing are naturally more variable than others. Although customers benefit from the hybrid model, they value consistency more than anything. Otherwise, your product is hard to budget for.

In a hybrid model, flat-rate prices should be the larger proportion of every customer’s bill. Otherwise, customers might feel like they’re being taken advantage of. At the very least, they won’t have a clue what they’re going to end up paying at the end of each billing cycle.

To ensure customers stay satisfied, it’s also important that they completely understand usage parameters before signing up. A lack of transparency means they’ll be surprised by their bill, which can lead to cancellations and chargebacks.

Regularly evaluate and update your pricing.

Pricing should never be a ‘set it and forget it’ aspect of your business — especially when using a hybrid pricing model. Regularly evaluate and update your pricing to reflect the value your product or service provides.

Gather customer feedback, consider market changes, and collect usage and product engagement data to refine your pricing strategy over time. You’ll not only ensure your pricing stays competitive but also maintain transparency and trust with your customers.

Educate your customers.

The complexity of hybrid pricing models can sometimes confuse customers. In addition to making your hybrid pricing as simple as possible, make sure you’re investing time and resources into education.

Clearly explain how your pricing works — both the subscription and usage components — and the benefits it provides. This can include detailed guides, explainer videos, or even one-on-one customer service interactions.

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