Chennai and Usage Based Pricing
Could the lack of metered auto rickshaws in Chennai be the reason that SaaS entrepreneurs from that city evangelise usage based pricing?
This is an arbit post. And so, even though it is work related I’m putting it on this “main” blog.
This morning I was talking to an old acquaintance about my company Babbage Insight. We are raising an angel funding round, and he was evaluating whether it is worth his money.
Having spoken about various aspects of the company, we started talking about pricing. I was telling him that while we have an inaugural pricing offer, that is only the floor, and that we need to figure out our precise pricing model. “I don’t know. We might price based on the number of data sources to integrate. Maybe by the number of metrics we track. Maybe the number or users. We don’t know yet.”, I said.
He brought up the inevitable question of whether we have considered “usage based pricing”.
To which I said:
well, you’re from Chennai, so you may not fully understand this. You hire an auto rickshaw, and you are constantly looking at the meter. You are constantly wondering how much of the ride you can afford. Maybe there will come a point where you say, ‘okay, this far is enough. let me walk the rest’. This is the problem with usage based pricing where you don’t know the price beforehand. Because you are constantly wondering whether this incremental bit of usage is worth it, you may not use the product as much as you should. And so you may not get the value that you think you should. And that diminishes your perception of my product.
The Chennai bit is important. It is an off hand comment I made but - the thing with Chennai is that auto rickshaws there have pretty much never run on meter. It is always a fixed price, that you agree on at the beginning of the trip. The problem is so notorious that I delivered a lecture, and wrote a public policy article on the topic (in pragati - looks like after the magazine shut down, the article is also not available).
Let’s put two and two together. Chennai is easily the home of SaaS (software as a service) businesses in India, being host to pioneers such as Zoho and Freshworks (it is these “mafias” that are powering the sector there even now). Chennai is also a city where auto rickshaws don’t run on meter, which means people there are not familiar with the perils of usage based pricing (what I mentioned above).
This is precisely why SaaS founders from Chennai evangelize usage based pricing - they don’t know of its pitfalls. They don’t know that the moment you put a meter, people will start looking at the meter rather than focusing on solving their problem.
And since Chennai is the home of Indian SaaS, Indian VCs have also internalised this thinking - that usage based pricing for SaaS is the way to go. And now it has become “accepted discourse”.
Maybe they (SaaS founders from Chennai, and VCs) should take a (metered) auto ride together!
On a more serious note, there are other pitfalls of usage based pricing - the most important of which is that you don’t know what you might spend. And so you can have a sticker shock when you get the bill. And then when reducing your bill becomes an objective for your customer, once again you can rest assured that they will not be getting full value from your product.
PS: All of this is a generic statement, and what kind of pricing model you adopt is a function of what you are building / selling. One size doesn’t fit all.