What is outcome-based pricing? How SaaS companies use it

At Relate 2024, Zendesk announced a groundbreaking change in its pricing strategy. They are moving away from traditional models and introducing outcome-based pricing for their AI agents.

This shift signifies a major transformation in the SaaS industry, emphasizing the importance of measurable results and aligning costs directly with the value received. In this article, we'll explore what outcome-based pricing is and how it's changing the way SaaS companies do business.

You'll also learn:

• Why SaaS companies are adopting outcome-based pricing
• How this model differs from usage-based pricing
• Real-world examples of outcome-based pricing in action
• The benefits of outcome-based pricing for SaaS businesses
• Key considerations for implementing this pricing model

Let’s start by explaining what outcome-based pricing really means in the SaaS industry.

What is outcome-based pricing?

Outcome-based pricing is a pricing model where customers pay for the results or value they get from a service. Instead of paying for the resources used to provide the service or the amount of time spent on it, the customer only pays based on the outcome. 

Think of it like this: Say a business hires a marketing firm to help increase its sales. The business wouldn't pay based on the number of hours the marketing firm works or the number of ads they create. They might pay based on the actual increase in leads or revenue the firm brought in

This focus on results is a key part of outcome-based pricing. It's a shift from traditional pricing models for services, where costs might be tied to time spent, resources used, or a fixed price for a project. With outcome-based pricing, the emphasis is on the value delivered to the customer.

Why SaaS companies are shifting to outcome-based pricing

The world of SaaS is changing very fast. Customers are no longer content with just having access to software. They want to see tangible results. This shift in customer expectations is a major force driving the adoption of outcome-based pricing. 

It's a move away from traditional pricing models for services, like project-based pricing or charging per user, towards a model that directly connects cost with value.

What’s behind the shift?

SaaS businesses are becoming partners in their customers' success. By tying their pricing to the outcomes customers achieve, they are incentivized to deliver real, measurable value. This leads to more customer satisfaction and retention. 

Why? Because customers are more likely to stick around when they see a clear return on their investment.

How SaaS companies are reacting to this shift

This trend is reflected in recent moves by major players in the SaaS industry. Zendesk, for example, recently announced outcome-based pricing for their AI agents. They’ll be charging customers only for issues that are resolved autonomously by AI. 

The message is clear: The future of SaaS pricing is about delivering value, not just providing access. Outcome-based pricing is a key part of this evolution. It aligns the interests of SaaS companies with the success of their customers.

Similarities & differences of usage-based vs. outcome-based pricing

Usage-based pricing and outcome-based pricing can seem similar at first glance, but there are some key differences. Let's break it down: 

Usage-based pricing explained

Usage-based pricing is like paying for what you use. It's common with metered services, where you're charged based on your consumption. 

Think of it like your electricity bill. You pay for the amount of electricity you consume each month. In the SaaS world, this might look like an AI company billing customers based on the processing power they use.  

Outcome-based pricing explained

Outcome-based pricing, on the other hand, takes things a step further. Instead of just paying for usage, you pay for results. It's about tying the cost directly to the value you receive. 

In the context of AI, this might mean only paying when the AI successfully resolves a customer issue without human intervention.

How both differ and why outcome-based pricing is what’s next

Both models share a focus on flexibility and transparency. They allow customers to pay only for their needs and provide a clear link between cost and value. 

However, outcome-based pricing goes beyond simply measuring consumption. It focuses on delivering measurable results and aligning incentives with customer success.

Outcome-based pricing is the next evolution of usage-based pricing. It builds on the concept of pay-as-you-go but adds a layer of accountability for achieving specific outcomes. It’s a tool for SaaS companies looking to show the value of their products and build stronger relationships with their customers.

Examples of outcome-based pricing in practice

Outcome-based pricing is gaining traction in SaaS, with players like Zendesk leading the charge. Let's take a closer look at how this pricing model is being applied in practice:

Zendesk's shift to outcome-based pricing

Zendesk is making waves with its AI-powered agents, designed to autonomously resolve customer issues from start to finish. What's particularly noteworthy is how Zendesk is aligning its pricing model with this offering.

Instead of traditional pricing methods, they're introducing outcome-based pricing for their AI agents. This shift means businesses incur costs only when an AI agent successfully resolves an issue without human intervention.

Key takeaways from Zendesk’s approach:

• Customer flexibility: Businesses can integrate AI agents at their own pace, with options to continue utilizing human agents where necessary. Agents can monitor automated resolution usage, forecast future needs, and adjust plans accordingly.
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• Simplicity and transparency: Zendesk's pricing is straightforward, ensuring customers get maximum value while maintaining control. There’s a no cost starter tier, and options to scale and track usage as needs grow. 
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• Scalability and predictability: As usage increases, Zendesk's pricing model scales accordingly, allowing businesses to manage their budgets effectively while avoiding unexpected costs. An in-product dashboard provides visibility into automated resolution usage and automation rate.

This move by Zendesk exemplifies how outcome-based pricing can work in SaaS. It aligns the cost of the service with the value it generates, making it a win-win for both Zendesk and its customers.

AI and customer support

Outcome-based pricing is particularly well-suited for industries like AI and customer support. These are industries where value can be directly measured by successful outcomes.  Let’s zoom in and see why outcome-based pricing plays a key role:

• Agentic AI services: Think chatbots, virtual assistants, and other AI-powered tools. These can autonomously handle customer interactions. Instead of paying for the development or deployment of these services, businesses can pay based on the number of issues resolved or the level of customer satisfaction achieved.  
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• Customer support platforms: Imagine a customer support platform that charges based on the number of tickets resolved or based on a reduction in customer churn. This approach incentivizes the platform provider to deliver a product that truly helps businesses improve their customer support outcomes.  

Benefits of outcome-based pricing for SaaS businesses

Outcome-based pricing offers a compelling value proposition for SaaS businesses. It's a way to build stronger customer relationships and drive business growth. Here's how:

• Happy customers = happy you: When customers pay for results, they're more likely to be satisfied. They see a clear connection between what they pay and the value they get, which builds trust and keeps them coming back for more.
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• Keep customers coming back: It's no secret that high churn rates can be a pain for SaaS businesses. Outcome-based pricing can help with that by showing the value of your product right away. When customers see positive outcomes, they're more likely to stick around.
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• Stand out from the crowd: In the bustling industry of SaaS, it's important to stand out. Outcome-based pricing can help you do that. It shows that your company is all about delivering real value, not just making a quick buck.
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• Build products people love: This model encourages you to really focus on what your customers want. By understanding the outcomes they're after, you can build better products that truly meet their needs.
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• Take your sales and marketing to the next level: Outcome-based pricing can give your sales and marketing efforts a boost of clarity. It lets you focus on the value your product delivers, making it easier to attract new customers and close deals.
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• Build real relationships: When you're focused on helping your customers succeed, you build stronger relationships. This can increase customer loyalty and turn your customers into your biggest fans.
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• Smooth out your finances: While it may seem odd at first, outcome-based pricing can make your finances more predictable in the long run. By tying revenue to customer success, you create a more stable and sustainable revenue stream.

Takeaway: Overall, outcome-based pricing is a win-win for both SaaS businesses and their customers. It creates a value-driven ecosystem where everyone is invested in achieving positive outcomes. 

By adopting this model, SaaS companies can position themselves for growth, improve customer relationships, and drive innovation in their product development.

Considerations for outcome-based pricing

Outcome-based pricing is flipping the SaaS businesses on its head, but it's not without its challenges. Here are a few key considerations to keep in mind:

Measuring and billing for outcomes

One of the biggest hurdles with outcome-based pricing is figuring out how to measure and bill for outcomes effectively. It's crucial to establish clear metrics and systems for tracking progress. 

This approach might involve setting up new processes, integrating with existing tools, or even developing custom solutions. The goal is to ensure accurate measurement and transparent billing. This way, both you and your users have a clear understanding of the value delivered.

Analytics and tracking systems

Robust analytics and tracking systems are essential for outcome-based pricing. You need to be able to collect and analyze data on customer usage, engagement, and outcomes. 

This data will help you understand how your product is performing, spot areas for improvement, and make informed pricing decisions. Investing in the right tools and infrastructure is crucial for success with this model.

Transparent communication

Clear and open communication with your customers is paramount. It's important to be upfront about how outcomes are measured, what metrics are used, and how pricing is calculated. 

This transparency builds trust and helps avoid disputes down the line. Regular communication about progress toward desired outcomes is also important for maintaining strong customer relationships.

Defining and measuring value

Outcome-based pricing requires a deep understanding of what your customers value. What outcomes are most important to them? How can you measure those outcomes in a meaningful way? 

Working closely with your customers to define and measure value is vital for setting realistic goals. It’s also key to ensuring your pricing model aligns with their needs.

Managing expectations

It's important to set realistic expectations with your customers about what outcome-based pricing entails. Clearly communicate the benefits and limitations of this model, and be prepared to address any concerns they may have. 

Remember: Managing expectations upfront can help avoid misunderstandings. Plus, it’s vital for a smooth transition to this new pricing structure.

Legal and contractual considerations

Outcome-based pricing may require changes to your legal and contractual agreements. Make sure your contracts clearly define the scope of services, how outcomes are measured, and the terms of payment. 

Tip: Consulting with legal counsel is advisable. This way, you can make sure your agreements are comprehensive and protect the interests of both parties.

How to implement outcome-based pricing in SaaS

Ready to take the plunge with outcome-based pricing? Here's a step-by-step guide to help you get started:

Step 1: Build a solid foundation

Accurate measurement is the cornerstone of outcome-based pricing. Start by developing the infrastructure to track and measure the outcomes that matter most to your customers. 

Doing so might involve integrating your product with analytics platforms, setting up data pipelines, or even building custom dashboards. The goal is to capture the data you need to demonstrate the value you deliver.

Step 2: Embrace flexible billing

Most billing systems often aren't built for the dynamic nature of outcome-based pricing. Consider using flexible billing tools like Orb, which allow you to build and experiment with various pricing models, no matter the complexity.

These tools can help you track usage, calculate costs based on outcomes, and generate accurate invoices. The result? You're freeing yourself up to focus on what matters most — your customers.

Step 3: Start with a pilot program

Before rolling out outcome-based pricing to your user base, test your pricing models with a pilot program. This approach allows you to gather feedback, identify any kinks in your system, and fine-tune your approach before scaling. 

Choose a small group of customers who are open to trying new things and work closely with them to track progress and gather insights.

Step 4: Communicate transparently

Open and honest communication is crucial throughout the implementation process. Clearly explain to your customers how outcome-based pricing works, what metrics are used, and how it benefits them. 

Be ready to answer their questions and address any concerns. This transparency builds trust and sets the stage for a successful long-term relationship.

Step 5: Iterate and improve

Outcome-based pricing is not a one-size-fits-all solution. Continuously track your results, gather feedback from your customers, and be willing to adjust your approach as needed. 

The key is to remain flexible and iterate on your pricing model to make sure it aligns with your business goals and delivers value to your customers.

Let Orb help create a pricing model that fits your business

We've explained outcome-based pricing and how it can benefit your SaaS business. Now, let's talk about how to bring this pricing model to life. 

Orb is a done-for-you billing platform. It allows you to implement and manage a wide range of pricing models, including outcome-based pricing. Orb's flexible tools allow you to:

• Track customer outcomes with precision: Accurately measure the value delivered to your customers. Orb's robust usage tracking capabilities help with that. We help ensure accurate billing and help you show the ROI of your product.
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• Design innovative pricing models: Experiment with pricing structures. Of course, this includes outcome-based pricing. Orb's plan versioning and custom SQL editor gives you the freedom to create bespoke pricing models.
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• Gain a clear view of your financial performance: Make use of Orb's detailed reporting and analytics. They’ll provide insights into your revenue streams and customer behavior. Also, they give you a 360-degree view of the effectiveness of your pricing strategies.
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• Simplify your billing operations: Integrate Orb with your existing tech stack. Think data warehouses, accounting software, and payment gateways. Doing so helps you automate your billing processes and reduce manual effort.

Ready to optimize your pricing strategy and unlock new growth opportunities? Explore our flexible pricing options to find a plan that perfectly suits your product.