How You Charge Beats How Much: Pricing-Model Design
Pick the monetization model, then the price metric, then the structure — the number comes last.
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 93%
Teams obsess over how much to charge and barely think about how to charge. Ramanujam inverts it: the monetization model (subscription / pay-as-you-go / freemium / hybrid), the price metric (the unit you charge on), and the price structure (flat, variable, two-dimensional) are the decisions that determine whether the price can be captured at all. Choosing the model is a diagnosis of your customers' usage and value patterns, not a fashion vote on whatever is currently in vogue.
Origin
Madhavan Ramanujam / Simon-Kucher, from Monetizing Innovation and 250+ tech engagements. The canonical case is Michelin's long-life truck tire — a 20% price premium was unwinnable in a price-sensitive market, so they changed the model to charge per mile driven instead. The same logic was applied at Segment, where Simon-Kucher shifted the price metric from number of APIs to monthly tracked users.
Core principles
- 01How you charge is way more important than how much you charge — the 'how much' falls out of the 'how'.
- 02The price metric must be a unit the customer perceives as value, and one you can actually track and attribute.
- 03Do not adopt usage-based pricing because it is in style; diagnose your usage/value pattern.
- 04Subscription and usage are not mutually exclusive — hybrids (platform fee plus overage) frequently win.
- 05A price structure can be engineered to incentivize the customer behaviours you want, so buyers self-govern their price.
How to run it
- 1
Diagnose subscription vs pay-as-you-go against the markers
Subscription fits when customers demand predictable bills, when usage is similar month over month, when usage is intermittent but value is ongoing (LifeLock: you only use it when your identity is stolen, but the protection is continuous), or when simplifying the pricing conversation is your advantage (Spotify, Netflix vs per-song).
Pro tip Highly variable usage plus pay-as-you-go means wildly different bills month to month — and a painful conversation with your customer.
Watch out Do not confuse 'transparent and fair' with 'predictable'. Fairness means not paying for months you didn't use. They are different demands and point at different models.
- 2
Choose pay-as-you-go when the markers point there
Usage-based fits when customers want low commitment or low friction to buy (AWS-style onboarding then growth), when they demand transparency and fairness, when usage and value are both episodic (a flight, a movie ticket), or when your underlying costs scale with usage.
Watch out You must have a clear metric you can track, attribute value to, and get the customer to agree represents value. If you can't track what you charge on, pay-as-you-go is a bad idea.
- 3
Pick the price metric on customer-perceived value
The metric should scale with the value the customer receives and be intelligible to the buyer persona. Segment moved from 'number of APIs' — meaningless to a marketing buyer — to monthly tracked users, a fairer metric that tracked how customers perceived value.
Pro tip The Michelin per-mile metric and the Segment per-monthly-tracked-user metric are the same move in different industries.
- 4
Design the price structure, including hybrids
Decide whether the price is flat for a period then variable, or fixed platform fee plus overage (HubSpot: a fixed monthly component, then pay-as-you-go above quotas and limits), or a marketplace take rate plus a platform/subscription fee.
- 5
Consider a two-dimensional value matrix to drive behaviour
Price on two axes — e.g. seats on one and number of departments (HR, legal, etc.) on the other — so that the more users and the more departments adopt, the better the per-user price. The structure builds the growth incentive into the price itself.
Pro tip This lets customers self-govern their pricing instead of negotiating it with you, and stops your pricing model from actively disincentivizing product-led growth.
Watch out You can talk product-led growth all you like; if your pricing model penalizes wall-to-wall adoption, it is a pipe dream.
In the wild
Michelin developed a truck tire that lasted 20% longer. In a brutally price-sensitive market, a 20% premium was unwinnable — and without one the longer life would cannibalize ~90% of their business. Instead of changing the price, they changed the model and charged based on miles driven.
→ Truckers loved it: they could pay as they went and pass the tire cost through to their end customers as a variable line item on each journey. Michelin recouped the longer life through usage, and more customers switched to Michelin because they could buy tires pay-as-you-go.
Segment (pre-Twilio) priced on the number of APIs, which determined your plan. As they sold to more personas inside companies, the metric broke down — a marketing buyer does not necessarily know what an API is.
→ The metric was changed to monthly tracked users, which mapped to perceived value (track more users, pay more) and was fairer and more intelligible across buyer personas — the same structural move as Michelin's per-mile pricing.
Common mistakes
Following the fashion (usage because Snowflake)
Most B2B SaaS companies adopt whatever model is currently in vogue. If subscription is hot, subscription is 'best'; if usage is hot, usage is. The right model depends on your customers' usage and value patterns, not the zeitgeist.
Charging on a metric you can't track
Pay-as-you-go requires clear, trackable, attributable metrics that the customer agrees represent value. Without that, billing becomes a dispute engine.
Rushing straight to the price number
Jumping to 'how much' without settling model, metric and structure means you are sub-optimizing like crazy — no price point can rescue the wrong metric.
Is it for you?
Best for
B2B SaaS and marketplace founders/PMs designing or re-platforming monetization, especially when a price increase seems unwinnable.
Not ideal for
Commodity transactions with an entrenched, non-negotiable industry price metric and no measurable value signal.
From the transcript
“we usually say how you charge is way more important than how much you charge”
“the how you charge question is super important way more important than how much if you don't focus on it and just rush to one…”
“when you think about pricing models you have to think about first picking pay as you go subscription premium then thinking about the metric big…”
“you need to have clear metrics that you can actually track and identify an attribute value”
From the episode
The art and science of pricing
Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)