Outcome-Based Value Metrics
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: August 13, 2018
Value metrics are what you charge for - per user, per 100 videos, per something that theoretically aligns with where your customer ascribes value from your product. They’re the most effective pricing mechanism you can have in the subscription world, but not all value metrics are created equal.
On this episode of the ProfitWell Report, James Carbary, Founder at Sweet Fish Media and the B2B Growth Show, asks us about what value metrics are best for growth. To understand value metrics and which type you should be using, and of course to answer James’s question, we looked at nearly four thousand subscription companies across multiple industries.
But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.
Outcome-Based Value Metrics
It’s important to understand the impact of value metrics. When comparing companies who use a value metric to those who don’t, you’ll note that those utilizing value metrics are growing at nearly double the rate as those deploying strictly feature differentiation.
This is because when you’re using a value metric properly, your customer is only paying for their usage where they’re getting value from your product. If they use less, they pay less, so why would they churn. If they use more, they pay more and don’t complain, because they’re getting value.
That being said, there are two types of value metrics - functional and outcome based. Functional value metrics are like per user or per 100 videos. Pricing scales around a function of usage. Outcome based value metrics are where you charge based on an outcome - like how many views a video received or how much money you made your customer.
When we look at the gross churn of companies using different models you’ll note that both types of value metrics outperform feature differentiation with up to 75% less churn, but the outcome based value metrics take this a step further with an additional 40% reduction in churn.
When you think about the center of an outcome based value metric this make sense, because if you’re aligned towards an outcome, why would you churn if you still believe in that outcome as a customer.
This trend continues further when looking at expansion revenue. Both types of value metrics still outperform feature differentiated pricing models with at least 30% more expansion revenue, but outcome based value metrics push those gains to nearly 50%.
If I can give you more of the outcome you’re buying my product for, why wouldn’t you spend more with me.
Ultimately, value metrics are everything when it comes to properly pricing subscription products, because you're aligning your revenue model directly to where a customer interprets value from your product.
We all don’t have the luxury of pricing based on outcome though, because sometimes it’s hard to perfectly measure how much money someone gained from using your product or how much that time you saved them is worth. Yet, we can take a lesson from this data in making sure we get as close to that customer and as close to value as technically possible.
Want to learn more? Check out our recent episode: The Term A.I. Impacts Willingness To Pay and subscribe to the show to get new episodes.
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You've got the questions,
and we have the data.
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This is the ProfitWell Report.
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Hey, Patrick and
the ProfitWell team.
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My name is James Carberry.
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I'm the founder of
Sweet Fish Media,
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and I cohost a podcast
called b two b growth.
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I've been seeing a lot of talk
about value metrics lately.
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What are you seeing in terms
of their impact on growth?
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Thanks a lot, man.
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Value metrics are what you charge
for per user, per hundred videos,
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per something that
theoretically aligns with where
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your customer ascribes
value from your product.
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They're the most impressive
and important pricing mechanism you
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can have in the
subscription world,
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but not all value metrics
are created equal.
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To understand value metrics and
which type you should be using
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and of course to answer
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When
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When comparing companies who
use a value metric to those who
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are simply using
feature differentiation,
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those with value metrics are
growing at double the rate as
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those feature
differentiated counterparts.
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This is because when you're
using a value metric properly,
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your customer is only paying
for their usage of value.
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If they use less, they pay
less, so why would they churn?
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If they use more,
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they pay more and don't really
complain because they're getting value.
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That being said though, there
are two types of value metrics.
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There's functional
and outcome based.
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Functional value metrics are like
per user or per hundred videos.
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00:01:33,845 --> 00:01:36,885
Pricing scales around
a function of usage.
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00:01:36,885 --> 00:01:39,660
Outcome based value metrics are
are where you charge based on
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some sort of outcome,
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like how many views a video
received or how much money you
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made that particular customer.
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When we look at the gross churn of
companies using different models,
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00:01:49,625 --> 00:01:52,505
you'll note that both types
of value metrics outperform
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feature differentiation
with at least seventy five
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percent less churn.
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00:01:56,970 --> 00:01:59,690
But the outcome based value
metrics take this a step
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further with an additional forty
percent reduction in churn.
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00:02:03,705 --> 00:02:06,425
When you think about the center
of an outcome based value
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00:02:06,425 --> 00:02:07,945
metric, this makes sense.
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00:02:07,945 --> 00:02:11,280
Because if you're aligned
towards that outcome,
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00:02:11,280 --> 00:02:15,520
why would you churn if you still
believed in that outcome as a customer?
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00:02:15,520 --> 00:02:18,960
This trend continues further when
looking at expansion revenue.
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00:02:18,960 --> 00:02:21,865
Both types of value metrics
still outperform feature
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00:02:21,865 --> 00:02:24,905
differentiated pricing models
with at least thirty percent
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00:02:24,905 --> 00:02:26,505
more expansion revenue.
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00:02:26,505 --> 00:02:30,600
But outcome based value metrics push
those gains to nearly fifty percent.
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00:02:30,600 --> 00:02:33,720
If I can give you more of
the outcome you're buying my
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00:02:33,720 --> 00:02:37,115
product for, why wouldn't
you spend more with me?
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00:02:37,115 --> 00:02:40,875
Ultimately, value metrics are
everything when it comes to properly
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00:02:40,875 --> 00:02:43,755
pricing subscription products
because you're aligning your
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00:02:43,755 --> 00:02:48,690
revenue model directly to where customer
interprets value from your product.
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00:02:48,690 --> 00:02:51,730
We all don't have the luxury
of pricing based on an outcome
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00:02:51,730 --> 00:02:54,610
though because sometimes it's
hard to perfectly measure how
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much money someone gained from
using your product or how much
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00:02:57,625 --> 00:03:00,585
time they saved and how
much that time is worth.
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00:03:00,585 --> 00:03:04,105
Yet we can take a lesson from
the data and making sure we get
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as close to the customer and as close
to value as technically possible.
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Well, that's all for now.
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If you have a question,
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shoot me an email or video to
p c at profit well dot com.
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Let's also thank James from
Sweet Fish Media for sparking
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this research by clicking
the link below to give a nice
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little shout out.
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We'll see you next week.
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This week's episode is
brought to you by ResStream,
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