Framebase • Tiered Pricing vs Pay-As-You-Go

How to charge for your product is something you’ll experiment with throughout your product’s lifecycle.  At Framebase.io, we recently made the switch from tiered pricing to a pay-as-you-go model. Here are a few points we learned:

[If you’re interested in adding video to your app or want to find out more about us, check us out]

Developers prefer pay-as-you-go pricing

We’re building an API for video and our customers are developers. We’ve had the opportunity to talk to many developers over the past months and the feedback we’ve consistently heard was that our tiered pricing plan wouldn’t work for them.

Costs are aligned with usage

If your pay-as-you go pricing model is directly tied to your own costs, developers know that they’re paying for what they use. It’s beneficial for small and medium sized projects to get started with. As their projects scale, their price will scale as well, making it a lot more affordable to grow fast without constantly having to worry about what bucket you’ll be in or having to re-negotiate contracts.

Developers will push to use your platform in unique ways

When we did tiered pricing, we bundled upload minutes and playback minutes into one package. We immediately received emails asking us for custom pricing plans, e.g, “I plan on doing 50,000 upload minutes, but only 1000 playback minutes” and vice versa. We can’t predict what our platform will be used for but we want to encourage developers to build new and interesting things with video. If our pricing model is restrictive in what developers can build, we feel like we need to come up with something better.

Developers are already used to pay-as-you-go pricing models

Two companies we look towards for direction are Twilio and Stripe. Both are developer platforms and have pay-as-you-go pricing models. Other examples are AWS, Firebase, Rackspace Cloud, etc.

Downsides to pay-as-you-go

Tiered pricing is more attractive to enterprises

Enterprise companies generally don’t like surprises. They plan their budget well in advance and having a service with a wide variable cost isn’t ideal when budgeting. If your service can’t effectively demonstrate its value and what it’ll cost, then it will be a hard sell in the enterprise world.

Tier pricing is more predictable

With tiered pricing, your revenue is more predictable. If you’re selling ten $200 a month plans, then you know your revenue will be $2000 a month. Also, if you know what it takes to sell at $200 a month plan, you’ll also know what your ROI will be on marketing and sales efforts.

Because pay-as-you-go is highly variable, it’s difficult to predict how much a certain group of users will bring you and more difficult to predict growth and ROI.

Final thoughts

Pricing is difficult and dependent on both your business model and the users you’re targeting. There are two questions that we always ask ourselves when we’re trying to think through our pricing:

1) What are we optimizing for? (Growth, integration, revenue, minimizing friction)

2) Who are our users? (How do they purchase? How big are they? What is their budget? How much are they already paying)

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