Back in November I started writing about why forward-thinking SaaS companies are shifting to usage-based models.
While many of the most successful public and private SaaS companies were already usage-based, there wasn’t a clear playbook on the complexities of scaling a usage-based business. Yet pivoting from traditional subscriptions to usage-based can be just as big of a shift as making the leap from on-prem to SaaS.
The response since the usage-based pricing playbook has far exceeded my expectations. My TechCrunch byline went semi-viral, Bessemer named usage-based pricing part of the “new normal” for SaaS go-to-market strategy, and Alex Wilhelm said it’s “one theme that’s come up time and again” in public company earnings calls. And we’ve seen leading software companies like Cisco, Trifacta, and Cypress announce brand new consumption-based pricing models.
Here’s the thing: I’ve learned a bunch more about usage-based pricing that I *wish* I had put in the playbook. Now I’m excited to share it with you.
Special thank you to Sam Lee, Patrick Malatack, Adam Ballai, Chris Seidell, Rachel Parrinello, and many others who’ve shared their experience around scaling with usage-based pricing in webinars, roundtables, and other simulacra of in-person gatherings.
1. Pure usage-based pricing isn’t for every product
Even if customers are asking for usage-based pricing, some companies just don’t have a great usage metric they can use for their pricing. This pricing metric should:
Strongly correlate with the value that different customers see in the product
Share in the customer’s success (and therefore not *discourage* product adoption)
Be flexible to allow customers to start small and scale over time
Consistently increase month-over-month for the average customer
Be feasible to monitor and meter in your product
Consider an online survey tool, for example. Should their usage metric be # of surveys, or does that force the customer to make a purchase decision each time someone on their team wants to deploy a new survey? Should it be # of survey responses, even though the value of a response might be very different if the respondents are B2B customers vs. free users vs. your own employees?
One way to solve for this is to mix subscription packages with usage-based pricing, similar to Zapier (screenshot below) or Cypress. The subscription packages help monetize the value of the product capabilities for different audiences. Meanwhile, the usage fee helps monetize customers as they grow their product adoption over time.
2. Usage-based pricing = compound interest
I wrote that public companies with a usage-based model are growing 38% faster than their peers. Unfortunately, that’s only half the story.
Usage-based pricing works like compound interest. It can actually be harder to reach your first $1M or even $10M with a usage model. Unlike selling fixed subscriptions that you can recognize immediately, with a usage-model you have to wait until your customer is launched, successful, and growing.
But all of that hard work does eventually add up. Growth starts to accrue naturally, just like compound interest, and your investment gets rewarded in future years.
Hat tip to Patrick Malatack for calling this out in our webinar with Traction.
3. Not all expansion revenue is created equally
Expansion revenue does look like compound interest from a macro-perspective. On the ground, it’s not always that simple. You should delineate your “organic” versus “inorganic” expansion and design separate motions to go after both opportunities.
Organic expansion = your customers simply use more of your product(s). This is a by-product of customers getting onboarded, seeing value from your product, and wanting to use more of it. The organic expansion number is usually owned by Customer Success rather than Sales. As such, most companies avoid over-paying commission on this expansion after the customer’s first year.
Inorganic expansion = your customer bought new products or added use cases / business units that were not part of the initial purchase. Generating inorganic expansion generally requires a commercially-minded Account Exec or Account Manager who partners with Customer Success. They’re building an account plan to spot untapped opportunity, asking for introductions to other teams, co-creating business cases, etc. You’ll want to treat these opportunities more like you would a new business sale and compensate the team accordingly.
4. Learn from patterns that resulted in your best customers
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