Usage-Based Pricing Strategies for SaaS Growth | Expert Insights

[00:00:00][Music] our next uh speaker also having a fireside chat with me is kyle poyer for from openview so if you've been following him on social media linkedin twitter uh his writings on blogs this guy is prolific and uh deep deep inside deep thoughts into how companies should be doing their pricing be proponent of product-led growth uh kyle welcome thanks for having me good to join you yeah it's it's my pleasure man so let's kick off right away with with sas pricing so in your experience what do you say how are most uh sas companies uh figuring out their pricing plan what's what how are they determining what's the value metric uh yeah uh good question so it varies a lot over the life cycle of companies you get a lot more data over time around your customers how to use the product what they value what your competitive landscape looks like uh you know i'll talk through what are the things to look for uh and so first off i saw there was a question uh the previous speaker or how do you set the price for your product when you're launching to me the value metric or the metric that kind of determines how much you charge or how much your customer pays that's a lot more important to get right early on than the exact price point uh you can do a lot to experiment with the price point your product's going to get more robust over time allowing you to capture more of that volume you're creating but it's a lot harder to change the unit of measure that you're using uh in your pricing so when i think about the the metric itself i'm looking for a few factors uh first is that it needs to align with how customers see value in your product uh and that sounds simple uh but it's it can be challenging to actually figure out what are the best metrics that do really uh correlate and so you know you might think about hubspot as an example folks know their marketing automation software it kind of makes sense that they charge you more as you generate more marketing contacts that you uh have a pump spotter that you want to send emails to you might not realize they didn't initially start that way they initially charge on a per user basis they had no notion of marketing contacts they had very little expansion revenue and then they had to go through the process and really figure out hey is it contact is the number of emails people are sending or is it about a revenue they're able to generate you know what is the right metric uh but ultimately concluded that context was really aligned with the value people saw specifically when they used hubspot and aligned with their objectives so customers were trying to be successful and generate more contacts to grow their own business so that's like first and foremost all the things i look for are is it flexible where folks can uh it allows you to land folks at a fairly attractive price point so people don't have to you know spend all of the potential at once they can bite off maybe it's for a team a business unit a project basis uh allows you to kind of land a customer fairly smoothly and then is it scalable so that you get more spend as your customers are growing and if they're successful with your product if you think about like cell phone plans they used to charge you based on how many minutes you talked or how many text messages you send uh but realizing that that's not those metrics aren't growing and so if they charge that way those metrics are going to lead them to get less and less revenue over time and they've moved towards gigabytes of data since data consumption is going through the roof it's a lot more scalable from a modernization standpoint then two other things are like predictable and then feasible for you to implement i think the predictability side enterprises care about it but um it's uh it's something that's important to make sure you have some predictability for your customers and then you have to be able to meter it to uh be able to share the data with customers around how much they're consuming of a certain metric uh so that feasibility piece can't be just an afterthought so if you currently charge per seat or you know like maybe you have buckets of 1 to 10 and 10 to whatever then you want to switch to usage-based pricing and you know making the change can be scary like what if we make less money so how would you how would you uh you know manage that switch and uh [Music] you know alleviate your fears yeah well uh that's your question i'd say like the first thing i think about is yeah is usage based as a usage-based model better in the long run for both you and your customers uh and i think there have been a lot of fears historically about usage-based pricing folks thought hey investors won't value it because i thought it's predictable it's not kind of fixed recurring revenue uh that fear has gone away i think snowflake and aws are two examples that show the market might even value usage model more than subscription models it means there's no shelfware in the business and it's uh tends to correlate with more net net retention so first kind of thing is is there an opportunity for your for your business you can look at hey our customers asking for it uh are we having some customers that have really high usage but uh not a whole lot of users and so we're really underpinning versus the value that we're delivering our competitors offering usage models like really look at that customer base your competitive landscape and then i think that there's when you think about usage-based pricing or or at least in my mind uh it does tend to coincide with probably less revenue from a customer upfront but more of a lifetime value because you're operating on more of a land and expand basis it's i think the other thing to just be mindful of is do your investors have the appetite for it do you have the capital uh to play that sort of patient long long game and then realize there might be an initial short-term hit and your customer is downgraded to certain usage plans and certain of certain customers spend less uh you might have to be have their like internal fortitude uh to take some of that short-term hit knowing that it's going to be healthier long-term for both you and your customers i think we haven't seen a whole lot of custom companies doing that but new relic is a great example where they launched a usage model about a year ago they had a couple of terrible frankly quarters as they migrated their existing customers and right-sized them on plans and now usage is sort of back up revenue growth is is heading in the right direction and uh so but it but it's not trivial to kind of get through that at home in order to get to the other side and i'm guessing it's it's also maybe not uh the best case for every type of customer so i'm thinking let's say coursera you know so it's oh it's online content it's taking courses so what's the usage like how often do you complete a lesson or a course and we know in e-learning that's the big problem they have is like people making time for learning because it's never urgent and so if they would switch away from like just get access to how many lessons per month or whatever they'd probably be out of business yeah it's a fair point i i think for me the usage should correspond with a positive business outcome so that you're sharing in the customer success and uh ideally there's a positive roi every time the customer is making that uh is for performing that action during that usage so with help spot they're not going to try to get fewer contacts to market to the marketing team is never going to try to do that just because they're paying more for hubspot in order to achieve that and so you want you really need that metric of your of usage to correspond with something that customer cares about is trying to increase that's why payments revenue is almost like the holy grail of usage-based pricing because you're sharing immediately in the in what the customer cares about which is generating more revenue for their business and they can almost treat it as just sort of a cost of goods sold or operating costs rather than a fixed expense that they have to budget towards but you know i think yeah you've held up the right things you don't want to have a metric that's too discretionary where the customer is constantly choosing whether or not to consume the product and might not necessarily see an roi from doing it it's also tough if uh your usage is highly variable or episodic within the account or if you're trying to have a push product where uh you're trying to you kind of constantly need to drive engagement and you need your customers to drive engagement within their uh their companies uh it's easier if there's a whole product where that that's kind of constantly bringing you back into the app itself so if one were to you know want to make the switch to a usage-based model um so what are the strategies to determine the the best usage metric anything besides just common sense that hey they want to increase their emails or yeah so i mean first thing is just even brainstorming as a leadership team what are the different metrics that uh you that indicate how much your customer uses of your product uh and no ideas are bad uh you should include users alongside of that alongside of those other metrics uh they're normally metrics that you're already tracking internally to measure the health of your business if you are a product led business they might might even include like your north star metrics uh of like one of the key things that you're looking at that indicate health of an account in terms of product adoption and stickiness i normally come up with about call it eight to ten metrics so and that's more internal verbal process then you run them through those five criteria i mentioned uh and looking at essentially like hey if we were to score these metrics on these criteria are there any that totally fail like we can't actually implement we can't monitor these metrics we rely on the customers telling us data or this actually doesn't correspond with value our best customers use less of this metric than our mediocre customers so you start scoring them through and then you kind of end up with about three or four high potential metrics and those are things that you want to do more diligence on i think you can ask customers about them uh there's some techniques that i use to do that that have nothing to talk through but you want to talk to your customers about it and then you also want to look at your existing data to look at for example like correlations between how much folks have spent historically and how much they use of the product to show that there seems to be some like directional uh likelihood with willingness to pay or are high usage folks with certain metrics more likely to renew and expand their spend over time than low usage folks those are and you know actually generally what's the cohort growth like within an account so we have one portfolio company that had seen about 120 130 net dollar retention but their usage metrics were growing 200 250 300 within an account in that first year and so their usage was growing way faster than spend was growing and that's part of what got them sort of conviction that these specific metrics that were growing really quickly would be a better better metric to kind of orient their pricing around thank you very much um and how how would you then design to accelerate revenue growth if you if you have switched to a usage-based model you want people to you know do more of that whatever the action is uh any tips there uh well it kind of requires a company-wide uh change like folks ask me like who what roles do you need in a usage-based company and i think of it as like it's the kind of core roles and work structure that you know a typical sas business would have but everyone's mindset changes and the activities that they're doing changes so customer success needs to be a mindset in these companies rather than just a job and in fact with the usage model in theory folks could stop using the product at a time which means that they basically stop spending at any time uh and so you're constantly at risk of having your customers sure uh but it's also really seamless for them to spend more as they as they consume more of the product so generally uh you're looking at your product team isn't just focused on that new features but you have people that are carved out looking at usability uh making sure the product is super easy to use intuitive has collaboration capabilities so that more folks are exposed to the product in an account uh where you're really minimizing any friction for people consuming the product sounds you know like a no-brainer but a lot of product doors are not set up with that kind of mindset or team right now your marketing team might need to do a lot more education that's connected to the product and so rather than just classic demand and maybe they're teaching customers about different use cases maybe they're building a community around best practices for how to consume your product so that marketing actually has a goal around driving more education more success with your product and ultimately more adoption over time that even can extend to your sales team uh and so you might look for folks that are more technical or product minded in selling you're not necessarily trying to get customers to commit to the highest level spend possible uh but rather doing things that align with customer success like you know offering trials or proof of concepts uh for the customer to kind of see success in an initial use case and then reps for instance tend to get a tail income so they're not just count on the upfront amount that they can land with the customer but the overall spend of that customer over time so your sales folks are like literally incentivized uh to stay with that customer and make sure that that customer is adopting the product uh and expanding more and more teams and use cases that could see value from it and so this kind of mindset applies really across the organization uh can you even talk about other examples if uh you're interested but uh really it's the company it's a company-wide job to drive an option but the good news is that you're creating an extremely customer-centric business model where everyone in your company is leading to kind of better mds better outcomes for your customers yeah totally i absolutely see so your your incentives are aligned both want the same thing as opposed to you know like sales just let's just close deals you know and get the money in so yeah so that's beautiful so does that mean that the customer success org needs to be bigger or or as you said then everybody needs to act more like customer success in a sense yeah it's a great question it's uh it varies a lot company to company some folks like an aws or a snowflake might have their reps stay with the book of business for kind of in perpetuity and so the reps even act in some ways like customer success uh other businesses they do have a fairly robust cs work uh that make sure that customers are uh being successful in the product i don't think they're neces they're normally that much bigger than traditional sas businesses but what i would say it's different here generally folks are more generous with support even for free users or low paying users you don't always know which of your users is going to see great results of your product and have their spend take off like you might imagine at twilio and you could have a 10 employee business uh that starts starts off on twilio from from a messaging standpoint and all of a sudden they're spending thousands if not millions of dollars in a couple of years and so you kind of want to be in that model you want to be really generous on support so that folks can get up and running even if even if they're not spending a whole lot today and then the other thing is that your customer success team is generally looking at uh patterns around what led to your most successful customers and trying to take those lessons and apply those early on in the journey for your new cohorts so it might be things like hey we found that customers that set up an integration with slack or that setups xyz dashboards uh tend to have really great adoption characteristics they're really focused on making sure customers hit those milestones early on uh and it said that those first three months first six months in a customer's life cycle are extremely critical uh to uh to long-term health okay this this sounds awesome and i'm totally on board uh but is is have you seen this like backfiring in a scenario where like companies went up you know ahead with good intentions we're going to be all about customer value and then it didn't work anything that comes to mind you mean i i see this as a uh it's a business model change rather than a event rather than a pricing change and so i have seen companies introduce like a usage based or pay as you go plan but they don't actually change any ways that they operate as a business and then they're surprised that they're not seeing the outcomes that they're looking for uh and but in general there's not a whole lot of kind of major failures and the reason is because there's been a lot of hesitancy among companies around changing their pricing model in the first place and so we think we're still in the early innings of businesses pivoting towards usage-based pricing and what tends to happen is you kind of start that way and more and more companies are starting usage-based and then if they maybe launch a new product maybe that new product is usage based but it's uh we haven't seen that many kind of legacy companies trying to overhaul their business model it's just reality is it so hard to do it successfully but that scares people uh from making the jump so i'm also guessing in order to align incentives how does it work with if you have like a a sales team so like they get their commissions based on the usage or in some cases yeah so uh it varies company company as a new relic is a great example because they've been really public about this transition they've been doing it for about a year uh totally changed their business model towards usage-based pricing and product like growth and with sales comp they had to uh kind of go back to the drawing board on it rather than focusing on how much you know arr did that cut to that sales rep book with a new customer in the first year and did they book a two-year or three-year agreement they're now looking at actual consumption behavior and so they they pay out their reps based on the realized consumption of customers and that creates a kind of good incentive where reps are trying to do what's in the best interest of a customer if that customer wants to make a bigger commitment and get a discount you know off their future spend that's great like that's in their best interest but sales isn't pushing them to do that before they're ready and uh they're they're kind of off acting uh as is someone that really is is only caring about that customer doing what's kind of in that best interest of their long-term health uh as a as a customer of the product and tell me about product lead growth and freemium tiers here so it is your recommendation then to just base it on the usage metric and up you know like in mailchimp you know first 500 emails is free and like or what you take here yeah i guess first comment is that i'm a big proponent of uh free offerings free free trials i think you know as i look at uh even my own background i used to as someone that works in the world of pricing i used to have a lot of concerns around free hurting the value perception of the product or uh being a distraction or uh leading to cannibalization where folks that might have otherwise paid now can get by which is the free version but to me that but that mindset has completely changed and i'm now a huge proponent of it and i think that uh when we looked at what happened in coleman as just a really interesting case study here there were so many companies that realized their demand fell off cliff in q2 of last year and they needed to do something to get people engaged in the sales funnel and so you know dozens and dozens of companies started introducing free versions of their product uh and companies that had never done that before in their in their history and they tended to realize this was extremely successful pluralsight ran a free april campaign they generated over a million sign ups and they called it their best most successful marketing campaign they've run in the history of the business and so folks realized that this is an incredible way to kind of accelerate your marketing efforts and decrease sort of the amount of uh basically get customers earlier on in the funnel allow them to try out the product be successful with it and then sell into them from a position of strength it's almost like if your customer is uh if you if you're going to a clothing store trying out a pair of jeans uh you're going to buy it if they look good but if you just walk by them you're just going to be like oh those are a nice pair of jeans but not necessarily talk to the person on the sales board buy them so all that said uh you know how to actually design a free offering i i tend to like to be generous with the capabilities that you offer you want to offer a free experience that is uh that it's something that's a robust like enterprise grade experience of your product you don't want to make it like a single user only version that has really limited features because then people will just assume that your product sucks in general they won't upgrade to the next year because you haven't earned their permission to uh to do that and uh so i like to be generous on features generous on users but cap it on certain usage limits and what that allows you to do is allows you to get the customer successful see value reach their aha moment in their product and then there's a real paywall or compelling event when they know now is the time i need to take out my credit card and buy i think slack is probably the poster child of a great example of this where uh they allow anyone within an account to sign up for slack often it's sort of an individual or a team starts using slack and then realize life is pretty boring if it's just a couple people to invite more and more people to join and then at some point slack goes from this place where folks are sort of chatting with their friends at work to a place where you know your work is actually happening mission critical business information lives and that's where they hit you with their uh usage limit around the amount of data and messages that you can store in the app and you realize hey i need to unlock this i need to be able to have access to this on an ongoing basis at that time you really understand how how success like how uh [Music] great the product is and uh it's really hard to take it away from these users that are really enjoying the product itself brilliant a couple of questions also from the attendees here so luis is uh these are all things that you have already mentioned to some extent so unpredictability of revenue um can you are there any benchmarks or can you do any sort of easy modeling to predict what the revenue might be yeah so uh in terms of predictability so you'll develop more predictability over time as you have more customers using the product and then you can you with your even your beta customers you can look at their historical usage patterns in the app to have a sense of hey other seasonal spikes uh what does the usage look like on a cohort basis uh and really it's a it's a matter of getting smarter and smarter about leveraging the data you have around customer consumption to better predict uh things going forward and so if you look at like a uh a snowflake or some of the top usage-based companies their fdna teams have to predict to wall street what their revenue is going to look like for future quarters and their revenue is consumption driven and so they have to look at things like at an individual customer level uh at a uh understanding where they are for in terms of their their journey on a cohort basis their use case their industry they're really trying to start getting really good at forecasting what they think that usage will look like going forward and so it's a it's it's a it's a process of getting less wrong over time based on how your uh how you're observing characteristics around your existing customers but i personally think uh i wouldn't let that fear predict of unpredictability stop you from doing usage-based pricing a lot of folks realize that on the aggregate usage across all of your customers tend to actually behave fairly predictably uh even if on a customer by customer uh instance it might be fairly variable and then i think the the other thing i would share here is that you don't it's not it's not a binary like i go you know cpa subscriptions or purely usage based pay as you go uh there are gray areas and one thing that we're seeing in our portfolio is companies having a base subscription fee and then usage base on top so that they have that predictable subscription revenue component and then that variable component that could scale up over time as the customer you know is successful in the product yeah you've written quite a bit about uh usage page pricing is there a resource you'd recommend if somebody wants to you know start implementing it and any link to share with the audience yeah i'll put a link here i highly recommend folks check out our youtube based pricing playbook we uh interview the top companies that have a youtube based pricing model and compile all those insights so i'll drop that in the chat amazing it covers everything from yeah financial metrics how to operate go to market strategy sales com you name it boom kyle thank you so much uh it's been a pleasure i i learned a lot inspired thank you thanks for having me