Usage-Based Pricing: Behind the Scenes of New Relic’s Transformation
On August 7, 2019 New Relic – the cloud observability company – had an abysmal day, possibly the worst in the company’s history.
Up until this point, New Relic had been on a relentlessly positive trajectory. After being founded in 2008, the company attracted a substantial amount of funding before going public in December 2014 – a rapid clip from startup to IPO. The stock price continued to surge post-IPO, quadrupling in value between 2015 and 2018.
But then came the company’s Q1 FY2020 earnings call on August 6th, 2019. Not only did the company have a disappointing quarter, they forecast that poor performance would continue into the next quarter.
New Relic’s stock price plunged 29% in a single day following the earnings call. It lost nearly half its value over the course of 12 months, ultimately falling below $40 per share in early 2020.
Pushed to the brink, the company was forced to innovate.
New Relic spent the next year reinventing itself to be better prepared for the future they saw coming and to be more attractive to the customers they wanted to win. They made changes that impacted all facets of the business, from the way they positioned their products to the way they charged for them to the way customers could access them.
Fast forward to July 2020, which the company called “perhaps the most important moment in New Relic’s thirteen year history” in its Investor Letter. Among their announcements included:
- Repositioning from application performance management (APM) to observability
- Transitioning products into a single platform and UI (New Relic One)
- Introducing a new (and generous) perpetual free pricing tier
- Shifting from subscriptions to a new consumption-based pricing model
It is difficult to understate the magnitude of these changes. New Relic is perhaps the first and only public SaaS company that has completely changed from a subscription based pricing model to a usage-based pricing model in the public eye.
I recently had a chance to sit down with Peter Goldmacher, New Relic’s VP of Investor Relations, to learn more about the company’s big bets, how they’ve gone, and what lessons they’ve learned along the way.
Inside New Relic’s big bet on consumption-based pricing
One insight New Relic found was that their old host-based pricing model was keeping people from fully adopting observability because it was deemed to be too expensive. If a customer had 100 hosts, they might only monitor 60 hosts and hope for the best.
“Our former CEO and Founder Lew Cirne used to draw a metaphor that I loved. It’s like buying health insurance for two of your three kids and hoping that the kid who gets sick is one of the ones who’s insured,” Goldmacher told me.
Meanwhile, New Relic’s approach of charging separately for each of its product SKUs meant that sales reps were selling the customer thirteen different products – a tough sell if the customer isn’t even fully adopting the flagship product.
New Relic realized that they needed a fresh pricing approach that reinforced a key competitive advantage of theirs: their database.
In New Relic’s new pricing model there are only two components: data and user seats. All thirteen products got rolled up into one of those two; it’s now a buffet model instead of an a la carte one.
With the company’s new consumption-based pricing, data is only $0.25 per GB per month (radically low for the industry). “We believe that almost all of our customers don’t have the scale to store their data as cheaply as we do… If you compare our price for storing data against our competitors, we’re only 5% to 20% of the costs,” Goldmacher said.
The other element of the model is user-based pricing – which is not traditionally a part of a consumption pricing model. New Relic has reimagined user-based so that customers can flex up or down on their provisioned users, unlike traditional subscription companies like Salesforce that provision on a named user basis.
New Relic’s goal is to not ask customers to commit to any more consumption than they need to. According to Goldmacher, “You hate shelfware and we hate trying to get a renewal if you had shelfware.”
Customers are incentivized to estimate their consumption as close as they can to their actual usage in exchange for volume discounts – or they can choose to not commit at all and buy on a pay-as-you-go basis.
For some folks, the extra approvals required to make a very large commitment just aren’t worth the added savings. And that’s fine by New Relic.
“What we have been surprised to see is that some of our largest customers have said, ‘We really don’t want to commit to anything and are comfortable paying rack rate,’” Goldmacher recounted.
The biggest hurdle: designing a new sales process for a consumption-based model
What surprised Goldmacher and team was how radically this transformation would impact their sales process.
In a traditional subscription model, sales focuses their efforts on selling upfront commitments since that’s how they get compensated. But this approach could lead to lengthy sales cycles and dissatisfied customers who never fully adopt the products they’re sold.
New Relic decided to turn this model on its head. Now it’s sales reps get paid nothing for signing a new commitment; they only get paid on consumption.
Rather than wasting time negotiating commitments, reps spend their days working closely with customers. Their only way to hit their number is to stay in accounts on a regular basis driving awareness, looking for new user opportunities, and having lunch-and-learns.
Many of New Relic’s existing sales reps were simply not interested in selling under a new consumption model.
But other profiles of sales reps not only appreciated the new model, they thrived under it. For instance, New Relic has moved some of their technical sales consultants into quota-carrying sales roles with notable success.
In Goldmacher’s words,
“We’re changing the complexion of our sales people away from ‘my expertise is managing big deals’ to ‘my expertise is ensuring my customer is successful.’”
Takeaways for other companies contemplating a consumption-based model
New Relic’s consumption-based pricing transformation has been underway for more than a year – and it’s still ongoing. This type of business change is not for the faint of heart.
In New Relic’s case the impact has been well worth the investment. It has led to a reacceleration in the company’s account growth as well as data ingestion, two leading indicators of future success.
Goldmacher had three pieces of advice for other companies considering making the leap.
Don’t be afraid to be aggressive and bold.
Goldmacher didn’t mince words about what he wished they would have changed.
“We would’ve done a lot differently. In hindsight, we would’ve been more aggressive and we would’ve been more bold,” he reflected.
Looking back, he would’ve changed the sales compensation model much earlier rather than waiting. At the time, he wasn’t sure if employees or customers could have handled it. But being more aggressive there could’ve been more productive.
He would’ve also accelerated the product roadmap since the product is so critical to customers’ consumption.
Usage-based pricing and product-led growth (PLG) is a powerful combination.
Just because customers would now have access to all thirteen New Relic products didn’t mean folks would magically start adopting them.
The company has had notable success leveraging in-product experiments to drive greater discovery and adoption. For example, when New Relic experimented with putting a button for its Errors Inbox product inside of its popular APM product, usage increased by 3x in three weeks.
“None of the marketing matters at all if your product experience isn’t driving the behaviors you want,”
said Goldmacher. “It’s gotta happen in the product.”
Change is always tough. Don’t underestimate the change management that’s required.
Existing customers were very hesitant to pay more on the new pricing model even though they’d now get access to all thirteen of New Relic’s products. With that in mind, New Relic made the decision to transition customers to the new pricing model on a flat basis if necessary rather than aiming for a price increase.
That decision led to a softness in revenue in the first several quarters of rolling out the new model, which was then challenging to communicate to investors. Goldmacher has paid close attention to setting the right expectations with the investor community and guiding investors to leading indicators of future success (ex: lower churn rates, higher consumption activity).
Even for private companies, it’s important to bring along all stakeholders – employees, customers and investors.
More resources on usage-based pricing
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