Usage-Based Pricing Playbook: Customer Success Is A Mindset, Not Just a Job
2021 has proven to be the year of usage-based pricing.
45% of expansion stage SaaS companies now say they have a usage-based or consumption-based pricing model, according to data from OpenView’s forthcoming 2021 Financial and Operating Benchmarks Report.
One quarter of these companies started to implement usage-based pricing within the last 12 months, including public companies like New Relic; fast-growing startups like Kong (#68 on the Cloud 100), Cypress, and Trifacta; and even industry stalwarts like Autodesk (founded in 1982). A large share of the holdouts say they’re either testing usage-based pricing (18%) or expect to test it in the future (23%).
But successfully adopting usage-based pricing requires more than just adjusting pricing. The complexities of pivoting from traditional seat-based subscriptions to usage-based pricing are analogous to making the leap from on-prem to SaaS in the first place.
In a pure consumption-based or pay-as-you-go model, every day the customer is making a decision about whether to use a product. That means that every day they could potentially decide to stop paying altogether. The hard work starts at contract close. It doesn’t end at contract close.
That’s why top usage-based SaaS companies instill a customer success mindset across every team. The entire company needs to be set up to do what’s in the best interest of making sure customers are seeing value. Here’s what that means for Product, Marketing, Sales, Customer Success, Pricing, and Finance.
Product: Treat product investments as a revenue-generating expense
At the risk of repeating myself, usage-based revenue growth depends on customers using and seeing value from the product. This is product-led growth in its purest form.
Usage-based companies (and product-led companies in general) spend more on R&D than their Sales & Marketing peers.
Notable examples include:
- Unity—2.0 (ratio of R&D to Sales & Marketing spend)
With this increased R&D investment, the best usage-based companies carve out product and UX resources to focus on product adoption, rather than just building new features. I highly recommend investing in usability research and product analytics tooling in order to realize a return on these product investments.
Marketing: Connect marketing with the product and user community
While product is the tip of the spear, many other functions have a hand in driving product adoption. This absolutely includes marketing and product marketing.
Top usage-based companies give users the tools and community to be more successful with their products and to discover new ways of finding value.
Twilio makes a great case-in-point. Whether through their quick start video guides, easy-to-find code samples for common use cases, a Twilio Champions program enabling expert power users, or even the TwilioQuest role-playing game—Twilio’s marketing centers around inspiring and educating users to adopt more of the product.
Sales: Stop treating “committed bookings” as the holy grail
Sales can either accelerate a usage-based model or detract from it.
The last thing a usage-based company should do is treat “bookings” or “commitments” as the holy grail. That sets up customers to over-commit ahead of their usage, feel taken advantage of, and potentially churn or downgrade the next year.
The top usage-based companies let reps share in the upside when customers consume more than they initially committed. New Relic has even taken this a step further where sales compensation is now 100% consumption-based, a notable change from their previous compensation structure.
With “commitments” no longer the primary goal, usage-based companies tend to be willing to be patient to land-and-expand accounts over time. They’re often willing, for instance, to do a pilot or proof of concept to prove out the value and expected usage, before rolling the customer into a committed use subscription.
Customer Success: Be proactive, looking for leading indicators of future success
Not only does Customer Success (CS) play an important role in a usage-based business, they can also more directly tie their efforts to business outcomes.
CS usually takes over post-sale to drive customer adoption. They initially focus on driving adoption of key features that create long-term stickiness, for example by setting up Slack integrations, or creating shared dashboards. Many usage-based businesses try to be prescriptive about the ideal journey a CSM should bring a customer on, based on what will make them most successful in the long run.
While CS is engaging proactively, reactive support is also required when users get stuck. Usage-based businesses tend to be particularly generous about their support offerings rather than putting support behind a paywall.
In a land-and-expand business model, it can be tough to predict who the best accounts will be and some customers might start for free and eventually scale their budget to thousands of dollars per month. It’s in a company’s best interest to not let that high-potential account slip through the cracks due to one bad support experience.
Pricing: Keep it simple even if that means leaving some money on the table
SaaS pricing teams tend to (logically) focus on maximizing ACV and capturing the full willingness-to-pay for a product. They’re constantly on the lookout for new ways to bundle, unbundle, and differentiate prices for different types of customers.
Usage-based pricing, on the other hand, needs to be simplified as much as possible. Pricing should not get in the way of customers adopting the product. That might mean “giving away” valuable features, which lead to a better customer experience, increased stickiness, and therefore a greater customer lifetime value.
Finance: Reinvent the traditional SaaS metrics playbook
Usage-based business models aren’t as easily predictable as traditional seat-based subscriptions. Consumption revenue can flex up and down based on seasonality, customers can scale more quickly (or slowly) than expected, and then there’s the broader economic environment. This not only makes it challenging for FP&A teams to produce an accurate forecast, it becomes tricky for customers to plan their spend and set aside budgets accordingly.
Finance teams improve the customer experience by helping customers make sense of their bill and plan their spend going forward. First and foremost they ensure accurate metering and billing because customers need to be able to trust their bill. They’re also treating forecasting as a data science exercise, digging into valuable signals at an individual customer and cohort level.
Be careful to not let traditional SaaS financial metrics guide decision-making in a negative way. For example, New Relic phased out Annual Recurring Revenue (ARR) as a metric for investors as the company pivoted to a usage-based model.
The company had shifted away from managing an ARR target and instead focused on driving consumption-based revenue. ARR was no longer a key component of sales compensation. Now they’re focused on metrics like actual consumption (monthly data ingested, in New Relic’s case), net revenue retention, and recognized revenue.
Usage-based pricing: more than a pricing strategy
Usage-based pricing is a company-wide effort, not a pricing strategy. The best performing usage-based businesses are maniacally obsessed with the success of their customers and each team has an important role to play.
While it isn’t easy to achieve, delivering a great customer experience brings all sorts of ancillary benefits over the long-run, whether through retention rates; referrals/word-of-mouth; or the ability to build new products that actually get used.
It’s time to ditch the traditional SaaS growth playbook and adopt the usage-based playbook instead.