Metrics that Measure Up
Todd Gardner - The rise of Usage-Based Pricing in B2B SaaS
SaaS Capital - I have always loved that name and followed their B2B SaaS Research for many years.
Todd Gardner was a founder at SaaS Capital, which helped lead the early days of "Debt Lending" for SaaS companies. Most recently, Todd is now the principal at SaaS Advisors assisting both SaaS companies and SaaS investors during the financing process.
During Todd's career, he has reviewed thousands of SaaS income statements and balance sheets which positions Todd very well for the business and financial impact of Usage-Based Pricing (UBP) for B2B SaaS companies.
The first topic we discussed was "What is Usage-Based Pricing"? The concept is pretty basic, aligning pricing to the value received by the customer. This concept has been used in other consumption-based industries, such as gas, water, and cellular phone bills.
How does UBP impact the traditional use of subscriptions? Approximately 50% of SaaS companies using a Usage-Based pricing model also include an annual subscription as part of the pricing structure....a hybrid model. One interesting aspect when using a UBP + Subscription model is what is included in the subscription versus being purely usage-based charges?
One of the challenges of a Usage-Based Pricing model is the increased challenge of revenue forecasting - which was one of the benefits of the traditional SaaS subscription model. Todd highlighted there is a trade-off in pricing between simplicity and value alignment. By having a hybrid Usage-Based Pricing model, there can still be the predictability of the subscription model while still having the opportunity to increase revenue as value increases for the customer.
Is there a history of Usage-Based Pricing in a software subscription model? In the spirit of all things being circular, the original use of UBP was in time-sharing, which was a popular software application usage model in the 1980s. One of the challenges in that phase of subscription software was once usage increased to make the monthly cost-prohibitive or after a couple of unexpected large invoices from higher than normal/expected charges. Todd highlighted that with the introduction of the Customer Success organization, coupled with the use of product analytics, a SaaS vendor can stay in front of sustained "larger than expected" invoices and even use increased usage to re-structure the agreement to either "cap" overage usage and/or decrease the per-unit cost in consideration of a larger commitment.
Todd recently conducted research that identified 6 product attributes or leverage points that suggest considering a Usage-Based Pricing model:
1. Lower in the technology stack products (infrastructure, databases, tools, platforms, etc.)
2. Application products that have a high Cost of Goods Sold basis
3. Use of the product is directly linked to business value (payments, eCommerce)
4. Self-provisioning products (think Product-Led Growth)
5. Growth and intensity of usage (high growth, heavy usage-based products)
6. Value is driven by automation - such as integration/API based products
Todd has a unique perspective on the SaaS industry, informed by reviewing and lending to 1,000's of SaaS companies, and his recent research on Usage-Based Pricing across the SaaS industry is the basis for an information-packed conversation.
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