Articles

Data helped CircleCI CFO make switch from subscription to usage pricing

January 1, 2020

Chitra Balasubramanian’s background interpreting data patterns helped her forecast the impact a new model would have on the software company.

When CircleCI made the recent switch from a subscription to a usage-based pricing model, it fell to its CFO, Chitra Balasubramanian, to model out the impact the change would have on the business. That was a task she was prepared for; several years earlier, at a previous company, she had led a team whose job was to make sense of huge amounts of data — just the kind of experience she needed to understand the pricing change.

“Forecasting a usage model is more of a data science problem than it is a classic Excel modeling problem,” Balasubramanian told CFO Dive. “Revenue is a backward-looking metric. Subscription values are just fairly standard and fixed units. You can’t necessarily call a usage-based model recurring revenue because it really is re-recurring revenue.”To model out the impact, she said, she and her team looked for patterns among cohorts, among other things, from which clues could be extrapolated.

How do cohorts expand over time?” she said. “Is there consistency across them in their motion? While you can’t get precision on every single account, you can look at groups of customers and see how they grow over time.”

Early days

Balasubramanian joined CircleCi, a platform for helping companies speed software development, just under five years ago to help it build out its finance and other functions.

“When I joined there were maybe 70 or 80 folks,” she said. “There was no FP&A team in place. There was a small accounting team, one or two folks doing HR-related functions, very basic people functions.”The company today, which recently completed a $100 million Series F round and is valued at about $1.7 billion, is in a very different place. It hosts about 50 million software builds each month.“The sector has been quite rapidly growing,” she said. “It’s what’s driving software development practices today.”The company last year named her its first CFO, giving her a chance to grow into a job to which she brought a wide range of experiences but had never held before.“I feel grateful for being trusted to take on that next-level role,” she said. “There was no mention of becoming the CFO when I joined. It was just about going in there, building out the function, focusing on the job. I wasn’t even thinking about growing into the CFO.”Her experience leading that data team at her previous company, called RetailNext, which culled data to help retailers improve their brick-and-mortar traffic flows and sales, gave her crucial preparation for managing the kind of work expected of her at CircleCI. “I was helping to draw insights out of lots of data,” she said.But she also brought relevant technology development experience from her early days as a public auditor with PwC. The firm had formed a small group the last year she was there to design tech tools to help it distinguish itself from the other Big Four firms.“It was essentially an opportunity to be an accounting subject-matter expert wearing a product management hat,” she said. “That year was basically me looking at our audit practices and saying, ‘hey, how can we make this better? How can we avoid just doing a test and then writing out a Word doc about what we did?’”Balasubramanian said she still thinks about the experience today. “It allowed someone who was otherwise thinking about audit, accounting, day-to-day, to think more operationally in a forward kind of way,” she said. “How can we use technology, change the process flow, make what we do a lot more scalable, a lot more error-avoiding, and a lot less manual?”

Forecasting growth

At CircleCI, one of the key metrics she looks at is net dollar retention, which shows how the company’s accounts expand and provide more value over time. It’s one of the metrics she relied on to see how changes in cohort use could help predict the impact the switch to usage pricing would have on the business.It can show, for example, what types of customers tend to have more seasonal usage, a data point that can be plugged into the forecasting model. “We try to break apart our customer base to look at how the usage takes place,” she said.Like many in the software-as-a-service (SaaS) space, the company brings in customers using a freemium model and then works with them at the enterprise level as the platform becomes integral to their software development process.“We have a lot of developers who sign up for our product on their own using our freemium model, and then over time, as their needs evolve, and as their companies require, we help get them onto contracts and a logical plan within our suite of offerings,” she said.

It was after tracking how customers were using the platform that company leadership decided to move away from the dominant subscription model.“The subscription in the earlier model was a little bit more like shelfware,” she said. “You’re paying for it, whether you use it or not.”The usage model, by contrast, better aligns revenue with how much value customers are getting out of the platform.“We just felt that was more of the right way of servicing our end customers versus having gaps that come about when it's a fixed subscription model,” she said.To help big users manage the cost increases that would result from the switch, the company devised a bonus credit system.“You purchase a bundle of credits,” she said. “The more you purchase, the more bonus credits you get, so it’s an implied discount. If they’re preparing for a product release or what have you, then they’ll end up using a lot. But then during the holidays, when they don’t need as much, that’s when they probably preserve some of these credits. So, it ends up balancing in a much more organic, natural way.”

This article was originally published on CFODive, and republished with permission.