- Usage-based pricing has grown 32% this year and now 45% of software-as-a-service (SaaS) companies use it all or in part, up from 34%, an OpenView survey shows.
- The pricing model, which leads to increases or decreases in revenue based on how much customers engage with a service, has been gaining on the more traditional subscription model as the main way SaaS companies make money.
- “There is an appetite for usage-based pricing, and we expect this to continue to accelerate in the coming months,” says Kyle Poyar, operating partner at OpenView, a venture capital firm. The survey is based on responses from 600 SaaS companies.
CircleCI, a company whose SaaS platform helps developers speed their software projects, moved from subscription to usage-based pricing a few years ago after tracking how often its customers accessed its services. Like a lot of SaaS companies, the company offers a free version to let people try out its platform without commitment and then charges them once they become premium users.
“The subscription in the earlier model was a little bit more like shelfware,” the company’s CFO, Chitra Balasubramanian, told CFO Dive. “You’re paying for it, whether you use it or not.”
To help its big users manage the cost increases that would result from the switch, the company devised a bonus credit system, which enables companies to pay less per use as their volume increases.
Pricing model growth
Usage-based pricing has been growing since at least 2018, when about a quarter of companies were using it, according to OpenView’s data.
It has tended to be used most in infrastructure platforms, like AWS, Google Cloud, and Azure. But that has been changing. Companies offering middleware and applications are now using it more.
Twilio, Strip and Plaid are among big middleware companies charging by usage, and Shopify, Slack, and HubSpot are among big application companies using the model.
Given the growth trajectories of companies operating throughout the tech stack, it appears usage pricing is helping to fuel growth at a faster rate than subscription pricing, which rises and falls based on the number of license holders, not on the volume of use.
Among companies growing at more than 100% annual recurring revenue (ARR), the main predictor of SaaS success, 51% either use usage-based pricing entirely or incorporate it in their subscription model. Among those growing at less than 100% ARR, 55% don’t use any usage-based pricing.
Closely watched SaaS metrics
Companies with the best net dollar retention (NDR) and customer acquisition costs (CAC), two other closely watched SaaS metrics, also tend to rely on usage-based pricing.
Among companies in the top performance quartile for the two SaaS metrics, NDR growth hit 122% for usage-pricing companies compared to 109% for subscription-only companies. There’s a similar difference in CAC performance, with usage-pricing companies generating payback in five months vs. nine months for subscription companies.
The only category where usage pricing isn’t taking hold quickly is in the enterprise space.
Big customers, which can spend millions of dollars a year on a SaaS company’s service, tend to like the cost predictability of subscription pricing. Only a little more than a quarter of companies’ enterprise customers pay on a usage basis. That rises to just over 40% when usage-based subscription tiers are included. That leaves about 60% of enterprise customers not using it.
That might change as usage pricing takes further hold in the SaaS space. More than 60% of companies say they’ll adopt usage pricing, if not in the next 12 months then at some point after that.
This article was originally published on CFO Dive, and republished with permission.