This year a big pricing debate broke out around subscriptions versus usage. “Subscription pricing is dead,” said Tech Crunch. “Smart SaaS companies are shifting to usage-based models.”
In the red corner we had subscriptions: fixed monthly prices, stodgy, old school, Rocky Balboa. In the blue corner we had usage: pay only for what you use, flexible, all the cool kids love him, Adonis Creed.
Sorry, I’m not falling for this one. I’m a lover, not a fighter. The best outcomes are often achieved when the two pricing models are combined.
In fact, I recently had dinner with a bunch of CFO’s and asked them what they thought of usage-based pricing models, as buyers of software. Unanimously, they hated it. Why? Because it’s impossible to budget. And therein lies the dilemma.
On the one hand, no one wants to pay for what they don’t use. That’s the attraction of usage-based models. On the other hand, we all hate being on the clock, there’s something nice about a simple, recurring fee. Imagine if you had to count how many minutes you watch Netflix every month, or if you ran out of minutes halfway through a movie!
That’s why the best models combine the two — call it “tiered plus usage.” A predictable fee for some level of service, and then pay-as-you-go if you need more. If you are familiar with AWS’s “reserved pricing,” it’s kind of like that. It’s the best of both worlds, finding the right balance between flexibility and predictability.
In fact, the Subscribed Institute found that subscription companies with usage-based pricing making up between 1-25% of their overall revenue mix grow faster than companies with no usage, but also faster than companies with more than 25% of their revenue coming from usage.
One of the best examples of this is New Relic, who recently pivoted to a usage-based pricing model. New Relic helps you monitor, debug and improve your entire tech stack. They give your developers and engineers an integrated look at your operational data so that you can anticipate problems as well as optimize performance.
New Relic’s Senior Director of Enterprise Systems Casey Koon recently talked with JJ Xia, Zuora’s Senior Director of Customer Strategy, to offer some takeaways on New Relic’s journey to usership. I’ve summarized the key takeaways and included some color commentary from Casey (you can watch on-demand here):
Usage-based pricing eliminates barriers to adoption. Instead of offering up a bunch of different product options and rate plans, New Relic is now saying: Go for it. Take a look around, and use what you need. If you need to pare back your usage now that’s fine, but we’ll be here to work with you as you grow.
As that first option on their pricing page states, “Start using New Relic with all the features you need for free forever. No credit card required.” I love the open-ended platform mentality of that message.
The results have been transformative. New Relic has essentially eliminated the barriers to their customers standardizing all their data monitoring on a single source of truth. And so far the numbers have been positive as well. As New Relic CFO Mark Sachleben noted on their last earnings call, committed ARR spend is up about 15% since the shift.
“Tiered + Usage” offers both predictability and flexibility. For their Pro and Enterprise plans, New Relic offers an “Annual Pool of Funds” option that provides volume discounts. Customers can opt for an annual commitment pool featuring roll-overs between months, rather than monthly commitments with” use-it-or lose-it” limitations and overage bills.
“The idea is that it’s still a usage-based model, but the customer pays a commitment value,” says Casey. “So the customer says, “Hey, I will spend a certain amount of money with New Relic for a year.’ And by committing to that, you get discounted price points through all of your different metrics, and then you can use that capability however you like, throughout the entire course of your contract.”
Pilot, pilot, pilot. Particularly if you’re new to usage-based pricing, it’s a good idea to find some interested customers and kick the tires before a formal launch. According to Casey, New Relic spent six months working with a few dozen customers (large and small) to identify gaps and generally fine-tune their offering. How did they know that they were making progress? The team noticed that they were starting to create two new kinds of happy customers: ones that had lower bills owing to lower relative usage, and ones that had higher bills because they felt empowered to engage more with the software.
“When we saw that happening with two different types of customers and seeing happy customer satisfaction with both of them, we knew we were really close to having the right model,” says Casey. “The process was also important because it forced us to think about ourselves as an overall platform, and not just a list of products.”
Sales enablement is key. Shifting to usage-based pricing doesn’t mean that everything runs on autopilot and the algorithms are in control. As mentioned at the top of the piece, at the enterprise level you’re probably still going to employ some tiered structures to help big companies manage their expenses, and those are going to entail enablement and training. The good news is that it turns your reps from “bad friends” — who only call when you’re over your limit — to business partners who are trying to figure out the optimal way to use the service.
“We trained up all of our sales reps, getting them comfortable on the model, doing lots and lots of sales enablement. We built lots of internal tooling in terms of pricing, so our AEs could take a look at the data that customers were generating, compare what that usage model is to what their existing model is, see how it’s going to help them.”
Get ready for cross-functional impact. Again, this is not about adding some pro-rating functionality to a few of your product lines. Even the smallest experiments with usage pricing will trigger some bigger holistic thinking about the way your customers use and value your service — and the way that your internal teams will need to support this change. There are implications for enablement, for sales compensation, for messaging, and for revenue recognition. For New Relic, a cross-functional team was gathered to assess what parts of the business will be impacted and get a strategy ready. You should be building to support an overall strategy, not just a list of requirements.
“It really changes every single aspect of the business, from how your sales reps sell and how your account managers engage, to how your support teams works. It really is a full cross-departmental effort, and so making sure that everyone is on the same page and aligned is really critical for having a great execution strategy.”
Shifting to usage can be a big leap, both in execution and mindset. Thanks to Casey and JJ for their insights!