For every successful SaaS company that has grown over 50% year over year — including such well-known companies as Zendesk, Box, Hubspot, and New Relic — there are thousands of startups that have failed.
In fact, according to a recent McKinsey study Grow Fast or Die Slow,
When you’re a startup, it’s fairly easy to double revenues in a month (for example, going from $10K to $20K). As you start to grow, you can expect to double revenue in a quarter, then in a year. But as you get larger, it’s very, very difficult to double your revenues in these same time frames — after all, how many companies grow from $50M to $100M in one month?
So how can SaaS companies grow, grow fast, grow efficiently, and keep growing?
In working with hundreds of SaaS companies, we’ve learned that the solution to sustaining a high growth rate is to diversify your approach to growth and embrace multiple growth strategies.
We’ve boiled it down to the top 10 essential growth strategies: this article highlights the fourth – Expand with Usage Pricing.
The best pricing strategy will let you put a number on the metric that customers value most, based on how they actually use your service. This is commonly called a “value metric.”
Simply put, a value metric should do 3 things:
1. Align to customer needs
2. Grow with customers
3. Be predictable — for customers and for the organization
This is fully supported by a recent McKinsey survey of Enterprise SaaS customers that showed that more than 75% of customers want pricing metrics that are aligned with perceived value, easy to understand, and easy to track (and thus predict costs). And yet, only about 27% of SaaS businesses use some sort of usage-based pricing.
The nice thing about a usage-based model is that you can use it to create multiple dimensions — which are, essentially, the levers you pull to drive price points higher and higher, drive engagement, and drive revenue. Depending on your business, your levers could be number of emails, API calls, number of units, or any features that can be packaged in different ways.
When CollabNet, a leading provider of Enterprise Cloud Development and Agile ALM products, launched a new professional service, one of their key concerns was how to price it. They quickly realized that a pricing structure based on usage would make more sense to subscribers than rigid feature-based pricing. So they decided to transition from a utility pricing model to a subscription pricing model based on usage (i.e. number of transactions per month that customers performed on the CollabNet platform).
As they got further into the rollout, they realized that they were essentially shifting to a subscription commerce model. CollabNet iterates fast. They pride themselves on working in two-week sprint cycles to release products to customers that they really want, when they need it. But with their current billing infrastructure, they calculated they’d spend more time on billing than actually delivering their service. In fact, CollabNet was spending about 25% of their road map on a billing platform rather than on their core product.
Usage pricing is about more than pricing; it defines how CollabNet delivers products and services to their customers. Having an always available, always flexible way to update pricing means that CollabNet can update pricing as their customers’ needs change. As the VP and GM at the time noted, this means that “Customers feel like they’re getting what they’re paying for, as opposed to being forced into buying something they don’t really want.” This is the true meaning of value pricing.
CollabNet needed the flexibility and the speed to provision a range of pricing plans — and focus on what they’re best at: providing collaborative software development features and functionality that help developers build great software.
1. Accurately track usage
2. Enable usage-based pricing, including overage plans, tiered usage pricing, volume pricing, rollover windows, and more
3. Rate usage to accurately bill customers
4. Rate usage in real time to provide customers with realtime billing information