Is usage-based pricing (UBP) going mainstream? That may be so, if you consider the results of Boston-based VC firm OpenView’s annual Financial and Operating Benchmarks survey. Of the nearly 600 SaaS companies that responded, 45% say they are using this flexible pricing model, up from 34% in 2020.
The survey also looks into how companies that adopt flexible pricing models perform compared to their counterparts, and how it impacts them more broadly. And since it doesn’t shy away from mentioning challenges, we felt it would be relevant reading for founders who might still be on the fence.
To get a deeper look into the results of the survey, we spoke with OpenView operating partner Kyle Poyar, who has championed usage-based pricing models in the past and co-authored the firm’s 2021 State of Usage-Based Pricing Report with partner Sanjiv Kalevar.
“Usage-based pricing is an incredible message that you stand behind your products, and you truly believe your customers are going to be successful.”
The main insights are below, but before we jump in, here’s a note on definitions: the report’s definition of usage-based pricing adoption includes companies like Twilio, whose pricing is almost entirely pay as you go, as well as those offering subscription tiers based on usage, like Zapier.
In other words, the report’s co-authors don’t draw the line at whether there’s a subscription element; instead, they consider if pricing is tied to product consumption behavior, as opposed to just seat-based pricing in a landscape where companies also charge based on customer size, functionality, services or other factors.
Why the seats are empty
One of the factors driving this shift is that charging for “seats” makes less sense than it used to, according to OpenView. Poyar noted that the value a customer receives rarely ties in directly with how many people log in, especially as more and more startups now offer solutions built around automation, AI or APIs.
“In fact,” he said, “it might even be negatively correlated: When AI can automate tasks, the more successful the solution is, the fewer people need to be logging in. So seats are just an outdated way of charging and don’t allow a company to communicate value or invest in features that would add more value.” While Poyar admitted that not every company does this, he pointed out that automation, APIs or AI often play a big role in the success of the companies going public today.
This might explain another shift in thinking: Many companies that go public “are calling out usage-based models and making it a focus of their S-1s or of their investor materials,” Poyar said. He added, “There used to be a fear that investors would penalize them for a usage-based model, because there was a fear that it wasn’t recurring revenue, and it wasn’t predictable. [ … ] Now, a usage-based revenue model is seen as a competitive advantage, and a driver of long-term growth.”