Has usage-based pricing (UBP) gone mainstream? That’s the case OpenView, a Boston-based VC firm, makes in its annual Financial and Operating Benchmarks survey. Out of the nearly 600 SaaS companies which responded, 45% say they are using this flexible pricing model, up from 34% in 2020.
The report, though, isn’t just about measuring how many companies adopt a trend that OpenView has been cheering for. It also looks into how these companies perform compared to their counterparts, and how it impacts them more broadly. And since it doesn’t shy away from mentioning challenges, we found it particularly relevant reading for founders who might still be on the fence.
We talked to OpenView operating partner Kyle Poyar, who co-authored the firm’s 2021 State of Usage-Based Pricing Report with partner Sanjiv Kalevar. The main insights are below, but before anything else, let’s note that 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 usage-based subscription tiers, like Zapier.
In other words, the report’s co-authors don’t draw the line at whether or not there’s a subscription element, but at whether or not pricing is tied to product consumption behavior. And while companies sometimes charge based on company size, functionality, services, or other factors, this is more blatantly opposed to seat-based pricing.
Momentum behind the shift
According to OpenView, one of the factors driving this shift is that “seats” often make less sense than they used to. Referring to the growing number of startups whose solutions revolve around automation, AI or APIs, Poyar noted that “in none of those cases does the value a customer receives tie directly to how many individual humans are logging in.”
“In fact,” he added, “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 So seats are just an outdated way of charging, and don’t allow a company to either communicate value or invest in features that would add more value.” While Poyar admitted that “it’s not every company,” he also pointed out that these types of businesses account for a large portion of public companies.
This might explain another shift Poyar described: 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.” Previously, “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. [ … ] Whereas now, a usage-based revenue model is seen as a competitive advantage, and a driver of long-term growth.”