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The Usage-Based
Pricing Playbook
Kyle Poyar and Sanjiv Kalevar — January 2021
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Key questions we’ll answer:
• Why are SaaS companies increasingly adopting a usage-
based revenue model?
• Which SaaS companies have been successful with a
usage-based revenue model, and how do they behave?
• How can companies overcome GTM and operational
challenges in scaling with a usage-based model?
Findings are backed by multiple sources:
• Conducted 15+ in-depth interviews with GTM and
operations executives at top-performing SaaS companies
that have a usage-based revenue model.
• Analyzed patterns in publicly traded companies.
•
Leveraged OpenView’s proprietary insights from working
directly with usage-based portfolio companies.
We investigated how to grow to $100M+
ARR with a usage-based revenue model
Diverse set of interviewees
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This playbook encompasses multiple flavors
of usage-based revenue generation*
Transactional
Usage-based subscription tiers
Flexible pricing where customers
only pay for what they used
during the period.
*Not mutually exclusive; many companies adopt multiple models for different customer segments
Customers commit to their desired
level of usage. They can upgrade or
pay overages for more usage. If they
need less usage, they can change
plans (subject to contract terms).
Third-party usage
Flexible pricing where customers only pay for
what was used during the period. Usage is not
controlled by the customer, but rather comes from
behavior by a third party (e.g., the customer’s end
customer).
Primary focus of this playbook
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3 takeaways for CEOs, CROs, and CFOs
CEO
CRO
CFO
1. Ensure a usage model is right
for your product. Each use
should generate a positive business
outcome for customers. You are
sharing in the customer’s success.
2. Take the time to pick the right
usage metric. It should grow
consistently across your customers,
help you communicate your
product’s value, and be
(somewhat) predictable.
3. Be prepared to build. From
billing to sales comp, many
companies have had to build
custom solutions to the operational
challenges around their specific
usage model.
1. Enterprises may push back on
usage pricing, but there are
ways around it. Companies
have found creative ways to offer
predictability for the enterprise
without hurting growth.
2. Pay reps beyond the first
commit. Reps need to be closing
deals quickly and then letting
usage grow in time. Include a tail
based on actual usage after ramp.
3. You can’t predict your largest
accounts. You’re making a bunch
of bets and some will pay off
spectacularly. Invest in a great
experience for all signups
regardless of their initial spend.
1. Brush up on rev rec. Unlike
subscriptions, usage-based
revenue is recognized as it occurs.
You may need to maintain multiple
rev rec policies to adapt to
different pricing models.
2. Finance becomes tied with
product. Billing is part of the
customer experience. Customers
need to trust their bill, gain access
to usage in real time, and see
consistent amounts across systems.
3. Forecasting requires data
science. Leading practitioners
predict usage at both a customer
and cohort-level in order to gain
conviction on future revenue.
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The Usage Imperative
Why are SaaS companies increasingly
adopting a usage-based revenue model?
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1990s
2000s
TODAY
Infrastructure
Data Center
Cloud
Connected
Cloud
Buyer
CIO
Executive
End User
Pricing
Large upfront purchase
Recurring annual
purchase
Start for free,
pay later as usage grows
Distribution
Sales led
growth
Marketing led
growth
Product led
growth
Software buying has evolved
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Usage-based revenue models address
these changes in buying behavior
Benefits of a usage-based model
Allows the customer to start at a low
cost, minimizing friction
Directly links the price paid with the
value received
Allows more users to access the product within
an account, making the software more
ubiquitous and seeding new use cases
Expands TAM by making the product more
accessible while uncapping the potential upside
Google Cloud Platform offers $300 of free
credits to every developer account. GCP is
at a >$10B annual run rate.
HubSpot charges based on a customer’s
leads. This links HubSpot’s revenue with their
customers’ GTM success.
AWS has been able to reach traditionally
cost-conscious SMB and middle-market
customers. >1M customers to date.
AuditBoard charges based on # of controls
rather than users. They generate 10x the
number of users in an account compared
to legacy SOX software.
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For further reading, we recommend this article from Nnamdi Iregbulem
`
Customers who spend $100k+
represent 72% of revenue, but only
6.7% of customers
Customers who spend $100k+
represent 46% of revenue, but only
0.8% of customers
Customers who spend $100k+
represent 74% of revenue, but only
0.7% of customers
The bet is that you lower the entry barriers,
and a subset of customers grow rapidly
There’s a 70-10 “rule” in customer concentration.
The top 10% of customers typically represent roughly 70% of
revenue. Meanwhile, the top 1% represent 40%.
% of
revenue
% of customers
1%
20%
50%
100%
80%
60%
40%
20%
Typical software company revenue concentration
- Usage-based
- Subscription-based
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Example: Twilio sees low friction to adopt
and massive expansion potential
2020 investor presentation
• Twilio has 10M+ developer
accounts, 200k+ active
customers, and a 132% dollar-
based net expansion rate.
• Despite the larger user base,
revenue is concentrated in top
customers. 7 customers spend
$10M+ per year and 142 spend
$1M+ per year.
• 85% of Twilio’s net expansion
comes from usage and only 15%
comes from new products.
• 76% of Twilio’s revenue mix is
from usage-based products.
Source: Twilio 2020 Investor Day Presentation
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Today’s software trends mandate charging
based on usage, not users
Automation
AI
API
Software increasingly automates
manual processes. The more
successful a product is, the fewer
user seats a customer needs.
Seat pricing doesn’t scale with
the value of automation.
AI takes automation a step further,
eventually eliminating the need
for whole teams of people for
ongoing tasks. Monetization
can no longer be tied only to
human users of a product.
For many of the fastest growing
software companies, the value is
in the API—software talking
directly to other software—rather
than the UI. There doesn’t need
to be a user to see value.
Zapier reports 61% of all
knowledge workers already
rely on automation.
Databricks has seen over a
million downloads per month for
its machine learning product.
In 2019 Twilio processed 600
billion API-based transactions.
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Success Stories
Which SaaS companies have been successful
with a usage-based revenue model, and how
do they behave?
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Infrastructure
Usage-based SaaS companies can be found
in all layers of the tech stack
Middleware
Application
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Investors are rewarding usage-based
companies in the public market
$500B
Combined Enterprise
value of largest usage-
based SaaS companies
$130
$100
$90
$51
$41
$30
$28
$18
$17
$15
$12
ShopifyStripe*SnowflakeTwilioUnityDatadogSlackHubSpotMongoDBAvalaraElastic50%
Revenue multiple premium
over the broader
SaaS index
Valuation of select usage-based SaaS companies ($B)
*Stripe is privately held. $100B valuation based on TechCrunch press releases as of 11/30/2020.
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Usage models correspond with faster net
expansion and continued growth at scale
Usage-
based
Broader
SaaS index
Difference
(%)
YoY revenue growth (Forecast)
29.9%
21.7%
+38%
Net dollar retention
120%
110%
+9%
EV/revenue multiple
21.6x
14.4x
+50%
Revenue scale ($, in millions)
$578
$434
+33%
Gross margin
73%
71%
+3%
Rule of 40
31.4%
29.1%
+8%
*Summary financials based on public comparables. All values are medians of the comparable sets.
Comparison of usage-based public SaaS companies to the broader SaaS index
1. Usage-based businesses see
continued growth at scale
(29.9% vs. 21.7%) driven by
best-in-class net retention
(120% vs 110%).
2. They do this at even greater
revenue scale with similar
gross margin and rule of 40
profiles to their peers.
3. As a result, usage-based
businesses are valued at a
substantial premium (21.6x vs
14.4x revenue multiple).
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Before: Flat-fee pricing
constrained growth
- Zocdoc, the Yelp of healthcare, was valued at
nearly $2B yet was on life support. Growth had
flatlined and burn was up to $40M+ per year.
-
They charged a $3,000 annual flat fee to
providers. This was cheap for some and
expensive for others. It didn’t create a path to
expand customers over time as they saw success
with the platform.
Example: Zocdoc’s growth took off after
adopting usage-based pricing
After: Usage-based pricing
accelerated land-and-expand
- Moved to usage-based pricing where providers
pay for each new patient booking.
- The provider network grew by 50% in the first states
that transitioned to the new model since it was
more affordable to try out the service.
- Provider churn went down by 50% and sales
productivity is up 4x.
- Zocdoc saw its first ever profitable quarter in Q4
2019 as growth rates were accelerating.
Source: https://medium.com/zocdoc-corp/zocdocs-turnaround-from-an-unsustainable-path-to-profitable-growth-c3fc7ce2314d
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7 of the 9 public companies with the best
NDR have a usage-based model
158%
139%
136% 135%
132%
130% 130% 130%
125% 124% 123% 122%
120% 120% 120%
115%
113% 112% 111%
105% 104%
100% 100%
96%
SnowflakeJFrogFastlySmartsheetSlackElasticDatadogZoomSumo LogicCrowdStrikeDynatracePagerDutyAsanaAnaplanMongoDBPing IdentityBandwidthCloudflareAvalaraSolarWindsZuoraDomoSurveyMonkeyCeridianNet dollar retention (NDR) among recent* SaaS IPOs
*Companies must have gone public on or after 11/1/2017. Net retention reported from a company’s 10-K or S-1, whichever is most recent.
= Usage-based
= Subscription SaaS
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Even traditional subscription companies are
incorporating a usage element in their pricing
- Usage is a fence between
packages
- Professional plan includes up
to five Lightning Flow
automation processes
- Platform editions have custom
object limits
- Usage is a fence between
packages
- Paid plans include a limit on
storage, file upload size,
version history, and number
of API calls
- Usage is the fence between
free and paid plans
- The free edition includes a 40-
minute maximum time limit for
group meetings
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Navigating Roadblocks
How can companies overcome GTM and
operational challenges in scaling with a
usage-based model?
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Strategy &
Pricing
Finance &
Operations
GTM
Strategy
The most common roadblocks are in
strategy, GTM, and finance
-
Is usage-based pricing the
right revenue model for us?
- Did we pick the right usage-
based value metric?
- What if customers don’t like
paying based on usage?
- How do we handle overages?
-
Is usage revenue valued
differently than subscription?
- How do we handle billing?
- How do we handle financial
planning with volatile revenue?
- How do we handle cash
management and rev rec?
- What should be the role of self-
service, sales and customer
success?
- How do we navigate sales
comp?
- How do we grow adoption
and usage?
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Strategy &
Pricing
Finance &
Operations
GTM
Strategy
Strategy & Pricing
-
Is usage-based pricing the
right revenue model for us?
- Did we pick the right usage-
based value metric?
- What if customers don’t like
paying based on usage?
- How do we handle overages?
-
Is usage revenue valued
differently than subscription?
- How do we handle billing?
- How do we handle financial
planning with volatile revenue?
- How do we handle cash
management and rev rec?
- What should be the role of self-
service, sales and customer
success?
- How do we navigate sales
comp?
- How do we grow adoption
and usage?
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Strategy & Pricing:
Executive Summary
1. First, evaluate whether a usage model is right for your product and customers.
Ideally the product will be so sticky that you won’t need to bend over backwards to lock in a commitment from
customers. Be mindful of the competitive dynamics, which influences whether your pricing will be viewed as
disruptive.
2. The issue could be with your usage-based value metric rather than usage pricing.
Make sure your value metric meets the five key criteria: it’s value-based, flexible, scalable, predictable, and
feasible. Usage should grow steadily over time for the average customer and should be well distributed across
accounts.
3. You can get creative with pricing structures to give customers greater peace of mind. Snowflake
allows customers to roll over their unused commitment, assuming that next year’s commitment grows. Datadog
charges based on the high water-mark of usage within a month, but excludes the top 1% to minimize the impact
of spikes. Meanwhile, AWS allows customers to commit to a usage volume without requiring an upfront
payment.
4. Be thoughtful about how to handle overages when customers exceed their plan.
There are at least five different overage models in practice. Some are more customer-friendly (e.g., giving the
customer headroom before overages kick in) while others incentivize a larger commitment.
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First, evaluate whether a usage model is
right for your product and customers
When usage-based pricing works
When it doesn’t work as well
• Success-based: Usage aligns directly with
customers’ business outcomes, allowing you to
share in their success.
• Sticky: Product is highly sticky once it’s adopted,
with usage consistently increasing over time.
• Customer-centric: Customers prefer the flexibility
to only pay based on what they use.
• Taxi-meter effect: Usage is discouraged when
customers feel the marginal cost of consumption.
• Variability: Usage is highly variable or episodic.
• Customer concerns: Customers are less savvy
technology buyers and demand a simplified
buying experience.
Hired found that recruiters only sent them a small share of
their open roles when pricing was pay-per-hire. Unlimited
models led to better adoption of the platform.
Communication API business Twilio finds that developers
can quickly prototype ideas and develop product-ready
applications. Developers pay once the app is live with
customers—which they don’t want to undo.
In some cases (see Eventbrite), usage-based pricing helps
acquire customers with a one-off use case, but this revenue
may not be viewed as consistent or recurring revenue.
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Ideally the product is sticky and hard to
take away from end users
“Eventually, someone from procurement calls me saying, ’I don’t know who you guys are,
but we’re spending $40,000 a month with you and we can’t budget our spend this way’...
That negotiation with procurement is very different because the leverage is on my side. I’m
happy to let [the pricing] ride with a higher unit-cost and I’m also happy to decrease it for an
upfront commitment. When you’ve already created a groundswell of usage, it’s
powerful to say, ‘Okay, fine, I guess I’ll flip the switch and take my product
away from your 1,000 engineers.’“
–Commercial Leader
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For many leading companies, the usage
metric shares in the customer’s success
“Customers almost never tell us that our pricing is a ‘success tax.’ We charge based on the
number of monthly users a customer has logging in. We help them attract those users and
many times we can show that we help with conversion, bringing more users in the door…
We also help with security each time someone logs in. The way we charge is intimately
intertwined with how we help customers and what customers are trying to do.”
–Commercial Leader
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Be mindful of the competitive dynamics in
your market
Are competitors charging on usage?
Yes
No
But customers don’t
like it
And we can
afford to go
unlimited
But our costs
are tied to
usage
Go unlimited
use
Make usage pricing
more customer friendly
And customers
like it
Keep it simple
for the buyer
And customers
want more flexibility
Disrupt competition
with a usage model
And customers are
hesitant to adopt a
new pricing model
Keep it simple
for the buyer
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There are many potential usage metrics that
you could use in your pricing
Company
Usage-based value metric(s)
- Number of SMS messages
- Compute resources
- Volume of data
- Number of external active users
- Number of tasks automated through the platform
- Number of zaps
- Number of marketing contacts
- Number of hosts (infrastructure monitoring)
- Amount of ingested or scanned GB (log management)
A value metric is the
unit of value that
determines how much
you charge and how
much a customer pays for
your product. It could be
based on customer size,
usage, users, or another
criteria.
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Take the time to pick a usage-based metric
that meets these 5 criteria
Criteria
Explanation
Value-based
• Aligns with how customers derive value from your product and how they see success
• Helps you communicate your unique product value
Flexible
• Allows the customer to choose and pay for their exact scope of usage
• Helps overcome buying constraints and budget thresholds
Scalable
• Generates more spend from a customer over time as they use more of the product
• Revenue scales naturally with customer growth
Predictable
• Provides billing and budget predictability for customers large and small
Feasible
• Possible for you to monitor, administer, and police with your customers
• Tracks with your COGS so that you do not have consistently unprofitable customers
Value metric checklist
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From per building to per
square foot pricing
• With per building pricing, customers were
incentivized to cherry pick which properties they
managed through the platform.
• Now pricing is more closely aligned with customer
value from the product as well as how customers
make money from tenants.
•
Average price per square foot increased significantly
without hurting adoption.
Examples: VTS and HubSpot adopted new
value metrics to help them scale
Contact pricing increased
net retention from 75% to 100%
• HubSpot originally only had fixed packages
rather than usage-based pricing. They saw a low
upgrade rate and net revenue retention of 75%.
•
Prior to IPO, HubSpot introduced contact-based
pricing where customers pay more as they
generate more leads through the platform.
• Net revenue retention increased to 100%.
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For many successful startups, usage grows
steadily over time for the average customer
50%
100%
150%
200%
250%
1
2
3
4
5
6
7
8
9 10 11 12
Metric A
Metric B
Metric C
Example net usage retention by month
Metric A is too flat as time elapses,
indicating that customers won’t expand
after they land.
Metric C is growing, but is highly spiky
and unpredictable. Customers will have
a difficult time estimating their usage
needs and budgeting appropriately.
Metric B is the best fit for pricing
purposes. It grows steadily over time
and growth even accelerates at scale
after the customer is fully implemented.
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There’s normally a subset of customers who
account for a large share of usage
•
Portfolio theory: Treat signups as a portfolio. Many
will cluster at the low end with modest usage. A
subset will scale rapidly.
•
70/10 “rule”: It is normal—and healthy—for the top
10% of accounts to represent 70% of overall usage
when a company hits scale.
•
Scalability: There should be the potential for usage
to scale substantially within an account as they move
from individual to team to org-wide adoption.
“One of our customers started off spending $15 per
month. That grew to $40,000 per month all
before procurement ever got involved.”
“We have two potential KPIs for usage-based pricing.
In reality, nobody needs more than 20 [of KPI
1]. The only one that ultimately matters is [KPI 2].”
“We get thousands of signups every month, but most
just use the product manually for less than $50 per
month. We don’t talk to them until they start
spending $1,000 per month.”
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Some enterprise buyers may push back
around lack of predictability
“From a customer’s perspective, they want to have consistency for
budgeting purposes. It’s a big concern for these larger companies when you
go through legal and procurement and they have a really tough time wrapping
their head around how much is the purchase… I’ve seen deals stall because they
got stuck with procurement. They couldn’t procure a purchase for something
when they didn’t know what the cost was.”
–Commercial Leader
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You can get creative with pricing structures
to give customers greater peace of mind
Pricing structure
How it works
Example
Larger discount for a
bigger commitment
Customers commit to a spend level for the year and get a better price for a
larger commitment.
Rolling over unused
credits
If the customer doesn’t use their committed credits, they can roll some over
assuming the next year’s commitment remains at least as large as the last
one.
Commit now, pay
later
Customers can choose between whether they want to pay for their
commitment fully upfront, partially upfront, or monthly in arrears.
They can save if they make a bigger commitment or choose to pay upfront.
Flexible usage
draw-down
The customer can choose between a monthly usage subscription or an
annual allotment that can be consumed flexibly. With the annual option, a
customer can grow into their commitment over time and not get penalized
for periodic spikes.
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Example: AWS has reached $45B+ in
revenue with extremely flexible pricing
- AWS is the fully realized version of
usage-based pricing, allowing
customers to pick and choose products
and their exact usage needs (prices are
as low as $0.0042 per hour).
-
They will generate $45B in revenue in
2020, up 30% year-over-year. To put
that in perspective, Snowflake
generated $265M in revenue in 2019.
- AWS has over 1 million customers
spanning startups to the largest global
enterprises.
- Affordable entry pricing: AWS offers free versions of 85 different
products. There are three types of free offers—always free, 12 months free,
and short-term free trials.
- Usage metrics: AWS charges based on different usage metrics
depending on the product. The core Compute Cloud is priced by the hour
of compute instances. Usage is billed in per-second increments to give the
customer even more flexibility.
- Flexible pricing structures: Customers can choose to pay-as-you-go or
save money by making a commitment. Discounts can go as high as 75%
off the published price.
- Flexible payment structures: Independent of the commitment,
customers can choose their contract length and whether they want to pay
fully upfront, partially upfront, or in arrears. For example, a 3-year term
gets a 62% discount when paid upfront or 57% discount when in arrears.
- Overages: AWS offers robust cost management functionality so customers
can set their own rules and budgets to control costs across their teams.
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Creativity can also apply to overages when
a customer exceeds their plan
Overage Model
Example
Rationale
Allow the customer to go over
at the pay-as-you-go rate
•
Incentivizes the customer to increase the size of their commitment
• Provides the most monetization potential
Allow the customer to go over while
maintaining their discount
• Makes scaling feel less punitive to the customer
• More customer centric if the customer may experience significant usage
fluctuation across months (for example, due to seasonality)
Give customers some headroom
before overages kick in
• Gives the customer peace of mind in the event of unanticipated spikes
that may be out of the customer’s control
• Greater price predictability for enterprise procurement teams
Throttle customer usage unless they
choose to upgrade their subscription
• Usage may balloon if the customer sets up the product incorrectly;
charging for overages would feel extremely punitive
• Very small businesses have greater difficulty affording overages
Give the customer control to choose
their preferred overage practice
• Puts control in the customer’s hands—they can set up their own budgets
by team or department and manage spend accordingly
• Allows the company to serve a broader spectrum of customer types
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Best practice for Enterprise: Give customers
headroom and re-up their commitment
“We didn’t like to use the term ‘overage’ with
customers; we used ‘flex’ instead. We found that a
minimum commitment is necessary for the enterprise
motion, but that customers should be able to flex
before their minimum. They would get a grace
period of 2–3 months before they would have
to decide whether to pay for the one-time flex
usage or to re-up their contract at a higher
commitment and higher discount. If they re-
up, the flex usage is forgiven.
–Commercial Leader
Benefits to the customer:
- Greater predictability in the buying process
- Fewer surprise fees they didn’t budget for
- Don’t have to worry about the administrative
burden of small overage payments
Benefits to the vendor:
-
Lock-in a greater future subscription
commitment with better LTV
- Gives the sales or AM team leverage to
re-engage the customer in an upsell
(feels like they’re doing the customer a solid)
-
Fewer billing and administrative headaches
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Strategy &
Pricing
Finance &
Operations
GTM
Strategy
Go-to-Market (GTM) Strategy
-
Is usage-based pricing the
right revenue model for us?
- Did we pick the right usage-
based value metric?
- What if customers don’t like
paying based on usage?
- How do we handle overages?
-
Is usage revenue valued
differently than subscription?
- How do we handle billing?
- How do we handle financial
planning with volatile revenue?
- How do we handle cash
management and rev rec?
- What should be the role of self-
service, sales and customer
success?
- How do we navigate sales
comp?
- How do we grow adoption
and usage?
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GTM Strategy: Executive Summary
• Self-service and free offerings open the top of the funnel (product led growth).
Free trials and free credits allow signups to try before they buy. High-quality support and a rapid
time to value help customers adopt the product. Based on a PQL methodology, the highest
potential self-service users get sent to sales. These PQLs need to fit the ideal customer profile and
a minimum usage threshold.
• Sales generates new committed subscriptions—without slowing down deals.
While the AE’s focus should be on the initial subscription commitment, their compensation should
include a tail of consumption so that reps don’t get too greedy on the first bite of the apple. Reps
are technically-versed, empathetic, and have great follow-through to navigate legal,
procurement, and security.
• Post-sales owns product adoption and “organic” expansion.
CS takes over to drive customer adoption and the usage of key features that create stickiness.
They are goaled based on a mix of MBOs and net dollar retention. Account managers or AEs
stay with accounts that have “inorganic” growth potential—other teams, workloads, use cases,
divisions, etc. Their responsibility is to systematically map out the account and create connections
with new stakeholders.
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The usage-based customer journey
Product led growth
Sales
Post-sales
KPIs = Signups, activation
rate, free to paid conversion
• Free trials and free credits allow
new signups to try before they buy—
without needing to talk to a rep.
• Great user experiences and rapid
time to value become critical.
•
Individual users, personal accounts,
and open source projects stay on
self-service.
• High-quality support is available to
all because it’s unclear which
signups will go on to see dramatic
growth.
KPIs = New subscription
commitments, exit revenue
• Sales gets involved for larger self-
service accounts as well as new
signups that fit a pre-determined
profile (e.g., executive at a large
enterprise).
• Their focus is on the initial
subscription commit as well as
purchasing services that generate
more revenue in the future.
• Reps are technically versed,
empathetic, and have great follow
through to navigate legal,
procurement, and security.
KPIs = Adoption of key
features, organic expansion
• CS usually takes over to drive
customer adoption. They are initially
focused on driving adoption of key
features that create stickiness
(e.g., Slack integrations).
• Their end goal is organic usage-
based expansion within existing use
cases.
• Account managers stay with high-
potential accounts to sell new use-
cases. They ask for intros to other
teams and navigate “inorganic”
expansion revenue.
For further reading, we recommend this article
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Self-service and free offerings open the top
of the funnel
Product led growth
“Our growth team is all about retention. Even if the lead barely pays us… In the
future they will pay you for something, but we don’t know what. We have to
treat everyone the same because some of those accounts will bloom
eventually.”
–Growth Leader
“Over half of our employees are in our support organization and we offer free
support to every one of our customers… it doesn't matter if you're spending $5 or
$5 million a year, just pick up the phone and dial it… This support is something
that our customers value and that we value. We differentiate on customer
experience because it takes 24, 26, 28 months for our accounts to
really peak in spend.”
-Commercial Leader
“Over three-and-a-half years ago, one self-serve customer went from $15 a
month to $40,000 a month… I don’t think they talked to any rep when
they first closed… They were what’s known as a bluebird. You never know
how it’ll work out… Those $100, $200 a month accounts can grow like that.”
–Commercial Leader
KPIs = Signups, activation
rate, free to paid conversion
• Free trials and free credits allow
new signups to try before they buy—
without needing to talk to a rep.
• Great user experiences and rapid
time to value become critical.
•
Individual users, personal accounts,
and open source projects stay on
self-service.
• High-quality support is available to
all because it’s unclear which sign-
ups will go on to see dramatic
growth.
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Grow by mixing sales with self-service at
the right part of the customer journey
“There are so many developers signing up that we have to tier them. We tier on
two metrics: fit and usage. Fit is static—it’s based on your email domain and takes
in things like employee count, industry, all that stuff. Usage is dynamic and
changes day-to-day based on product signals. We only work with accounts that
reach a certain threshold on both fit and usage. Regardless of tier, we won’t
even offer commitments until you’re spending $25k a year or so... It is
all pay-as-you-go until then.”
–Growth Leader
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41
Sales generates new committed
subscriptions—without slowing down deals
Sales
KPIs = New subscription
commitments, exit revenue
• Sales gets involved for larger self-
service accounts as well as new
signups that fit a pre-determined
profile (e.g., executive at a large
enterprise).
• Their focus is on the initial
subscription commit as well as
purchasing services that generate
more revenue in the future.
• Reps are technically-versed,
empathetic, and have great follow-
through to navigate legal,
procurement, and security.
“The customer success team doesn't usually get involved until they're
already around $20,000 or so in annual spend… Once we identify them
as a high-potential account we’ll pass that along to sales saying, ‘I helped
this customer, it seems like they have some pretty big ideas, and it looks like they’re a
pretty decent name, what do you think?’”
–Commercial Leader
“Once you start spending $1000, $2000 a month, you’re seeing pretty
healthy potential. That's where we kick them over to our account
management. What those customers are looking for is two things: discounting and
predictability. That is, looking for a better price than what we're putting on our
website, and knowing what that’ll be in the future.”
–Commercial Leader
”It’s easy to predict who will be a good sales rep… They need to be willing to be
technically-versed, deeply empathetic, have great follow-through, and be
willing to run through walls for legal, procurement, and security. I think the
technical side is particularly important, and the more developer-related your product is
the more important it is.”
–Commercial Leader
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Sales comp usually balances commitments
with realized usage
• New committed bookings are
usually the primary KPI
• Don’t overly penalize non-
commit spending if you can
afford it
•
Include a tail of consumption so
that reps get upside if the
customer expands
Encourages sales reps to close deals quickly vs.
waiting and potentially over-selling the customer.
The tail period depends on consumption behavior
and can range from 4 months to 12+ months.
Committed bookings are ideal for cash flow
purposes, predictability, and customer lock-in.
Ultimately a dollar is a dollar and it’s best to do right
by the customer.
Committed bookings get a higher commission rate
and they get paid out in advance while flex/overage
gets paid quarterly in arrears.
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Added a consumption revenue component to sales compensation
•
Initially Snowflake compensated the field sales team based on bookings, which is when they collected
cash; however, Snowflake only recognized revenue on consumption and customers could roll-over their
credits.
•
The financial success of a company with usage-based pricing is ultimately tied to consumption, so it made
more sense to align sales incentives to the same goal.
•
Snowflake changed compensation to be split between committed bookings and recognized consumption,
which gets paid out as it’s earned based on a customer’s consumption.
• Most of the first contracts are a proof of concept and at some point the customer will spike consumption or
bring on more workloads. As such, the sales reps stay with accounts rather than handing them off.
Example: Snowflake changed sales comp
before the IPO to incentivize better behaviors
See Snowflake S-1
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Post-sales owns product adoption and
“organic” expansion
Post-sales
KPIs = Adoption of key
features, organic expansion
• CS usually takes over to drive
customer adoption. They are initially
focused on driving adoption of key
features that create stickiness
(e.g., Slack integrations).
• Their end goal is organic usage-
based expansion within existing use
cases.
• Account managers stay with high-
potential accounts to sell new use-
cases. They ask for intros to other
teams and navigate “inorganic”
expansion revenue.
“We gathered feedback from our best customers about what features are most important and
what were the leading indicators of growth. We learned that it’s things like setting up particular
integrations, whether it be with Slack because it’s a collaboration tool or AWS or PagerDuty for
alerting… We’ve defined the journey that a CSM should aspire to bring a customer
on and we would be really prescriptive in trying to engage our customers to help
them do it.”
–Commercial Leader
“Our CS team is compensated for hitting their MBO’s and they have a net retention
goal based on seeing a certain organic growth out of their customer… But they
didn’t take ownership in terms of the commercial relationship. Their soft skills are around
building relationships and they have a high level of empathy. We didn’t want them to then
come in and have a tough conversation about the commercial relationship.”
–Commercial Leader
“One issue we ran into is that there was a lack of urgency for customers to start
using the product. Even if they committed to something on paper, there was no stick if they
delayed implementation… The goal of Customer Success was to reduce the number of days to
get them to onboard. After that, it was about identifying as many sticky and new features that
they could use to achieve their expected outcomes.”
–Commercial Leader
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Requiring an account plan to keep a customer after 12 months
•
The AE has 12 months to continue to sell into the deals that they closed—finding new use cases, geographies, business
units, etc.
•
If the AE wants to keep the account after 12 months, they need an in-depth account plan and must commit to an
expansion target that gets added to their annual quota. Needless to say, this doesn’t happen often.
•
Enterprises with untapped potential get passed from the AE to expansion-focused account managers. The account
managers collaborate with the CSM and AE to develop an approved, customer-specific plan to systematically expand
high-potential accounts.
•
CSMs stay focused on adoption and renewal; however, part of their compensation is tied to net dollar retention. This
creates alignment with company-wide goals and encourages them to pull in the AE or AM when they spot a potential
upsell opportunity.
•
This approach has many benefits: (1) keeps the AEs focused on new business, (2) avoids over-compensating for organic,
usage-based growth, (3) designates a clear expansion owner for relevant accounts, (4) is process-oriented rather than
ad hoc, (5) recognizes that account expansion is a team sport.
Example: How one API company
systematically generates expansion
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Strategy &
Pricing
Finance &
Operations
GTM
Strategy
Finance & Operations
-
Is usage-based pricing the
right revenue model for us?
- Did we pick the right usage-
based value metric?
- What if customers don’t like
paying based on usage?
- How do we handle overages?
-
Is usage revenue valued
differently than subscription?
- How do we handle billing?
- How do we handle financial
planning with volatile revenue?
- How do we handle cash
management and rev rec?
- What should be the role of self-
service, sales and customer
success?
- How do we navigate sales
comp?
- How do we grow adoption
and usage?
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Finance & Operations: Executive Summary
1. Usage-based companies typically focus on five financial metrics. These include
revenue, remaining performance obligations (RPOs), billings, dollar-based net expansion
rate, and active customer accounts. Each has its own role in demonstrating the underlying
financial health of the model.
2. Usage revenue is valued by investors if it is predictable, growing, and high
margin. It is a known quantity particularly in infrastructure software given the success of
companies like Twilio and AWS. Demonstrating predictability isn’t easy, and forecasting
consumption revenue becomes a data science exercise as companies prepare to go
public.
3. Handling usage-based billing is a consistent pain point. Billing becomes an
important part of the customer experience and accurate billing is critical for generating
trust with the customers. Most usage-based companies have built their own in-house billing
systems and have dedicated product and engineering resources who focus just on billing.
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48
Public companies typically focus on 5
financial metrics
Metric
Description
Revenue
- Consumption revenue gets recognized as the consumption occurs.
- Contracted subscription revenue gets recognized consistently over the contracted period.
Remaining
performance
obligations (RPO)
- Contracted future revenue that has not been recognized yet.
- Particularly important in a consumption-driven model where usage can fluctuate.
Billings
-
The total amount billed or invoiced, which represents the cash to be collected. Billings usually
happen in advance, but may happen monthly or quarterly in arrears.
- While this is important in the early days, highly capitalized businesses focus less on billings
and more on revenue and RPO.
Dollar-based net
expansion
- Dollar-based retention including the benefits of upsells.
- Calculated based either on annual recurring revenue (Datadog) or GAAP revenue (Twilio).
Active customer
accounts
- Number of accounts with at least [$X] in revenue in the last month of the period.
- Since customers can stop using the product without directly churning, active accounts are a
better representation of the size of the customer base.
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Usage revenue is valued by investors if it is
predictable, growing, and high margin
“The market doesn’t view a
consumption model as an issue.
It’s a known quantity in infrastructure
software because of Twilio and AWS.
Predictability and margin will be
bigger hang-ups… For investors,
they look at the net retention dollars
and see that clearly customers are
getting value out of the product or
they won’t be using it.”
Q3 2020 Investor Presentation
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If revenue is consumption-based, you have
to invest heavily in predicting consumption
“Forecasting isn’t as visible as in
a pure SaaS model. There’s more
variance in revenue each quarter
and it requires multiple years to
model… A few years ago we might
be off by 6-8%. Now it’s down to 3-
4%... The finance team is mostly data
science. They’re forecasting at an
individual customer view and a
cohort view factoring in ramp.”
FP&A and customers both want the same thing:
predictability. Financial planning is intimately tied to
product and customer success.
IPO-ready FP&A teams treat forecasting as a data
science exercise. Teams are digging into valuable
revenue signals on the cohort and customer level.
Accurate metering, billing, and financial
planning is necessary to IPO. These can be major
operational challenges for scaling usage-based
businesses.
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51
Handling usage-based billing is a
consistent pain point
“I still haven’t seen a great company on the finance ops side of things, to be honest.
Consumption-based billing is really tough. I’ve now been at three companies where
billing is usually one of the biggest negatives in the model around the customer
experience because it’s really hard to explain the bill to a customer. And usually if you dig
in hard enough, it’s not 100% accurate… And it’s not that you’re ripping them off, they’re
usually getting a lot of free things… My advice is to invest in a robust billing system. Don’t
try to hack something together with manual invoices or you’ll lose trust very fast.”
–Commercial Leader
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Advice for handling billing roadblocks
There are no silver
bullets
- ”We were previously using a utility company’s billing software…. It was meant for an energy
company. We hacked it together and, frankly, it was terrible.” –Commercial Leader
- “We’ve used homegrown billing solutions… We’ve used legacy enterprise solutions. I spent
a ton of time doing this. They all suck.” –Growth Leader
Billing is part of
your customer
experience
-
“I’ve been at three companies where billing is one of the biggest negatives in the customer
experience. There’s so many complexities around it. At the end of the day, customers need
to be able to trust their bill.” –Commercial Leader
-
“If you miss on the billing experience you can botch the account… Folks on both sides
need to see the same thing” –Commercial Leader
Dedicate
engineering
resources
-
“We had an entire engineering team dedicated to running and updating our billing
code. It’s a massive lift.” –Commercial Leader
-
“You need a product billing team. Designer, PM, Engineers—the whole thing.”
–Commercial Leader
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Wrap Up
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54
3 takeaways for CEOs, CROs, and CFOs
CEO
CRO
CFO
1. Ensure a usage model is right
for your product. Each use
should generate a positive
business outcome for customers.
You are sharing in the customer’s
success.
2. Take the time to pick the
right usage metric. It should
grow consistently across your
customers, help you communicate
your product’s value, and be
(somewhat) predictable.
3. Be prepared to build. From
billing to sales comp, many
companies have had to build
custom solutions to the
operational challenges around
their specific usage model.
1. Enterprises may push back
on usage pricing, but there
are ways around it.
Companies have found creative
ways to offer predictability for the
enterprise without hurting growth.
2. Pay reps beyond the first
commit. Reps need to be closing
deals quickly and then letting
usage grow in time. Include a tail
based on actual usage after
ramp.
3. You can’t predict your
largest accounts. You’re
making a bunch of bets and
some will pay off spectacularly.
Invest in a great experience for all
sign-ups regardless of their initial
spend.
1. Brush up on rev rec. Unlike
subscriptions, usage-based
revenue is recognized as it
occurs. You may need to
maintain multiple rev rec policies
to adapt to different pricing
models.
2. Finance becomes tied with
product. Billing is part of the
customer experience. Customers
need to trust their bill, gain access
to usage in real time, and see
consistent amounts across
systems.
3. Forecasting requires data
science. Leading practitioners
predict usage at both a customer
and cohort-level in order to gain
conviction on future revenue.
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55
About the authors
SANJIV KALEVAR
Partner
KYLE POYAR
VP, Growth
Kyle helps OpenView’s portfolio companies
accelerate revenue growth and become market
leaders. He works closely with executive and
founding teams on a broad range of topics including
pricing & packaging, product led growth, GTM
strategy, and customer expansion. He joined
OpenView in 2016 from Simon-Kucher.
Sanjiv focuses on venture and growth investments in
B2B software and is particularly interested in large
legacy industries that have not or are undergoing
digital transformation. Sanjiv joined OpenView as a
Partner in November 2020. Prior to OpenView,
Sanjiv was a Principal at Battery Ventures where he
led investments in ServiceTitan, AuditBoard, MX,
VNDLY, Vidyard, InVision, RiskIQ, and more.
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56
•
Jonathan Hill, Commercial Leader at Linode
• Martin Gontovnikas, Growth Leader at Auth0
• Omar Nawaz, Product Leader at Chargebee
• Philip Johnson, Growth Leader at Cloudflare
• Ray Colletti, Commercial Leader at CodeCov and Datadog
• Sam Lee, Commercial Leader at Snowflake
• Wes Schifone, Commercial Leader at PagerDuty and Datadog
• Branden Hurley, Investment Banker at Goldman Sachs
• Ben Martz, Commercial Leader at Skytap and Zipwhip
• Bobby Brown, Commercial Leader at Twilio and MessageBird
• David Caughman, Commercial Leader at Stripe
• David Dorman, Growth Leader at Grafana Labs and Digital Ocean
• Gregg Miller, Marketing Leader at Zapier
•
Ismail Madni, Commercial Leader at Okta and InVision
•
Javier Molina, Commercial Leader at MongoDB
A special thank you to those who helped
shape this playbook
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57
Our mission is to improve people’s
working lives.
We do this by:
•
Investing in the best software
companies
• Helping our portfolio companies
accelerate growth and become
market leaders
Learn more at ov.vc
THE EXPANSION STAGE SOFTWARE VC
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58
Thank You!
Kyle Poyar and Sanjiv Kalevar
Kyle@ov.vc