How to Scale with Usage-Based Pricing with Kyle Poyar from OpenView

Partner
Proprietary and Confidential ©2022 OpenView Advisors, LLC. All rights reserved.

Data Center Cloud Connected Cloud
CIO Executive End User
Large upfront purchase Recurring annual purchase Start for free, Pay-as-you-go
Sales-led growth Marketing-led growth Product-led growth

Seat pricing doesn’t scale with
the value of automation.
Monetization can no longer be tied
only to human users of a product.
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.

27% 30%
34%
45% 45%
56%
11%
23%
Expect to test
UBP in 2023
or later
Will test UBP
in next 6-12
months
Source: OpenView 2021 Financial & Operating Benchmarks Survey *P=Projected

At New Relic, we believe the reason that a
consumption model is the way forward for
software is because it changes the fundamental
nature of the relationship between the vendor
and the customer; the vendor understands that
if they don’t build great products that customers
enjoy using, they won’t get paid.”

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 ubiquitous and
seeding new use cases.
Expands TAM by making the
product more accessible
while uncapping the
potential upside.

YoY revenue growth (Forecast) 29.9% 21.7%
Net dollar retention 120% 110%
Revenue scale ($, in millions) $578 $434
EV/revenue multiple 21.6x 14.4x
*Summary financials based on public comparables. All values are medians of the comparable sets.
Usage-based businesses
see continued growth at
scale driven by best-in-
class net retention.
They do this at even
greater revenue scale
with similar gross margin
and rule of 40 profiles to
their peers.
As a result, usage-based
businesses are valued
at a substantial
premium (21.6x vs 14.4x
revenue multiple).

Going from seat-based subscriptions to usage-based pricing
is like making the leap from on-prem to SaaS.

Charge based on seats.
Charge more for premium features.
Stop customers from exceeding their subscription
Pay reps on first year bookings.
Hand customer off to CSMs.
Force customers to commit.

SUBSCRIPTION SAAS USAGE-BASED PRICING
Charge based on seats. Pick the right usage metric.
Charge more for premium features. Don’t gate your features behind a paywall.
Stop customers from exceeding their subscription Give large customers peace of mind.
Pay reps on first year bookings. Pay reps beyond the first commit.
Hand customer off to CSMs. Every team plays a role in customer success.
Force customers to commit. Invest in becoming predictable.

SMS messages Compute resources
Data volume
Marketing contacts
# of hosts API requests
Tasks automated
Zaps
Aligns with value
Flexible for customers
Scalable over time
Predictable in aggregate
Feasible to meter
This company is a former portfolio company of OpenView.
For additional information including OpenView’s full list of portfolio companies, please visit ov.vc

Pro features gated
behind subscriptions

Powerful products with
no barriers to entry

Confirming customer
use cases.
Calculators to estimate
usage and ramp up.
Tying usage to ROI
and outcomes.

Confirming customer
use cases.
usage and ramp up.
Tying usage to ROI
and outcomes.
“Gift card” model where
the customer can flexibly
draw down their usage.
Roll over unused credits
in exchange for a
larger commit.

Confirming customer
use cases.
usage and ramp up.
Tying usage to ROI
and outcomes.
“Gift card” model where
the customer can flexibly
draw down their usage.
Roll over unused credits
in exchange for a
larger commit.
Tooling to monitor
usage trends.
Alerting based on
forecasted usage.
Expert help to
right-size usage.

Replace it with “flex” or “on demand” usage.
Consider a grace period before invoicing for it.

Slows down deals from closing.
Leads customers to be over-sold,
driving churn or down-sell.
Increases uncertainty since prospects
aren’t seeing value or using the
product yet.
Adds predictability with larger
committed contracts.
Helps you collect cash upfront.

INITIALLY COMP-ED SALES BASED ON
BOOKINGS; however, Snowflake
recognized revenue on consumption and
customers could roll-over credits.
CHANGED SALES COMP AHEAD OF
THE IPO to be split between committed
bookings and consumption, which gets
paid out as it’s earned.
Most of the first contracts are a proof
of concept and at some point the
customer will spike consumption.
SALES REPS STAY WITH ACCOUNTS
RATHER THAN HANDING THEM OFF.
NDR after IPO
Source: Snowflake S-1 filing and subsequent investor presentations
158%
168% 168% 169%
173%
178%
Q3
FY21
Q4
FY21
Q1
FY22
Q2
FY22
Q3
FY22
Q4
FY22

Treat product investments as
revenue-generating expenses.
Spend more on PLG and
user experience.
Connect marketing efforts
with the product and
user community.
Educate customers on use cases
and new ways of finding value.
Stop treating “committed
bookings” as the holy grail;
compensate accordingly.
Start with a trial or proof
of concept.
Be proactive, looking for leading
indicators of future success.
Drive adoption of sticky features.
Reinvent the traditional SaaS
metrics playbook.
Help customers predict
their usage.
Keep pricing simple even if that
means leaving some money on
the table.

We report revenue on what people are actually
consuming during the quarter. We have tons and
tons of customers that we have zero history with
that we somehow have to project exactly what
they’re going to do and how they’re going to
grow… We’d rather come from a conservative
posture and be able to walk things up.”
– Snowflake CEO Frank Slootman after their Q4 FY22 earnings release.
The stock fell 20%+ after the announcement of lower than expected
FY23 revenue.

You no longer have to build all
of this in-house. There are
emerging vendors like m3ter,
Metronome, Orb, Octane,
Amberflo, and more.
Financial planning is intimately
tied to product and customer
success. Finance leaders need to
stay close with revenue teams.
The best finance teams dig into
valuable usage and revenue
signals on the cohort and
customer level.

01 Pick the right usage metric.
02
Don’t gate your features behind a paywall.
Ensure customers have what they need to
be successful.
03
Procurement teams crave predictability.
Give large customers peace of mind
without eroding your usage model.
PRO-TIP: BAN THE WORD OVERAGE.
Usage-based pricing works best as land-and-
expand. Pay reps beyond the first commit to
align their actions with your business goals.
You share in your customer’s success.
That means every team must play a role
in customer adoption.
If revenue is consumption-based, invest
heavily in predicting consumption.

Founded in 2006, OpenView is a venture capital firm investing globally in business software
companies. With a mission to improve people’s working lives, OpenView’s focused
investment approach across sector and stage enables the firm to identify and partner with
business software companies that it deems to be category leading. The firm’s focus extends
to operational excellence through its dedicated expansion team working with portfolio
companies on go-to-market, sales and marketing, product-led growth, talent, and
corporate development.
The firm is based in Boston and has approximately $2 billion in total capital under
management. For more information about OpenView and its portfolio companies, please
visit ov.vc
This document is for informational and illustrative purposes only and has been prepared by
OpenView Advisors, LLC. This information contained in this document shall not constitute an
offer, solicitation, or recommendation to sell or offer to purchase any securities, investment
products, financial instruments or investment advisory services, nor will it form the basis or a
part of any such contract. Any such offer will only be made pursuant to formal investment
documents in compliance with applicable state and federal laws and regulations.
Any information and research presented in this document is based on data obtained from
sources believed to reliable, but no representations, guarantees or warranties are made
with regard to the accuracy, completeness, or suitability of the information. Additional
citations are available upon request.

in/kyle-poyar
@poyark
https://kylepoyar.substack.com/
kyle@ov.vc

How to Scale with Usage-Based Pricing with Kyle Poyar from OpenView

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

More from OpenView

More from OpenView (20)

How to Scale with Usage-Based Pricing with Kyle Poyar from OpenView