Dive Brief:
- Software-as-a-service vendors will increase their reliance on usage-based pricing models to retain enterprise customers and boost revenue growth, according to a recent ICONIQ Growth report. The investment firm analyzed more than decade’s worth of quarterly operating and financial data from 96 SaaS providers, including Atlassian, DocuSign, Cloudflare, Shopify and Snowflake.
- Charging customers based on their monthly consumption of a software product rather than through an annual subscription fee or upfront purchase provides greater opportunity for revenue gains but exposes vendors to higher levels of volatility, Christine Edmonds, general partner and head of analytics at ICONIQ Growth, said via email.
- For customers, there are pros and cons to usage-based pricing. “It offers more flexibility and scalability, which can be beneficial as companies look to efficiently drive growth,” Edmonds said. “However, a UBP model can also be more complex and less predictable.”
Dive Insight:
Economic anxieties jolted SaaS companies over the last year, as persistent inflation and rising interest rates led customers to rationalize and optimize IT spending.
Topline growth fell across the board for SaaS vendors, many of which had gotten used to seeing revenues double year over year. That level of business expansion wasn’t sustainable, according to the report.
“The last few years of unprecedented growth and favorable tailwinds have been anomalous for SaaS businesses,” Edmonds said. “The shift in the macro environment has made 2023 a challenging one for SaaS businesses and made it difficult to maintain the topline performance that became expected of companies over the past few years.”
Salesforce saw year-over-year revenue growth decline by half, to 11% during the three-month period ending July 31, compared to 22% in the same period last year. The CRM giant anticipates a revenue growth boost from an August price hike and adoption of its expanding suite of generative AI features.
Rather than fight the optimization trend, the largest cloud providers — AWS, Microsoft and Google Cloud — pledged to help customers control costs, banking on increased usage over time. SaaS companies have followed suit.
Like Salesforce, data cloud provider Snowflake saw revenue growth cut by half during the second quarter, from 83% in 2022 to 37% this year. Earlier this week, the company countered claims that Instacart had reduced its Snowflake usage, following a preliminary S-1 filing by the grocery delivery service before the Securities and Exchange Commission.
“Snowflake has partnered closely with Instacart to scale up to meet the company’s massive demand growth, and then to optimize for efficiency,” the company said, adding that savings through optimization expanded Instacart’s use cases and workloads on Snowflake.
“Optimizations are undertaken on a workload-by-workload basis, and have been extremely successful,” the statement said.
UBP represents another optimization lever enterprises can pull on when necessary.
“It's something that customers want and are asking for because they got tired of paying for annual subscriptions that they didn't utilize,” Andy Sealock, senior partner, advisory and transformation at consulting firm West Monroe, told CFO Dive sister publication CIO Dive.
That trend is likely to continue, according to the ICONIQ Growth report.
“We’re predicting we’ll continue to see a rise in UBP popularity as SaaS products are focusing on driving efficiency for organizations, making it beneficial for them to be priced based on value, rather than per seat,” Edmonds said.
The shift to consumption-based billing has the additional impact of tightening the alignment between vendor and customer business outcomes, Sealock said. Periodic macro fluctuations are reflected in both parties’ bottom lines.
“It’s an interesting value proposition,” said Sealock. “Do you want to be a vendor and just charge me as much as the market will bear, or do you want to be a partner and tie your business outcomes to my business outcomes?”
