Usage-based pricing delivers 2x growth in public SaaS -- and the gap is widening. No other factor impacts growth in a more meaningful way. Public SaaS companies with predominantly usage-based pricing are growing at 25% vs. 13% growth for subscription SaaS in Q2 2024. This analysis was based on a company-by-company review of pricing pages and financial reports. Hybrid pricing has become common, so judgment calls were required. Not all companies fall neatly into one pricing model or the other. Public companies identified as predominately usage-based were Amplitude, Cloudflare, Datadog, Dynatrace, Elastic, Fastly, JFrog, Lightspeed Commerce, MongoDB, Semrush, Shopify, Snowflake, Toast, and Twilio. I would welcome thoughts on companies to add or drop from this list. Why are UBP companies growing faster than subscription companies, and is it sustainable? One explanation is that UBP companies are grouped into higher-growth segments like cyber security or analytics. This is not the case; however, the UBP companies listed above are evenly distributed across all segments. The more likely explanation comes from the pricing model itself, which has historically driven high net revenue retention (NRR). UBP makes expansion revenue frictionless, thus driving higher NRR and higher growth (especially in a period of challenging new sales as we have now). Unfortunately, only 67% of SaaS companies report their NRR*, and there are dozens of different approaches. The data that is available shows UBP companies outperformed their subscription peers with a 111% NRR in Q2 2024 vs 108%. That may not seem like a big difference, but compounding that advantage over time significantly impacts growth. How sustainable is the higher growth of UBP companies? As shown in the chart, the longitudinal consistency in the data suggests it’s an enduring phenomenon. Over 14 quarters spanning both high and slow growth periods, UBP companies have grown 17 points faster than their subscription peers: 44% to 27%. And at no time during that period did UBP companies grow less than 50% faster than subscription companies. Furthermore, these data are based on median growth rates and are therefore not subject to distortion by one or two outliers. The data is compelling; however, identifying UBP as a sustainable growth driver is not necessarily an actionable observation. Many companies do not lend themselves to UBP, at least not for their initial product. Use this framework to see if UBP fits your products: https://lnkd.in/gWXgkKr4 Given the evidence above, companies should explore every opportunity to introduce some level of UBP into their organization. The public data show that the growth benefits are significant and enduring.
P. Cory Hogan
6mo
Thanks Todd Gardner, great data! UBP was a big part of our success in scaling Lob to $100M+ and also Qualtrics before our fat IPO...But it wasn't a binary move. In both cases, it took a lot of external and internal calibration and iterations before we had the UBP/Sub blends dialed in and a model that was both predictable/secure for us/board and seamless/flexible for our customers. Too many SaaS cos treat pricing like a sacred cow to be touched annually at best (ie 5% uplift) and fail to test and experiment with this valuable lever. Any findings on productive blends/compositions/ratios?
James Thompson
6mo
Insightful posts Todd Gardner. Makes sense that UBP companies grow faster because it lends well to expansion revenue leading to higher NRR. I'd also add UBP can be more inviting to new customers due to lower barrier to entry.
Jonathan Tice
6mo
As I’m seeing it, UBP was heavily criticized for its rapid revenue erosion when things were soft because of the lack of friction to reduce usage. This is simply how the model works. That revenue churn was not necessarily logo churn and when things picked up, there was no friction to allow it (EG no contracts to be signed etc) The revenue churn that we saw with subscription based pricing was, for the most part, logo churn. So as things return, there is the cost to reacquire the customer. This is resulting in often no decision and going without or new competitive situations. Regardless, the friction of reacquiring creates a business cost, time lag and potential price deflation where UBP kept the unit economics.
Hillel Zidel
6mo
Thanks Todd Gardner. Would be interesting to extend this to look at the ARR multiple delta and growth adjusted ARR multiple delta between usage and subscription companies. You would expect the subscription companies to have higher multiples as subscription models in theory give you greater revenue visibility.
Kyle Poyar
6mo
There was a big concern that UBP lost it's luster last year as growth rates fell faster than at other companies. It's great to see growth *rebounding* faster, too
Robert Scott
6mo
A possible explanation is that cause and effect are in fact reversed. If a company is experience high usage growth, rapid user adoption etc it is more likely to select a usage based pricing model to try and monetize as much as possible of this. Fast growth is causing the selection of usage based pricing, the pricing model does not explain the growth.
Jonathan Tom
6mo
With GenAI integration into SaaS GTM processes, do you see the trend of UBD adoption accelerating, staying the same, or slowing?
Should HashiCorp be on the list? My guess is that UBP is correlated with agility in other organizational factors that leads to better performance overall - product, engineering, customer experience, so overall agree with your main point - some type of UBP adoption ought to be considered. If it can't be done, it's a good reflection for the org to fix whatever the blockers are.
David Spitz
6mo
Great work Todd Gardner ! I love this question — UBP is clearly going to suck up more and more of the landscape. Just look at Benioff’s recent comments which Kyle Poyar posted on, saying that this is where the grand-daddy of subscriptions is moving to. As for your findings, like so much of what we try to look at — the data is too imperfect and sparse to be too confident about the conclusions. I’m personally not convinced that UBP companies grow faster. Though I’m cheering for you getting closer to an answer. I still love having this analysis though! My view is that given a choice and given fairness, visibility into your bill and rough equivalence in pricing (if you can actually understand it!) — customers will always choose consumption-based models. Especially as AI agents become more pervasive (inevitable!).
Was really happy reading this post Todd Gardner because as you know I have made a very large bet* that most B2B software companies will adopt usage models in the future and this provides compelling financial data to motivate that adoption. There definitely seems to be clustering in terms of the early adopters: cloud infrastructure, development tooling, messaging, API-first offerings (which you see a lot of in fraud, identity and compliance industries) and AI. This lines up with our customer base. I think the chasm between these early adopters and the mainstream is about to be crossed and the post from Kyle Poyar about Salesforce is encouraging - it might signpost subscription businesses needing to adopt usage based pricing rather than simply wanting to for the financial benefits. *Not advocating gambling, simply saying I quit my nice AWS job to set up a company, with Griffin Parry, called m3ter which enables this transformation