Why is usage-based pricing on the rise?

Let's dive into the trend of 2021

👋 Hi, I’m Kyle and welcome to my newsletter, Growth Unhinged. Every other week I take a closer look at what drives a SaaS company’s growth. Expect deep dive takes on SaaS pricing, product-led growth, public company benchmarks, and much more.

Usage-based pricing is, frankly, trendy.

45% of SaaS companies now have some form of usage-based pricing (UBP), up from 34% last year, according to new data from OpenView’s State of Usage-Based Pricing Report (spoiler alert: I wrote it along with my colleague Sanjiv Kalevar).

The survey, it should be noted, used an expansive definition of usage-based pricing counting both companies with a largely usage-based or pay-as-you-go model along with companies that sell usage-based subscriptions.

Newcomers to usage-based pricing include startups like Cypress.io, Pulumi, and Algolia (which called it the ‘most customer-friendly pricing’ in the market); public companies like New Relic; and long-time incumbents like Autodesk.

Creative usage models can even be found in unexpected places like at design giant Canva, which allows folks to buy on a credits-basis rather than just a traditional subscription.

Among the UBP holdouts, 20% say they’ll launch or test usage-based pricing in 2022. Another 41% say that they expect to potentially test usage-based pricing in the future.

That begs the question: why is usage-based pricing so trendy? Take a look at my analysis and find a link to the Usage-Based Pricing report here.

The TL;DR:

1. We’re in the end user era of software buying

2. The seats are empty

3. Usage-based companies have better financial performance than their peers

4. Investors are not only getting more comfortable with usage models, they now prefer them

5. Usage-based pricing sends an incredible message to customers that’s hard to replicate

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Here’s what else I’m thinking about this week:

• HashiCorp released their S-1 filing revealing $259M in TTM revenue, 124% net dollar retention, and a whopping 100 million open source downloads. Not too shabby. Here’s what I’m digging: the company is betting on their cloud offering and boasting that it “enables [them] to offer consumption-based pricing.”

• Zoom is testing ads for free users. Time to upgrade to a paid version, huh Sec. Clinton?

• New Relic’s stock surged on news that their transformation is working. Among their many changes was a pivot towards usage-based pricing.

• We’re seeing a new category of SaaS around enabling PLG adoption. On that note, congrats to the folks at Reprise on your fresh $62M Series B and the launch of a free Starter plan!

• Anna Heim at TechCrunch interviewed me about the rise of usage-based pricing (caution: it’s paywalled).