August 29, 2023
License-based subscription pricing has dominated B2B SaaS for decades, and for good reason. It’s easy to forecast and customers understand how it works. But a pure license-based subscription model is not the only option. A hybrid license and usage-based pricing model can help you scale your revenue as your customers grow with shorter acquisition cycles and frictionless expansion.
SaaS customers understand license-based subscription contracts and know how to justify the expense. They can easily quantify the amount of money they’ll need to spend with your company over the course of a contract.
License-based subscriptions also have a low cost of entry for smaller companies to get started. Companies of all sizes can access your products quickly and with fair pricing through simple, easy to manage monthly and annual subscription contracts. For sales reps, subscription pricing can scale quickly and gives them the flexibility to pull pricing levers, such as offering lowering prices per license at larger deal sizes.
License-based pricing models have their limitations. These subscriptions work best when customers can estimate the number of licenses they’ll need for the entire term upfront at the beginning of their contract. But when customers grow and need more licenses, they reach a barrier to using your product and can’t increase their user headcount without speaking to an account executive to renegotiate their contract and then advocate internally to get the updated contract signed.
With recent layoffs, it’s common to see headcount reductions. When this happens in the middle of a contract, customers are still required to pay for the same number of licenses their sales rep encouraged them to buy upfront.
Locking customers into rigid contracts, when they need flexibility from their vendors the most, can have consequences. They may start talking to other vendors at renewal, even if they’re happy with your product’s performance.
According to Bain & Company, companies with usage-based pricing achieve a 10 percentage point higher net revenue retention than pure subscription-based vendors. This is one of the reasons why usage-based pricing is growing in popularity. In fact, some of the most highly valued software companies, like Datadog and Snowflake, built their businesses on consumption-based pricing.
While this is a great rationale to have a usage-based pricing component, you may not want a pure usage-based model. Usage-based pricing, on its own, can hamper revenue predictability since your customers’ usage may vary dramatically month-to-month.
Further, if you have a one-off product quality issue (e.g. unexpected downtime), customers without any contractually committed revenue can cease using your product overnight and never pay you another dime - you never have a chance to save them. By adding usage on top of your subscription component, customers are incentivized to work with you to troubleshoot issues that arise during the contract term due to their contractual payment obligation.
The solution is to create a hybrid model by blending your existing license-based subscription pricing model with usage-based pricing. You’ll be in good company. OpenView Partners’ latest report, The State of Usage Based Pricing, shows that 3 out of 5 SaaS companies use some form of usage-based pricing today. Almost half of companies surveyed are taking a hybrid approach by offering components of both models.
Adding a usage-based pricing component can lead to happier customers because they’re not being charged for inactive users. It allows more users to access your product whenever they need it, instantly increasing flexibility, customer happiness, and helping seed new use cases by removing barriers to entry when customers want to experiment with your features.
Finally, usage-based pricing encourages and promotes a land and expand strategy - customers go live faster and revenue expands without sales intervention. That’s why some of the most popular license-based SaaS companies make it easy for customers to manage usage-based portions of their subscription agreements on their own, like when adding and removing users.
Slack’s Fair Billing Policy is a great example of how to give customers control when users join and leave companies over the course of their Slack subscription. Slack customers can add new users partway through a billing period and only pay for the time used. If a user becomes inactive, customers are credited back the prorated amount at the end of the billing period.
An ideal hybrid usage and license-based pricing model generally includes these components:
It allows your customers to provision new users and deprovision inactive users, whenever they'd like to in your platform, without having to talk to a sales rep. Best in class companies set up alerts that notify their sales reps to reach out with volume-based discounts and other offers when it becomes clear that customers need more licenses or are accessing new features.
Setting up the ideal hybrid license-based subscription and usage-based pricing model requires a strong foundation. Otherwise, you’ll spend months, or longer, consolidating disparate revenue recognition tools, which can be a hassle not to mention confusing, for customers who are bogged down with disjointed contracts.
MonetizeNow can help you balance revenue predictability, forecast accurately, and maximize your revenue with blended license and usage-based revenue recognition.
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