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Success stories with usage-based pricing
The stories of how and why AWS, Stripe, Twilio, Clearbit, Algolia and others went about shifting to usage based pricing.
OpenView reported that seven out of nine companies that went IPO with the best net dollar retention had a usage-based model. Nowadays, not only infrastructure companies but also API-based products and application software like Hubspot and Slack have adopted usage-based pricing. This model is particularly suitable for product-led growth companies as it focuses on delivering value to customers through its products, creating a sustainable revenue model.
In this article , we take a look at several successful companies that have implemented the consumption-based pricing model and how it happened.
Amazon Web Services (AWS)
AWS (Amazon Web Services) is a cloud computing platform that provides a variety of services such as storage, computing power, and databases. Previously, AWS used a traditional pricing model where customers paid upfront for a certain amount of computing power.
In 2006, AWS introduced usage-based pricing. Now, customers could pay only for the amount of computing resources they used and could scale up or down as needed. This made it more accessible and affordable for customers.
When it comes to pricing, Amazon has a Free Tier, which enables businesses to use a variety of services with certain restrictions for the first year. It also offers an Always Free tier with limited services. Although all Amazon services are priced on demand, discounts are available in several cases such as reserving services for 1 or 3 years, bidding on Amazon's Spot Instance market for spare computing capacity, or making a commitment to purchase a certain quantity of Amazon resources for the entire organization.
UBP helped AWS significantly increase its market share and grow its customer base. It has made it easier for small businesses and startups to access AWS's services, which were previously out of reach due to high upfront costs. AWS has been able to reach traditionally cost-conscious SMB and middle-market with >1M customers to date. The flexibility of UBP also allows larger enterprises to better manage their computing resources and control costs.
Overall, AWS's transition to usage-based pricing was a game-changer in the cloud computing industry and helped establish AWS as a market leader.
It is a data warehousing platform that operates on cloud computing and provides storage, analysis, and data processing solutions.
Before transitioning to usage-based pricing, Snowflake had a traditional pricing model forcing customers to estimate their storage needs in advance and pay upfront for a fixed amount of storage.
In 2018, Snowflake introduced usage-based pricing which is based on two consumption metrics: compute usage and data storage. The cost of computing is determined by the number of credits required to execute queries or perform a service. And the pricing rate for credits varies depending on the edition used: standard, enterprise, or business-critical. Likewise, the charge for storage is calculated based on the amount of data stored per month in bytes, along with the cost of transferring data between regions. The total compressed file size is utilized to calculate the storage bill for a given account.
It allowed them to differentiate itself from competitors and appeal to a wider range of customers, including smaller businesses and those with fluctuating data needs. By eliminating the need for upfront commitments and allowing customers to pay for only what they use, Snowflake was able to reduce barriers to adoption and increase customer satisfaction.
Also, as customers used more of the Snowflake platform, they would naturally pay more, creating a direct relationship between usage and revenue. This allowed Snowflake to capture more of the value it created for customers, leading to increased revenue and profitability.
A search-as-a-service platform that enables businesses to create fast, relevant, and personalized user search and discovery experiences. Algolia provides a suite of developer tools, including search APIs, search UI libraries, and analytics, that allow businesses to implement highly customizable search features on their websites, mobile apps, and other digital platforms.
Before transitioning to a usage-based pricing model, Algolia had a traditional pricing model based on the number of records indexed and the number of queries performed. This model was complex and often created friction with customers who found it difficult to predict their monthly costs.
With the UBP model, Algolia simplified its pricing by charging customers based on their usage of search features, such as indexing, query processing, and user analytics. This model allowed customers to pay only for what they use, eliminating the unpredictability and complexity of the previous pricing model.
UBP also helped Algolia grow and succeed by aligning its revenue with customer value. As customers used more search features and generated more value from the platform, Algolia's revenue increased accordingly. This incentivized Algolia to focus on delivering high-quality search experiences that drive customer success, leading to higher customer retention and revenue growth.
Algolia successfully transitioned to a usage-based pricing model by ensuring the following steps:
They realized that pursuing growth without considering long-term implications could lead to poor decision-making. They shifted away from a sales-led growth model and embraced a product-led growth approach.
The transition to the new pricing model took almost a year, during which they made significant changes such as modifying the service order, billing system, and pricing page, as well as training the support and sales teams. This investment of time was worthwhile.
Nudged everyone to foster a PLG (product-led growth) mindset and adjust their approach to work.
Datadog is a cloud-based monitoring and analytics platform that provides businesses with real-time insights into their IT infrastructure and applications. They help customers monitor server and application performance, logs, and metrics, as well as provide infrastructure-as-code and security solutions.
Before transitioning to a usage-based pricing model, Datadog had a tiered pricing model based on the number of hosts or servers being monitored. It had limited flexibility and made it difficult for customers to adjust to changing needs.
Datadog's made the transition to a usage-based pricing model so they can increase the value they delivered to customers while also increasing their revenue. Here is an interesting fact: Datadog’s customers who spend $100k+ represent 72% of revenue, but only 6.7% of customers.
Further, by simplifying its pricing and offering more flexible payment options, Datadog was able to appeal to a wider range of customers.
Azure is a cloud computing platform offered by Microsoft. Previously, it had adopted a traditional pricing model based on a combination of upfront commitments and pay-as-you-go pricing. However, in 2012, Azure began offering a usage-based pricing model, similar to AWS and Google Cloud, where customers only pay for the resources they use.
Azure's services such as Azure Virtual Machines, Azure Backup, and Azure Logic Apps have shown remarkable growth due to their consumption-based pricing model. For Azure Virtual Machines, customers are charged for the time that the VM instance is in use, with the pay-as-you-go model being ideal for unpredictable workloads. Azure also offers reserved instances, where customers pay upfront for a fixed period of VM run time, and spot VMs, which provide deep discounts but customers lack control over when the VM runs. Their Azure Logic Apps uses a graduated tier pricing model, where the cost per unit decreases with increased consumption.
UBP allowed Azure to become a more customer-focused and agile company, and better compete with other cloud providers who were already offering usage-based pricing. Secondly, it enabled Azure to attract more customers who were looking for a more flexible and scalable pricing model. Further, it allowed customers to try Azure's services without having to make a large upfront commitment, which made it easier for smaller businesses to adopt Azure.
Stripe is a payment infrastructure designed for businesses to accept payments and send payouts with ease. Their previous flat-rate pricing model was based on the transaction volume. However, in 2019, they introduced a new pricing model which allows their users to only pay for the services they use, based on the number of API requests made by their customers.The value proposition for customers lies in the per-transaction pricing, which remains constant irrespective of the transaction size, card type, or card-issuing network. Every customer is charged a fixed rate for each successful card charge, simplifying the payment process.
A consumption-based pricing strategy set them apart from the competition and helped them to attract more users, particularly startups and small businesses. It also helped them better monetize their platform by charging for additional services beyond payment processing.
It provides web service APIs that enable users to engage in communication functions such as making and receiving phone calls, and sending and receiving text messages.
Twilio offered a more traditional pricing model based on per-user, per-month pricing, with different tiers for different levels of usage. Today, customers have the flexibility to choose from various pricing options, such as pay-as-you-go, volume discounts, committed use discounts, or a combination of these. Twilio's pricing model for its SMS product is based on a per-SMS basis, which effectively captures the value delivered to the customers.
Customers can experiment with Twilio's services without making a long-term commitment, and could easily scale their usage up or down depending on their needs. It improved the adoption and usage of Twilio's services, leading to significant revenue growth for the company.
Clearbit is an API-driven solution that enriches real-time data for businesses, providing enhanced market intelligence into prospects. The product integrates with various tools, such as Salesforce, G Suite, Outlook, HubSpot, Marketo, Zapier, Segment, and Tray.
In 2018, Clearbit shifted to a usage-based pricing model from its traditional subscription-based pricing model. Instead of having to pay a fixed fee for access to the company's tools, customers can now only pay for what they use. The pricing model is based on the number of API requests made. This move enabled Clearbit to capture revenue from larger enterprise customers who were using the company's tools at scale and improve its customer retention rates.
Zapier is a productivity tool that streamlines repetitive tasks by automating workflows between different web applications. Previously, Zapier offered tiered plans based on the number of zaps (automated workflows) and the features offered in each plan.
In 2020, Zapier announced a major shift in its pricing model, moving towards usage-based pricing where customers are charged based on the number of tasks performed instead of the number of zaps created or the features included in each plan. It provides a free version with certain limitations where customers can perform up to 100 tasks per month and have up to 5 Zaps active at a time. The free version also includes a 14-day trial of premium features.
For its professional and team-based plans (Zapier Pro, Team, Company, or higher), Zapier uses a usage-based pricing model. If customers exceed the task limit, they will be charged an overage rate per task. It is worth noting that Zapier recently achieved an Annual Recurring Revenue of $140 million.
This pricing model allows for greater transparency and predictability in customers’ billing. So it’s no wonder customers love it!
Mailchimp provides businesses with email marketing and automation software that facilitates customer communication and management. It also provides several audience engagement tools within its platform.
Earlier, it offered a tiered pricing model that charged customers based on the number of subscribers on their email list. The more subscribers a customer had, the higher their monthly fee would be, making it difficult for small businesses to afford the platform.
In 2019, Mailchimp introduced usage-based pricing for its email marketing service, allowing customers to pay based on the number of emails they send per month, rather than the size of their subscriber list. Users can opt for this pay-as-you-go model, which is ideal for infrequent senders. With this model, each email sent consumes one credit, and users can purchase credits as needed.Moreover, Mailchimp provides a free plan that permits up to 500 contacts and 2,500 monthly sends.
Many businesses today depend on Slack to effectively communicate and collaborate across teams. Before Slack transitioned to usage-based pricing in 2021, they had a tiered pricing model based on the number of features and amount of storage included. Customers were charged a fixed price per user per month, regardless of how much they used the platform.
Today, Slack charges customers based on the actual usage of the platform, measured in terms of the number of messages sent and calls made. Customers can choose from a range of pricing plans based on the number of active users and the expected usage levels.
The new pricing model allows customers to start small and only pay for what they use, while also providing flexibility to scale up as their usage increases. This has helped to drive adoption and usage of the platform, while also increasing customer satisfaction and retention.
Before transitioning to usage-based pricing, Cypress had a traditional pricing model with a free plan and several paid plans with additional features. The paid plans ranged from $99/month to $299/month, depending on the number of parallel test runs and other features.
With the new consumption-based pricing model, Cypress offers four tiers tailored to different types of users: Free, Team, Business, and Enterprise. Each tier offers more features than the free open-source (Test Runner) product and caters to different sizes of teams and use cases.
The new pricing model offers more affordable starting prices (the paid plan's price has been reduced from $100/month to $75/month). Customers can now pay for their exact usage starting at $6 per 1,000 test results. Cypress has also introduced two new plans, Business and Enterprise, that include access to features such as single sign-on, premium support, and complex integrations. The Enterprise plan comes with unlimited users, which is a first for the company and allows larger organizations to open up the product to their entire engineering team. The new pricing model has encouraged customers to proactively upgrade, and unlimited users have been a strong catalyst for expansion.
Even traditional subscription companies adopt hybrid pricing
In recent years, there has been a shift towards incorporating usage-based pricing models even by these traditional subscription-based companies like Salesforce, Zoom, and Box. Usage is a fence between their pricing packages.
Salesforce, a cloud-based customer relationship management (CRM) platform offers plans for a monthly fee, But it also offers usage-based pricing through add-ons such as Salesforce Inbox and Salesforce CPQ. These add-ons are priced per user per month. And usage is based on the number of actions taken within the add-on, such as the number of emails sent or quotes generated.
Similarly, Zoom, the popular video conferencing and web conferencing platform that grew popular during the pandemic, offers usage-based pricing through its Zoom Meetings platform. While Zoom Meetings is primarily sold as a subscription, customers can purchase add-ons such as Zoom Video Webinars and Zoom Rooms where usage is based on the number of attendees or the number of rooms, respectively.
Box, a cloud content management and file-sharing service offers both subscription and usage-based pricing through their Box Platform product. Box Platform allows developers to integrate Box's services into their applications, and pricing is based on the number of API requests made by the application.
The incorporation of usage-based pricing by traditional subscription-based companies is a reflection of the changing landscape of SaaS pricing models. These examples stand by what we believe: Usage-based pricing is the future of pricing.