Three-quarters of software is still sold as a subscription or perpetual license, models that work well when customers know exactly how much they need.
But even with this momentum, consumption-based pricing isn’t suited to every situation (see Figure 2).
Our research finds that customers expect to more than double their use of this model in the next one to three years, with most of that growth in the next 12 months. Among the software companies with the highest valuation multiples, those offering consumption-based pricing on average earned 10 points higher revenue retention from existing customers, as measured by net dollar retention (NDR). In 2021, companies with primarily consumption-based models, including Snowflake, JFrog, Elastic NV, Datadog, and Confluent, increased revenue approximately 8 percentage points higher on average than companies that mainly license or sell subscriptions to their software. Indeed, many of today’s most valuable, fastest-growing SaaS companies employ consumption pricing (see Figure 1). Nearly half of software companies using it say it has helped them acquire more customers, and two-thirds say it’s helping them increase revenue with existing customers. With consumption pricing, 80% of customers report better alignment with the value they receive, according to Bain & Company research. It has quickly become popular with customers. There are many flavors of consumption pricing, ranging from pay-as-you-go to allowances that are burned down and limits that are capped, but all with payment that is ultimately based on usage and aligned with value.
Whereas traditional subscription-based SaaS is typically paid in advance based on a predetermined capacity, such as seats licensed, the latest evolution of SaaS uses consumption-based models that calculate the price based on measures of actual use, such as data ingested, messages sent, or hours used. Revenue for software-as-a-service (SaaS) companies has grown 22% a year compounded since 2017, evidence of its popularity with customers tired of underused “shelfware” software licenses and of managing their own infrastructure.
0 kommentar(er)
