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In a usage-based model, expansion “just happens” as customers are successful and it also widens the top of the funnel.
HubSpot offered three subscription packages ranging in price from $3,000 to $18,000 per year for it's first five years in business. But it struggled with poor churn and anemic expansion revenue. Net revenue retention was near 70%, a far cry from the 100%+ that most SaaS companies aim to achieve.
Something needed to change. So in 2011, they introduced usage-based pricing. As customers used the software to generate more leads, they would proportionally increase their spend with HubSpot. This pricing change allowed HubSpot to share in the success of its customers.
By the time HubSpot went public in 2014, net revenue retention had jumped to nearly 100% — all without hurting the company’s ability to acquire new customers. HubSpot annual revenue for 2020 was $883 million.
In a usage-based model, a company doesn’t get paid until after the customer has adopted the product. From the customer’s perspective, this means that there’s no risk to try before they buy. Products like Snowflake and Google Cloud Platform take this a step further and even offer $300+ in free usage credits for new developers to test drive their products.
And of the IPOs over the last three years, seven of the nine that had the best net dollar retention all have a usage-based model. Snowflake in particular is off the charts with a 158% net dollar retention.
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Worth Reading
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Shopify's merchant acquisition channels (Source: page 8 of Shopify's Q4 financial results
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