This article was originally published on Forbes Council.
I was talking to a prospect last month, and during the call, he said, “We want to implement usage-based pricing. Our GTM team says the same, too, but we cannot because our billing platform doesn’t support it, and we don’t want to burden our accountants to do manual billing.” When prospects express feelings of helplessness like this, it reaffirms the critical need for flexible billing solutions in the market.
The "SaaS crash" of 2022 dramatically ended a decade of almost unchecked growth. While subscription-based businesses soared more than 300% from 2012 to 2018, the SaaS crash of 2022 served as a sobering wake-up call. Just as Adyen's valuation plummeted by 39%, giants like Shopify, DocuSign and Salesforce are staring at revised growth forecasts and layoffs.
"Contrary to popular belief, most companies don't have a cost problem; they have a revenue problem," says Pfeffer, a professor from Stanford University. Cutting the workforce might seem like a quick fix, but it's likely to diminish, not increase, your revenue.
Investors have shifted their mindset from "scalable" growth to "sustainable" growth. To address this shift, companies should start focussing on how to expand market share and reduce churn. One of the most significant issues that businesses grapple with is the complexity of managing pricing and billing.
No matter how innovative your product or packaging is, your billing tool is the engine that’s going to do the revenue collection work. Far from a mere transactional back-end, modern billing platforms can serve as powerful hubs for customer engagement and sustainable growth. Let’s look at three ways you can optimize your SaaS revenue.
Adopting Flexible Packaging
The era of one-size-fits-all is passé. In today's age of AI and hyper-personalization, sticking to traditional subscription models can be a recipe for stagnation. With AI making its presence known in everything we use, the traditional, static subscription pricing reduces the value your product has to offer for the customer.
New Relic is an example of how packaging and pricing redefined a company in 2020. With an estimated 25 million engineers worldwide, many lacked access to efficient data about the health and performance of their systems or were entangled in dated monitoring tools.
The company reinvented its offering, providing an integrated platform tailored to modern requirements. The results were nothing short of spectacular. Their Q2 fiscal '23 figures show:
- A revenue surge to $226.9 million, marking a robust 16% year-over-year growth.
- An increase in active customer accounts from 14,300 to 15,300.
CEO Bill Staples emphasized the significance of their shift, stating their new pricing model was a major driving force in securing deals with notable firms. In Q1, nearly 88% of New Relic's total revenue came from consumption. Moreover, their Consumption Run Rate (CRR) saw several big players amplify their spending. “While the macro clouds seem darker, the alignment and value proposition of New Relic's consumption model shines brightly, distinguishing it from competitors’ pricing models,” says Staples.
The art of crafting strong packaging lies in having a flexible billing platform. You need a tool that can blend various pricing components effortlessly, however you want to price.
When a company can test and iterate its pricing strategy, it can better meet consumer demands and thus drive demand.
Also Read: AI Billing Platform: How Togai Powered Flexible Billing for an AI Copywriting Company
Implementing New Pricing Models
To create demand that’s close to what we saw during COVID-19, you need to diversify your offerings and expand your market share. You can try the concept of feature gating (entitlements)—this can act as a market segmenter for your business.
Docker, known for its containerization platform, provides another case of feature-gating for market segmentation. By late 2020, under Scott's guidance, Docker introduced a pricing structure imposing minimal pay-per-use fees on businesses for its container registry service, a platform for storing and sharing containers.
This pivot propelled Docker's Annual Recurring Revenue (ARR) from $3 million to $10 million in just months, all while maintaining an impressively low customer churn, even with the heightened costs for their clientele.
Post its pivot, which saw its workforce shrink from 420 to 60, Docker, sans sales reps, leaned into a PLG sales model to engage its vast 20 million-strong user community.
By crafting packages that cater to different segments, you can expand your market share from upmarket to smaller companies, ensuring that as they grow, so will their loyalty toward your platform.
Providing Cross-Sells And Up-Sells
Fascinatingly, Salesforce's admission during the economic downturn—"We hired too many people"—illustrates the perils of mismanaging your demand generation strategy.
Up-selling and cross-selling features in your billing tool offer a more agile solution. They allow businesses to adapt to market shifts without the devastating human and financial costs associated with layoffs. To push a new feature for an existing paying customer, you should use your billing platform to add one-time add-ons or even seasonal discounts.
Your platform should be intuitively engineered to identify customer usage patterns and key milestones. It should seamlessly trigger an up-sell prompt once a trial or credit for a particular feature is over.
Also, if you have a billing tool that doesn’t support all the functionalities you need to grow, then it can be difficult to experiment with your product, build everything in-house and expand your market reach.
Final Thoughts
There's a paradigm shift happening, and those who don't adapt will be left behind. Your billing tool is not a utility; it's a weapon in your arsenal for generating demand in an industry landscape that’s evolving faster than ever before. The goalposts have shifted—quality leads and flexible pricing models are the new yardsticks for success. And if you’re still not convinced, just look at the cautionary tales.
