Guide to Revenue Recognition on 4 Common Pricing Scenarios
Revenue Recognition Guide
Usage-based pricing is becoming a market standard for SaaS companies worldwide. It is a way to charge users for their actual use of a service, rather than paying a flat subscription fee regardless of their consumption. A simple example of this is Netflix vs a utilities company — with Netflix, you pay a fixed monthly fee, regardless of how many movies or TV shows you watched. With a utilities company, you only pay for the utilities you used, and even then, the amount you are charged is based on a variety of factors such as amount consumed, etc.
According to OpenView Advisors, over 45% of SaaS companies currently use usage-based pricing, up over 30% from last year. There are a number of benefits driving this adoption trend.
From a customer’s perspective:
From a business’s perspective:
As with any decision, there are some considerations to take into account when adopting a usage-based pricing model:
Despite these considerations, we are seeing an increasing trend towards adoption. Both startups and established companies are pivoting towards this strategy. In fact, our research below indicates that switching to usage-based pricing correlates to superior performance for companies when compared to their peers.
According to OpenView Advisor’s data from a spread of public SaaS companies, companies that incorporate a usage-based pricing strategy tend to perform better. Companies implementing usage-based pricing have higher projected revenue growth, seeing an average of 30% forecasted revenue growth (compared to the 22% growth forecasted for all SaaS companies). They also have a higher enterprise-value-to-revenue (EV/R) multiple, averaging around 22x (compared to the industry-wide average of 14x). Finally, companies that leverage usage-based pricing are healthier and more effective, seeing an average of 120% net dollar retention (compared to 110% for broader SaaS companies).
Companies who incorporate usage-based pricing are also among the fastest growing companies. They make up the majority of companies with greater than 100% ARR growth, and are in the minority of companies with less than 100% ARR growth.
Business leaders across the SaaS industry have noticed the benefits of usage-based pricing models and have turned to adoption themselves to gain a competitive advantage. Our prediction is that usage-based pricing will be a standard practice for SaaS companies in the near future.
Octane was founded in 2020 to help SaaS companies embed usage-based pricing and billing into their ecosystem. The many intricacies of building and maintaining a reliable usage-based billing system — especially one that can grow with your business — makes implementation a difficult undertaking. Rather than building a system in-house, most SaaS companies have started to work with leading usage-based billing providers like Octane.
If you’re interested in implementing usage-based pricing or automating usage-based billing, chat with us and start building your competitive advantage today.
By Nate Matherson, Co-founder & CEO of ContainIQ