Usage Based Pricing Vs Recurring Revenue
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The secret elephant in the room of generative AI apps is that almost everyone is seeing insanely high churn levels https://t.co/jUfE1TX8Ws
— @levelsio (@levelsio) June 1, 2023
Saas is changing. As we head into a tougher economic environment, I'm seeing an increase in demand for usage based pricing on SaaS products that used to be unquestionably recurring revenue products.
Many apps don't really fit neatly into a subscription. Take one of our products screenshotapi.net. We charge based on the number of screenshots per month, but we do this with two subscriptions:
- A monthly subscription that includes up to X screenshots
- An "overage" price per screenshot if they go over.
There are quite a few challenges we've seen to moving to 100% usage based. The biggest one is people don't pay. They hammer the shit out of the api and then their card fails and you'll never see them again. So you'd have to charge them daily? Weekly? Do people get annoyed with micro transactions? How might that redefine LTV?
You could also give people the option, but that's annoying too. All of that logic needs to be built. It's still remarkable to me how much effort I still have to put into billing even with stripe checkout links and their new hosted page for people to manage their own subscriptions. Both of which would not help you implement usage based pricing.
Tools
There are some cool companies coming out that have better interfaces and infrastructure around usage based pricing. We haven't yet found one we like. A new one I found the other day is open source and able to be self hosted.
Habits
I've noticed that really when I'm checking out any new tool that forces me to put a credit card in, I just cancel it right away so I don't forget. If your product is pure utility where I might not have a high frequency of usage, it might make more sense to have usage based pricing. That being said, we have at least 2 products that arguably should be strictly usage based but aren't because we're addicted to the MRR.
Screenshotapi.net and sheet.best both fit into a usage based model. These two gems in our portfolio have been steadily growing but I often wonder if we could really ramp up growth and reduce churn by moving to usage based.
Metrics
All the terms we're used to having calculated for us (retention, MRR, LTV, cohorts, etc) all take a slightly different meaning when talking usage based. What is an active customer? Someone that uses the product once a month? once a year? Both could be true. Let's say you have a compliance product that once a year needs to be refreshed to get re-certified, so they log in to your tool and do what they need to do but only once or twice a year. Maybe in that case annual pricing is the only option instead of usage based. But plenty of products might fall into having a customer use it once or twice a quarter. Monthly pricing doesn't make much sense. Perhaps annual doesn't either, and usage based would probably starve the company of any real cash.
The point is the lines get a little fuzzy depending on the business, but if more and more customers are demanding usage based pricing, I think that has a lot of interesting implications. The big one is a massive opportunity for startups to build billing software that handles this stuff better than stripe. Stripe is a pain in the ass with this stuff. Just a few years ago, that would have been a crazy statement to make, that you'd want to (sort of) compete with stripe on billing software. It doesn't sound so crazy anymore.
AI products
Some of the AI products I've seen lately just don't make sense as subscriptions. Midjourney for example charges for some amount of compute or some shit. As a layman, that is super confusing. Just let me pay for the images I need.
Another example would be that dude built one of those AI headshot things. Of course that shouldn't be a subscription. You want 10 headshots, you pay once and then you maybe come back when you want new ones. All these guys are building transactional tools and expecting people to continue paying monthly. No wonder churn is so high!
Exercise
It's actually a fun exercise to rethink how any product could be usage based if only to clarify where the real value is being delivered.
Super Send - usage based might look like the # of messages sent per month
Screenshot api - just # of screenshots per month
Cold DM - number of DMs per month
Sheet best - number of api calls per month
Growthbar - # of articles per month (+ something for the SEO tool which is more continuous)
cold email studio - # of meetings booked per month