A market niche for technology start-ups?

Griffin Parry detects a major change in how software-as-service companies charge their customers. As he sees it, more and more suppliers are looking at pricing as a strategic lever as they compete for business in a crowded marketplace. In particular, instead of charging fixed subscriptions based on an agreed number of users, they adopt more flexible usage-based pricing models. “The problem,” he says, “is that usage-based pricing is hard to do.”

Parry co-founded with partner John Griffin M3ter, a London-based startup specializing in usage-based pricing. Launched in 2022, the company has just raised $14 million in Series A funding to expand its US business and introduce new analytics-based decision-making features.

And you could tell this is a bold move. The concept of usage-based pricing has gained popularity in recent years. M3ter is not the only platform provider in the pricing game. But Parry sees an increasing demand and hunger for workable solutions, which creates opportunities for specialized startups.

Market downwind

In a report Consulting firm Bain & Company, published in September 2022, noted that usage-based charging, rather than subscription, “fueled some of the fastest-growing and most valuable SaaS companies,” including Snowflake, Datadog, and Twilio named in the report.

It’s a simple enough concept. Traditionally, software-as-a-service has been sold on a subscription model, with the price remaining fixed unless the subscription is changed. The usage-based approach model gives users more flexibility. This could mean cutting costs as usage drops or, conversely, the ability to scale up the use of the software – and pay a little more – when needed.

Now that sounds pretty easy. After all, it is a model that we as consumers may be used to when we pay for metered water, electricity or telephone calls. So why is this a growth market that offers opportunities for startups like M3ter?

Parry says there are some beneficial winds in the market.

Product-led growth

“The emergence of product-driven growth is helping,” he says. Over the past few years, it’s become easier for vendors of all sizes – though not nearly as easy – to sell to enterprise customers by finding corners of the organization willing to try a product, often with a free trial or freemium base. The idea is that once some people start using it, others within organizations will follow. A usage-based pricing approach can be useful, not least because it allows end users to scale usage with relative ease.

Then there is the macroeconomic situation. We are experiencing difficult economic times. Buyers of software products are looking more closely at pricing. In particular, they are looking for pricing models that meet their needs.

But here’s the question. Given that usage-based pricing is not a new concept in itself, and that the tools mentioned above are among those that have been doing this for years, why don’t SaaS companies just build their own billing systems?

Pain points

Parry recognizes that there’s more than one way to create a usage-based offering. “You can build your own platform or do it using a spreadsheet,” he says. “And in the past, companies had to do it themselves.”

But, he argues, it’s not easy to be right. Running a previous company – Gamespark – Parry says he and co-owner John Griffin were into usage-based pricing, but it was hard to do. When the company was sold to Amazon, he worked at AWS (Amazon Web Services). Again, he says he saw difficulties implementing a user-centric approach.

One of the biggest challenges, he says, is making sure everyone has the usage data. That includes not only billing departments, but also customer-facing staff. “Anyone who speaks to customers should have the data at their fingertips,” he says. It must also be transparent to customers. Unless they know why they are being charged a certain amount, they may not be happy. So each system must combine usage and pricing data and distribute it to anyone who wants and needs it. “If you make mistakes, you get revenue leakage and a bad customer experience.”

Strategic Pricing

There are, of course, non-technical challenges around pricing. It may well be that a supplier can count on a usage basis, but is that really what most customers want? A subscription-based approach may be a bit of a blunt instrument, but it’s predictable. Finance staff can rest easy knowing that costs won’t go up due to a spike in the number of users.

Bain’s report found that 80 percent of users say usage pricing delivers services that are more price-aligned to the value they receive. But it’s important to get the model right. That could be as simple as pay-as-you-go or a model that puts the end user through different levels of payment depending on the activity.

For his part, Parry acknowledges that he is not an expert on strategic pricing. The role of M3ter and its competitors is to provide their customers with the means to match prices to users’ demands and demands. Customers include Stedi, Sift and Clickhouse.

The data opportunity

Parry also sees a data opportunity. Some of the Series A money will be spent adding analytics features. According to him, customer usage data can be leveraged to support a huge amount of automated decision-making around pricing.

Usage-based pricing is on the rise. Parry says that in 2020, 34 percent of software companies used the model. Today it is 61 percent. Adoption has been driven in part by the economic environment that has forced both users and sellers to focus on the cost equation. However, when the global economy picks up, he expects the trend to continue.

For startup companies working in the software arena, the concept can help them with their product-driven growth strategies. It also creates a growing market for flexible pricing tools.