A Primer: Subscription vs Usage Based Pricing Models

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There’s been a lot of recent debate about which ~~pricing~~ business model is superior in tech: Subscription vs Usage Based.

Rocky Balboa was a Subscription model. He had to work hard for every expansion dollar. Ivan Drago was created in a lab, much like Usage Based net dollar retention rates.

Is Usage Based Pricing (UBP) just another hype-train contender, with a decent right hand but no jab? Or is it the real deal - a truly better way to align value to customer problems, and reap the benefits?

What I’ve found is there’s no single answer to the question - it varies depending on what you are selling and who you are selling to.

However, what I’m increasingly made aware of is how the “best” Usage Based companies are outperforming the “best” Subscription companies across two core metrics:

Revenue growth
- How fast is your topline scaling y/y
Net dollar retention
- How well are you able to land, expand, and retain customers

ICONIQ dropped a new report on business efficiency that painted a compelling story for Usage Based models. Actually, compelling may be an understatement. From reading the report, you’d think you were doing something gravely wrong if you were purely relying on Subscription.

Source: ICONIQ The New Era of Growth

The report shows that the “best” Usage Based companies are growing nearly twice as fast as the “best” Subscription based companies.

And net dollar retention followed a similar trend - the “top performing” usage based companies achieved net dollar retention 20% to 40% higher than their Subscription peers.

To put that in perspective, that would mean if the company picked up and went on vacation for a year, and didn’t acquire or lose a single customer, they’d still grow 20% to 40% more than their red headed Subscription step brothers. That’s nutty.

Source: ICONIQ The New Era of Growth

It made me wonder why this phenomenon exists - thumbing through the report, it looks like two regional champs went head to head in the state Superbowl.

But East Texas sent the D1 powerhouse Dillon Panthers, and West Texas brought a bunch of kids from a D4 art school. Not all champs are the same.

OpenView was on the Usage Based corner perhaps before anyone else. Credit where credit is due. And shout out Kyle Poyar and Growth Unhinged

Calling out the differences in models:

If you are usage based, you are intimately linked to the underlying value proposition of what you are selling. You live and die by how embedded and critical you are to how the user solves a problem.