Vectors of Growth

Every technology company wants to grow. At least, every US technology company wants to grow and companies with VC or PE money behind them must grow. The popular metric of SaaS company performance is the Rule of 40, which combines revenue growth with profit margin. While there has been a lot of focus on profitability in the last couple of years, growing the top line offers a much bigger lever than cutting costs. Growth is essential.

But where does growth come from?

The common wisdom is that to grow your revenue, you need to sell more deals, but there are many ways to skin that cat. I like to use the term "vectors of growth" because they offer companies different directions to pursue. While these vectors are not mutually exclusive, they each come with a cost, and every company needs to carefully prioritize the ones it wants to pursue. Trying to focus on everything means there is no focus at all.

Let’s examine the different strategies to achieve topline growth:

Growth from New Customers

When you want to grow from new customers, the key question to answer is where to find them, which vector to pursue. Another important question is how much you need to change your product or your GTM strategy to pursue a particular vector because such changes require money and time to implement.

- New Geographies

This is often one of the easier growth vectors to unlock. If a company is currently selling in the US, expanding to countries like the UK, Canada, and Australia is relatively simple. Still, it requires that the product works in those countries. Selling a collaboration product like Slack or Zoom solves a universal problem with minimal product changes. On the other hand, HR and payroll products like Gusto or Rippling have to support country-specific labor laws to be sellable in any particular country.

The GTM strategy also requires some changes, usually some type of local presence. But if the product works, these are relatively easy to implement.

- New Segments

Going up-market or down-market is one of the most common growth strategies. Many B2B software companies start by selling to small businesses and over time target larger and larger customers. This strategy is not without product challenges, as enterprises require various customizations, integrations, and security features that were previously irrelevant to an SMB product. Conversely, products designed for the enterprise segment are usually very difficult to adapt for the simplicity required in the SMB market.

The GTM changes can also be quite significant. The enterprise sales process using a direct sales force is significantly more complex, long, and expensive compared to selling online to small businesses. That has an impact on all other functions, including Marketing, Legal, Finance, and Services. As Bill Binch describes on his blog, going after the enterprise is a company-wide motion.

Companies that seem to have mastered selling to all segments are those with products that have been designed for use by a single user and offer value that increases with the user count, following the network effect per Metcalfe’s Law. Examples of such B2All companies include Box, Slack, and Zoom. These companies are very good at attracting individual users in an enterprise and then converting them into enterprise licenses.

- New Verticals

When a company adopts a vertical GTM strategy, it quickly learns that different verticals have different requirements based on the specific needs of the business. For example, subscription billing for media companies requires a high volume of very simple invoices compared to B2B SaaS companies with a low volume of highly complex invoices involving many line items, negotiated prices, ramp contracts, etc. Expanding from one vertical use case to another may require significant product investment.

Similarly, a vertical GTM motion requires a depth of vertical expertise that your typical horizontal sales reps might not have and that needs to be addressed by building vertical sales teams or adding overlay experts.

- New Markets

This is the most radical vector of growth where the company enters a new market, often through an acquisition. And I am not talking about a small technology acquisition that can be tucked into the existing product. I mean buying a business that adds a new product for a different market. Think Salesforce buying Slack. This is what some companies have to do after they have exhausted all the other vectors of growth (or do you still believe that there was some great product synergy between Salesforce and Slack?).

This vector of growth comes at a relatively high cost in cash or equity. Beyond the acquisition cost, there can be significant engineering costs to integrate the acquired products with the existing ones and GTM costs to enable cross-selling of the acquired products by the existing Sales teams.

Growth from Existing Customers

Now, let’s look at strategies to find growth from existing customers, commonly referred to as expansion:

- Adoption Increase

This is the most obvious and perhaps easiest to implement growth vector of them all. The customers already use the product, and the goal is to make them use it more. Whatever the metric, you want them to adopt more units. If your scaling is by users, you want them to expand the user population. If the metric is usage-based like API calls, gigabytes, or dollars, you want them to increase that usage.

This is part Customer Success and part Sales. Customer Success should monitor current adoption metrics and step in when customers don’t utilize what they are already paying for. Maxing out adoption is a great step towards revenue growth while customers who are not using what they pay for are in danger of downsizing or churning, which is the archenemy of growth.

The Sales strategies usually involve sales plays, such as expanding from Sales to Services teams, just like Salesforce has done with CRM. The appeal of this strategy is the relatively low cost. The product usually doesn’t need to be changed and the changes to the GTM motion are relatively low, mostly related to enablement (training).

- Add-On Products

Add-on products are a great way to generate growth from existing customers. The demand typically comes from the existing customers themselves. Eventually, the product is built, and the decision is made to charge for it (as opposed to including it as a feature in the existing product).

The product-related cost is obvious – the add-on has to be built and that has to be prioritized over other product requirements. The GTM cost is relatively low because sales reps have been already asking for the product (because their customers have been asking for it). Sure, there will be some enablement costs involved and some complexities related to pricing, order processing, revenue recognition, etc. But overall, this is a dependable way to add growth from existing customers.

The only caveat is that it must be an add-on – something that adds value to existing deployments. This is not to be confused with the New Markets strategy, where the company builds (or acquires) a new product that has to be sold again, even to existing customers.

- Use Case Expansion

The use case expansion strategy assumes the adoption of the product by a different part of the company, usually a different business unit with a different use case. That often introduces new product requirements because the new business unit has different needs. A good example is OpenAI, which uses its LLM engine for an end-user-facing application (ChatGPT) but also for use by developers who can access it via an API. Adapting a product to support such different use cases requires development effort.

The GTM motion also comes at a tangible cost with this strategy. It likely requires a different sales team with different expertise to pursue the new use case. It may also require different pricing and packaging. This effort is similar to expanding to a new vertical when pursuing new logos.

Growth Strategies for Both New and Existing Customers

- Pricing Optimization

This strategy looks at how to extract more money out of existing or new customers with minimal product and GTM changes while keeping an eye on churn and win rates. It doesn’t always mean just simple price increases; more sophisticated approaches involve pricing model engineering. An example could be the introduction of a usage-based price component while lowering the recurring fees. Another example might be the addition of advertising-supported revenue to paying subscribers, as done by Hulu, Prime, and HBO recently. 

- GTM Effectiveness

This is the mother of all growth strategies because it aims to improve the effectiveness of the existing GTM motion. It can include areas such as pipeline conversion, account allocation, quotas and incentive strategies, win rate improvements, etc. It applies to both new and existing customers and is the entire reason why companies have Sales Operations, Enablement, and Marketing Operations functions.

Summary

There are many vectors of growth available to most companies. Given specific circumstances, some of them are more effective than others. Companies have to choose strategically to achieve the desired outcomes. But choose they must. The worst mistake they could make is to put a half-hearted effort behind all these strategies at the same time. The result is confusion, over-extended resources, and little growth as a result.

Is Usage Pricing Right for You?

There is currently a lot of buzz around usage-based pricing (also known as consumption pricing), particularly in the SaaS industry. This heightened interest has been largely fueled by the remarkable success of companies like AWS, Snowflake, and Stripe, which have thrived using this pricing model. As a result, many SaaS companies – and their investors - now view usage-based pricing as a key factor for achieving success in the market. 

However, it's essential to recognize that while usage-based pricing has proven highly effective for certain businesses, it may not be the optimal choice for all. Some companies may find greater success with a fixed-price subscription model, while others might benefit from a combination of both usage and recurring pricing options. In some cases, the pricing model may not significantly impact the overall performance of the business. An example when we compare Apple TV, which charges per movie (usage pricing), and Netflix, which employs a flat monthly fee (subscription pricing). Both companies have achieved considerable success despite adopting different pricing strategies.  

Examining trends in various industries sheds further light on the matter. For instance, the telecommunications sector has transitioned from usage-based pricing to flat fee models. Remember the days when phone bills were determined by the number of minutes called? Of course, they still use usage pricing in many areas, such as international calls but such calls are now more and more conducted via much cheaper online video calling. For telcos, usage pricing is not the future, it’s the past. And if anyone has a black belt in pricing, it’s the telcos! 

Still, many SaaS companies continue to explore the potential of usage pricing. The allure of this approach lies in its ability to directly align value with costs, potentially appealing to customers and vendors alike. So, let’s look at various factors to consider before deciding to go all AWS with your pricing: 

1. Does usage align with the value delivered? 

AWS employs usage pricing out of necessity. Their services cater to application developers, each with a unique use case offering different value while representing different workload on AWS. Given the diverse range of applications and their varying reliance on different AWS services, the company has no choice but counting tasks, jobs, containers, gigabytes, and API calls to accurately measure usage and bill accordingly. That’s common to many infrastructure software companies, including Snowflake and Stripe1. 

For software designed as a business application, it’s usually easier to tie pricing to the delivered business value and the most common metric for a business is the number of employees (users). The most notorious example of this approach is Salesforce, the godfather of SaaS, which successfully employs user count as its primary metric. For other companies, metrics such as the count of vehicles or number of sites may be suitable, depending on the software's functionality. If this metric aligns with the value the software delivers, businesses can implement a flat monthly price, charging for each unit regardless of usage frequency. There is a lot to like about that! 

Some business applications have the option to adopt usage-based metrics like the number of contracts, invoices, miles driven, or revenue under management for their pricing models. In some scenarios, that kind of pricing may better align with the value they deliver for every customer. Before jumping into usage-based pricing, figure out the metric that best aligns with your value and structure the pricing accordingly.  

2. Do you like the predictability of recurring revenue? 

One of the main reasons companies prefer the flat subscription model is its predictability. CFOs appreciate the reliability of recurring revenue because it keeps coming in quarter after quarter, as long as you keep your churn rates under control. The recurring models were the big winners of the pandemic, as the subscribers – consumers and businesses alike – remained loyal to their subscriptions even through the times of economic uncertainty. 

The problem with usage-based pricing models is that they are not recurring. When customers consume, they pay you, and all is great. When usage slows, your revenue dwindles. Take Uber as an example, a company that purely charges based on usage. As the picture shows, their quarterly revenue is quite bumpy: up and down with consumption. 

Compare that to Netflix with its flat recurring subscription model during the same time period, and you get the idea. 

Now, some usage is more predictable than others. Storage, as measured by gigabytes or terabytes consumed, will be less volatile than transactions. Storage is cumulative; it never goes down. Even in tough times, customers generate data, and they are unlikely to delete any. Storage is a metric that effectively only goes up; sometimes faster and sometimes slower, but it always keeps growing. That’s why usage works so well for companies like Snowflake. On the other hand, other types of usage such as transactions, miles, or contracts can fluctuate dramatically.

3. How do your customers budget? 

Nobody likes a surprise bill. Your energy bill probably stays within a certain range every month, but when you receive a higher than usual bill, you take notice – and you are unhappy. Customers appreciate predictable spending, and a consumption model works well only if it is predictable. Unpredictable consumption fees are only acceptable if they are negligible, and the customer doesn't bother to care about the amount.  

This aspect is particularly relevant when selling enterprise technology. Enterprises have budgets set for the year and any significant overspending or underspending can be challenging, especially for your champion within the account. That's where the predictability of the flat fee model shines. When dealing with a usage model, enterprise customers prefer to lock in a committed amount of usage at a predictable cost to budget for it. That helps the budgeting, but this type of drawdown model adds a significant amount of billing complexity and frequently leads to customer satisfaction issues when they run into overages. 

If you have an enterprise product, consider how your pricing will fit the customers' budgeting process. 

4. Do your customers see the value in usage pricing? 

Usage pricing sounds like a very fair model, where the customer pays for what has been used. It seems to work quite well for many consumer applications, especially where the metric reflects two key factors: 

1. The perceived value the offering delivers 

2. The perceived cost  

A good example is the pricing for Uber, which is primarily based on the distance traveled. The value perception is obvious – it's more valuable to travel 50 miles than to travel 5 miles. Moreover, most consumers understand that Uber’s cost is based on the cost of fuel, the vehicle depreciation, and the driver’s time. Charging for mileage is a reasonable proxy for all that.  

However, it is a little more difficult to justify usage pricing in the payments industry, where credit card companies have been pricing based on a percentage of the payment amount. The value seems aligned, but only up to a certain point. After that, the fee becomes too large. A 3% fee on a $10,000 payment is $300, and at that point, you may prefer to be paid by a check or debit. That’s why we rarely see credit cards used for large amounts. 

On top of that, the cost perception does not add up. The payment amount is just a number in a computer, and the credit card company's cost is the same to process a $10 payment as it is to process a $10,000 payment. That is why the payments industry remains unsettled, with new payment methods (and even currencies) popping up all the time.  

5. Does your usage pricing inhibit usage? 

When you charge for usage, your customers become more aware of their usage behavior. Everything is fine as long as the cost is negligible, but the moment it becomes a budget item, your customers will adjust their behavior to optimize their spending. Enterprises will literarily incentivize their employees to reduce their usage. That is probably not what you want. You want them to use your product a lot, as long as you get compensated for the increased cost that results from increased usage.  

Imagine if Spotify charged users for every song they play. Some customers would just play fewer songs or dust off the radio while others might find ways to circumvent the limitations. That is not the behavior you would want, and this is precisely why the Spotify flat fee model became so successful - and completely disrupted the music industry. 

If you want your product to succeed, you need customers to use it. A lot. Your pricing should not stand in the way of adoption. That means that it needs to be either: 

1. Negligible compared to the customer's buying power. A $3.99 price to rent a movie is negligible for most Apple TV customers while $19.99 is perhaps too expensive. Or,  

2. Valuable compared to the alternative. Uber's usage charges may not be negligible, but they are quite valuable when compared to the cost of a traditional taxi or limousine services. 

Usage pricing can lower the barrier to adoption for new customers, as it allows them to try the product without committing to a fixed fee. However, as their usage grows, so do the charges. If your pricing isn't comparatively valuable and/or negligible, it may discourage usage. When implementing usage pricing, it is crucial to ensure that the pricing structure encourages customers to adopt and use the product. 

6. Can you measure the usage? 

If you charge customers based on a usage metric, they will want to be able to validate the accuracy of your metering. When you get a higher than usual phone bill, you want to see what caused the spike. Similarly, if your pricing is based on a percentage of transaction amount (e.g., payments, billing, invoicing), customers will want to compare your charge with their books. If those numbers do not match, they will start asking difficult questions. 

To accurately meter the usage and handle customers' questions, you will need to build the right instrumentation into your product. Adding such instrumentation is not trivial – we are talking about productized code that provides accurate counters and can be exposed to your customers via a self-service portal. That logic needs to be secure, auditable, and maintained just like any other product functionality. And unlike other product features, you probably won't be able to charge for this one. 

More importantly, you will need to deal with customer service scenarios such as credits, refunds, errors, disputes, promotions, proration, service freezes, vacation holds, etc. Those capabilities need to be built, and your customer service team will need to be large enough to handle any such inquiries. Deploying usage pricing comes at a cost. Counting users is much easier. 

7. Are you ready for variable considerations? 

Recurring revenue models come with a fair amount of accounting complexity – from quoting to billing to revenue recognition. Quoting becomes challenging for the Sales teams as they must help customers estimate their usage and spending commitments. Revenue recognition is pretty complex for your accounting team even with the flat subscription model. In the simplest form, you may be billing your subscribers annually upfront, but you can only recognize 1/12th of the revenue after each month upon service delivery. 

Usage pricing can require much more complex accounting. It may force you to adopt variable considerations, which will add significant accounting complexity, especially when there is a fair amount of fluctuation in usage between each revenue period. Your auditor may require you to estimate your revenue in advance of each period and then reconcile it with actual revenue. This accounting complexity will add additional pressure and cost on your accounting team. 

8. Have you considered a mixed model? 

Do you really want to adopt usage pricing? Obviously, it is the right model for many products, and for some, it may be the only feasible model. All the points mentioned above are not intended to discourage you from doing the right thing. However, there are many factors to consider before embarking on that journey. 

That said, your pricing does not need to be an either-or decision. We see the emergence of mixed models that combine a monthly flat fee with some additional charges to account for usage. For instance, Apple and Disney+ offer access to some of their content for a flat monthly fee, yet they charge a usage premium for premium content, such as new releases. The advantage of such mixed models is more predictability, better value alignment, and hopefully higher revenues. However, it also adds more complexity to the pricing structure and its operationalization. 

There are many possibilities out there. Choose wisely!