How Hubspot Grew NRR 41% 🤯

The numbers behind Usage Based Pricing

Today we know HubSpot as one of the top public SaaS companies with a market cap above $30 billion, but it wasn’t always on the path to an IPO. For its first five years Hubspot never placed any focus on pricing, simply having 3 different tiers ranging from $3-18k a year.

When Pat Grady, a Partner at Sequoia came into the business considering investing in their Series A he saw a company with a rigid pricing plan selling to SMBs, struggling with poor churn, price sensitive customers and anemic expansion revenue resulting in 70% NRR, far below the target of 100+% for SaaS companies.

“Pat was incredibly helpful… in sort of rethinking our pricing model and unit economics and really got us on a good path… For us it was huge, they helped us with our business model a lot, pricing model too” Brian Halligan, Co-Founder of Hubspot

Something had to change. In 2011, armed with Sequoia’s capital & insights Hubspot introduced usage-based pricing, where customer’s spending increased proportionally as they generated more leads in the software. They would continue experimentation, launching 6 different pricing structures over the next 7 years to refine their business model & GTM.

2010: Flat rate pricing

2011: Usage tiers based on contacts

2012: 2-part tariff with base platform fee and variable fee for contacts

2013: 3-part tariff with base level of contacts included in platform fee

2014: Freemium with launch of HubSpot CRM

2016: Multi-product with CRM, Marketing, and Sales software

2018: Platform pricing with bundle options

By 2014 when HubSpot went public, net revenue retention had jumped to nearly 100% - without hurting new customer acquisition. HubSpot's success demonstrates how SaaS companies adopting usage-based pricing grow faster by landing new customers, growing with them, and keeping them as customers and so today we’re going to dive into the benefits and pitfalls of usage based pricing.

After last week’s positive reception to the churn research I’ve decided to try and make this newsletter unique, providing in depth research & data analysis for free.

This week I’ve put together a database of some of the best startups in the world to see which are using traditional SaaS vs usage-pricing, and includes screenshots of their pricing pages, what trials they offer and industries so you can see companies relevant to you. Just send me a reply and I’ll personally send you the link (free).

What is Usage-Based Pricing?

Usage-based pricing (UBP), enables customers to pay according to how much they use a product, aiming to align pricing with the actual outcomes customers derive instead of just charging for features, avoiding situations where customers pay for unused capabilities.

The Rise of Usage Based Pricing

UBP has gained remarkable momentum in SaaS. According to OpenView's study, UBP adoption rose from 45% of SaaS businesses in 2021 to 3 out of 5 companies by February 2023. Chargebee's study found 63% of SaaS businesses now use some UBP.

The momentum is expected to continue, with 74% of SaaS businesses likely to offer more UBP products by the end of 2023, with early stage-startups increasingly look to adopt this business model.

This rise has been led by a change in how software is purchase. As the buying decision has increasingly moved to end users in business & engineering teams there is a greater expectation to realise value before paying for a service. UBP is powerful in that it allows users to start for little/no cost and loop in procurement & finance teams only once usage grows and your company has multiple product champions within the team.

Benefits of Usage-Based Pricing

UBP offers several advantages:

User Benefits:

1. Low barrier to entry to start with low usage and scale up

2. Better flexibility as usage fluctuates month-to-month based on needs

3. Opens product to wide range of customers from individuals to enterprises

Business Benefits:

1. Revenues scale with user growth

2. Lower churn when usage temporarily decreases

1. Attracts wide customer base across segments

2. Allows capturing more value

As a result of UBP enabling massive expansion revenue whilst reducing churn the fastest-growing SaaS Companies (growing over 100% YoY), disproportionately leverage UBP. Top quartile NDR for largely UBP companies was 122%, compared to 110% for usage-based subscription tiers and 109% for no UBP.

This trend is present in both private and public markets where the vast majority (70%) of companies with top quartile NDRs (e.g. Snowflake) use usage-based models almost exclusively.

Downsides of Usage-Based Pricing

While offering many advantages, UBP also brings revenue unpredictability and potential "sticker shock" during high usage periods, making forecasting challenging. As a result whilst this model worked well for Hubspot, and others selling into SMB/mid-market segments, enterprise customers are significantly more hesitant.

This causes more problems for the product teams as well. Whilst SMBs may prefer UBP it’s a much more technically complex build out, somewhat mitigating the benefits of selling to the lower end of the market with faster sales cycles, as you’re often just shifting the work from the sales team to the product team. To actually make the shift like Hubspot did requires robust subscription management/billing systems to handle complexities like multi-product/metric usage tracking, accurate invoicing, revenue recognition, and more.

Overcoming Enterprise Hesitations

While enterprises have historically been hesitant to buy software with unpredictable costs, this can be overcome by helping customers predict and understand consumption:

Pricing:

• Use transparent pricing metrics aligned with value prop for easy tracking

• Offer committed consumption through tiers/upfront credit packages

• Carefully consider punitive overage charges that risk customer friction

Sales:

• Conduct sizing exercises using customer usage data

• Offer periodic "true ups" instead of overages

Product:

• Build usage dashboards with forecasting

• Notify customers nearing limits

Customer Support:

• Provide guides on optimising product usage

• Have success managers proactively engage when usage spikes