Private equity perspectives on usage pricing: How to automate billing & revenue recognition for consumption

For Controllers, CFOs, VPs of Finance, and Revenue Accountants in the private equity ecosystem, this is the webinar you’ve been waiting for. Usage-based pricing models are increasingly common, but they bring unique challenges in billing operations and revenue recognition. In fact, 60% of companies in our internal survey reported challenges with contracts/amendments, data quality issues, and manual workload for consumption billing and revenue recognition.

Ready to face the challenges while gaining insight for the future? Join our guests Ethan DeSilva, Vice President at Insight Partners, Ira Golub, Vice President at Bregal Sagemount PE Equity firm, Rob Litterst, cofounder of PricingSaaS and author of Good Better Best, along with our host Brad Mortimore, as they share expert insights on navigating these complexities. With private equity-backed growth strategies and actionable advice, this webinar will guide you in smart, automated solutions for usage billing and revenue recognition.

What you’ll gain:

• Emerging trends in SaaS pricing and how to stay ahead of the competition.
• Insider perspectives on where private equity sees usage-based pricing driving value creation.
• A breakdown of 5 top usage billing models and their revenue recognition implications.
• Strategies & tools to navigate compliance and operational challenges in revenue recognition.
• Practical advice on reducing rev rec effort by up to 70%, with solutions tailored for PE-backed companies.

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Transcript

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Brad Mortimore: So hi everyone. And welcome to today's webinar. We have an incredible panel of experts with us who will share some of their firsthand perspectives on usage-based pricing, also known as consumption billing or variable pricing.

You know, this model has been around for a while. Yet many companies are still navigating how to implement it effectively. Pricing strategy is a, it's a critical driver of business growth and scalability, and it has influence in revenue recognition, cashflow, renewals, upsells, and even potentially customer churn. So with such a wide variety of potential models to choose from, understanding the opportunities and the trade offs of each model is essential.

So today we're fortunate enough to be joined by some experts who have analyzed and advised hundreds of companies on pricing and monetization strategies. And they'll share their unique perspectives and insights on usage-based pricing and billing, helping us to explore some of the best practices and the key considerations for success.

Okay. So with that being said, we'll do some introductions here and I'll start first. My name is Brad Mortimore. I'm our Vice President of Strategic Accounts here at Zone. My background is actually more in finance and accounting. I spent several years working in back office, accounting, implementing ERP and billing solutions. I'm also an alumni of NetSuite. I worked at NetSuite for about four years, as a solution consultant, you know, worked with hundreds of companies evaluating ERP solutions, particularly in the SaaS and the technology space. In the last six and a half years now, I've been at Zone & Co help- helping companies automate billing and revenue recognition within a NetSuite.

But I'm joined by an amazing panel today, Ethan DeSilva, Ira Golub, and Rob Litterst. Just some bios of each individual here. So, Ethan is Vice President at Insight Partners' R&D Center of Excellence, where he leads the monetization strategy practice. Ethan has worked with over 250 SaaS businesses on their monetization strategy throughout his time at Insight and earlier in his career as an engagement manager at Simon Kutcher and Partners.

Ira is Vice President of Bregal Sagemount, where he leads their offer optimization center of excellence, focusing on product and pricing strategy. Throughout his consulting and private equity career, he has successfully driven strategic initiatives for over 25 companies, helping them achieve, achieve sustainable top and bottom line growth. His expertise spans topics in product strategy, pricing and packaging sales and finance.

And then last we also have Rob. Rob is the co-founder of PricingSaaS and author of Good Better Best, a weekly newsletter that breaks down the latest trends and tactics in SaaS pricing. And Rob has spent over a decade in different capacities in SaaS sales, marketing, and pricing strategy.

So again, just thanks to all three of you guys for being here today and looking forward to some of your thoughts and your insights.

Okay, so we have an awesome lineup today. We're first going to start off with a quick little background of who Zone is for those in the audience that might not be familiar with us and how we work with customers.

But then we're going to transition into the panelists and we're going to get some of their insights into usage-based pricing and trends. And I have a lot of questions to ask them.

We're then going to take the conversation a layer deeper, and we're going to introduce the five most common usage-based billing models that we see companies adopt. And we're going to talk about some of their implications that they might have on data, integrations, billing, revenue recognition, renewals, and upsells and downsells and how they impact potentially different areas of the business, hopefully giving the audience here some insights into how to navigate their own, you know, pricing strategies.

We're then going to wrap up and tie everything together with talking about automation strategies. So we're going to talk about the complexities of usage-based billing, but then we'll tie that all together with the necessity of how to automate billing and revenue recognition to eliminate the accounting and finance team from potentially being a bottleneck when it comes to these models.

And then lastly, given the amount of time we'll have, we'll do some Q&A.

Okay. So quick just background on Zone & Co. We are a company that provides native NetSuite solutions built for NetSuite. We wholeheartedly believe that NetSuite is the core system of record for general ledger, chart of accounts, it's all of your transactions.

And we, we build solutions that expand the capability of NetSuite, in potentially many different areas of the accounting operation. So that , that may be billing and revenue recognition accounts payable, approvals, bank payments, and reconciliation, reporting, and even payroll.

We have over 4,000 customers globally, and we've been working within the NetSuite ecosystem for a little bit over a decade now.

So moving on to the the panelists here a little bit. Rob, I know I gave a background on you, but if you don't mind, maybe quick saying hello and just give them an intro of yourself.

Rob Litterst: Absolutely. Thanks, Brad.

So I spent About three years at ProfitWell as a pricing strategist. And while I was there, I started a newsletter called Good Better Best. So I've been writing about pricing and packaging strategies and SaaS for about five years now.

And two years ago, I met a technical partner who was building this database of SaaS pricing pages, layered with scraping tools and AI. And for the last two years, we've basically been tracking over 3000 SaaS pricing pages, to try to identify trends, understand kind of where the market is going and also identify like specific examples of companies that are doing really cool things with pricing and packaging.

So that is PricingSaaS the kind of data company that we've been running. And now my newsletter kind of ladders up to that. And I think that's probably the most relevant part of my background for this webinar. I also led a growth marketing team at HubSpot, have been in SaaS for about 12 years across sales and marketing.

So a lot of experience there for sure.

Brad Mortimore: Yeah. You're b by the way, your website and the research that you've consolidated is amazing. And for, especially for someone like me and incredibly useful. I think you're in a, you're very unique and that you're one of the only people that I know that has consolidated the tracking and the reporting of this for thousands of companies at such a detailed level too, that you provide on your website.

So I guess my first question for you is, how have you seen the adoption of usage-based pricing evolve over the last three to five years?

Rob Litterst: Definitely. I think when I was at ProfitWell, which I left Profitwell on 2021, but I know usage-based pricing was gaining a ton of steam. I think people saw the success of Snowflake and other companies who were, who were consumption-driven and really wanted to move in that direction. And I think anytime I started with a new client, the first thing that they said is that they wanted to re-evaluate their value metric and see if they could just push fully towards consumption.

The biggest thing that I think I've noticed over the last three to five years Is just that that's kind of been reconciled a little bit and people have kind of been pressure tested and kind of pressure checked on on going full consumption.

I think like the two trends that I've seen most frequently that I expect we'll talk about a lot today, especially after that poll are hybrid models. Like I think hybrid models have become more popular than ever. And that's a huge part of kind of my background in pricing. I sold a hybrid model at HubSpot and believe really strongly in, in, that being a super effective way to package your SaaS.

And then also kind of prepaid credit models have become more popular too. And so I think those are ways that people are implementing usage, but within a context where, you know, they it can't kind of run away from the customer and doesn't scare the customer with unexpected bills.

Brad Mortimore: Yeah, both of those models of which we're going to dive into in a little bit here, and I would say just to kind of follow or add to that some of the trends that I've seen in the adoption of usage-based billing is, you know, you can go back, you know, a decade or so, and the only information you potentially had on your customer was whether or not they logged into your tool or not.

But today you have far more, much more data. Of not only how if they're logging in, but how they're actually using your tool, right? And that's where the adoption or usage-based pricing has come in to say, how are they, what are they downloading? What are they clicking? What are they using the most? And how can we monetize, you know, some of that data?

So my second question I have for you is Are there any recent innovations or trends that you've seen in usage billing technology that you find particularly impactful?

Rob Litterst: Yeah, I think over the last like three years, I've noticed just a huge uptick in the number of startups in this space. Like when I was at ProfitWell, I don't really remember there being a any usage base billing solutions, period.

Like, I think that was like a completely nascent space. And now you have Zone & Co, what you guys are doing with NetSuite, obviously you have Orb, Metronome, Meter, you have Stripe getting into the game with Stripe Billing. You have all of these solutions. They're trying to tackle it from different angles.

And I think it's going to be really interesting. I think like what's going to end up happening is there going to be companies that kind of tackle different parts of the market and different kind of aspects of pricing, right? Like, I think there are certain solutions that are going to integrate pricing and product and kind of the engineering side. And then other solutions that are going to be talking more to the finance side.

And then I think, you know, they're like product their product platforms out there right now, like LaunchDarkly and StatSig and stuff like that, that are feature flagging platforms and can also kind of contribute to pricing and packaging.

So I think the space is getting a lot more crowded, a lot more interesting, and there are a lot of ways to go about it. But I think one of the first components to a usage-based pricing strategy is you actually have to be able to measure the usage in the right way. So I think it's super important and I'm super excited to see where it goes.

Brad Mortimore: Yeah, I wholeheartedly agree. I think in the billing, you know, technology space, there'll never be a one size fits all, right? I mean, there's going to be B2B models. They're going to be B2C models and there's different you know, solutions that are better fit for those business models, for sure. Awesome, Rob.

We're definitely going to come back to you, but appreciate that. Moving on to to Ira. Ira, if you don't mind, maybe quick saying hello and do it a little bit of background.

Ira Golub: Yeah, great to meet, or I guess maybe see everybody. Ira Golub, a lot like Ethan. I started my career at Simon Kutcher and Partners.

I think if you're in the pricing world and you shake a tree, 10 SKPers fall out, but I moved over to the private equity space for the past couple of years have been largely holding commercial facing roles. Most of my experience is in the software space currently at Sagemount, which invests in lower middle market and middle market technology companies, but also have a little bit of a background in industrials, healthcare, I've I've seen a couple of things.

So, Brad, as, as you mentioned, I lead our offer optimization pillar and just kind of given my background in pricing, a lot of our pricing and packaging work kind of falls on my desk within the portfolio.

Brad Mortimore: Awesome. And so I was actually fortunate enough to be in attendance at the Bregal Sagemount conference that you guys did in Santa Monica.

And the title of that, the event there was called The Big Exit. Right. And I think especially for private equity backed companies. That's what's on the mind of these founders and executives is how do I grow my business and achieve the highest possible multiplier for a potential big exit. And there's obviously many contributing factors to that, which I think you guys presented on beautifully at the event.

But I also believe pricing and billing play a critical, critical role in that. So I guess the question I have for you is, how do investors view usage-based pricing models versus maybe traditional subscription models when you're assessing a company's growth potential?

Ira Golub: Yeah, it's a great question. I think the biggest things to look out for can be divided up into current customers, new customers, and then let's call it like macro.

So on a current customer basis, you know, the big indicator is really net retention, gross retention becoming one of the most important valuation metrics. You know, as companies advance more towards profit profitability, it's how can you ensure that a usage-based model is, unlocking growth amongst your current customer base.

So what are those upsells downsells look like is super, super important from an investor lens as they're trying to model out what the next couple of years are going to look like. To that end as well on the new customer side, thinking about new logo velocity, you know, how much of a usage-based model or how many changes can you make to your model that would enable, you know, an increase in, in logo velocity? What are those implications on your business? If you can go grab more market, and so on.

And then in a macro level, more on the downside, what are the risks? So an example here is a business in the auto industry charging on auto claims in a world that's moving more towards autonomous vehicles is a macro risk that's going to get flagged in an investment committee.

So you want to be considerate of, you know, how usage-based or how variable your model is and how maybe macro headwinds could effectuate changes down the line.

So I would say those are probably the three biggest factors in each of the metrics that are tied to them that are really top of mind, you know, when we're doing diligence on a new company, a new platform, or we're considering new businesses.

Brad Mortimore: Yeah, you started to touch on this. You mentioned net retention and growth retention as being critical metrics to measure, especially for usage-based companies. Could you just expand upon that? Or what other financial metrics do you monitor for companies who do have usage-based pricing?

Ira Golub: Yep. Yeah. I would say net and gross retention are probably the biggest two.

So just on a pure dollar basis, how much of that revenue bucket are you able to retain of those that are leaving? So that's going to be an indicator of basically what you have to replace every year. You can think about gross retention as kind of your bucket that's left over. So if you were running a 90% gross retention, it means you start the year in a 10% hole and that's where you get to that new logo velocity versus net retention. It's how are you going to fill that hole from current customers?

So how are you going to enable a usage-based model to upsell those customers, to let them grow deeper with you and so on, or how are you going to go out and get new customers to hit whatever that exponential curve is you're looking to hit 10, 20, 50, 100% growth, hopefully 100% growth for everybody that's on the phone.

Brad Mortimore: Awesome, thank you, Ira. I'm going to move on to Ethan here. Ethan, you as well, if you don't mind, maybe just quick saying hello and doing a little background.

Ethan DeSilva: Yeah, thanks, Brad. So, similar to Ira, right? I started Simon Kutcher and Partners. I like to think of myself as a reformed consultant, sort of learned a lot of good methodologies and how to approach, you know, problem solving, but I think, you know, I took what I learned there and it's really applied 80/20 version to my work with portfolio companies within Insight. And so I work with, you know, portfolio companies of all shapes and sizes, some from some of our earlier companies to some of our more mature ones on redesigning product and monetization strategy. Really as they launch new products, launch new markets and then their value proposition expands.

Brad Mortimore: Ethan, I'm glad that you were able to join this because Zone & Co is we're a fellow Insight, you know, we're Insight portfolio company. We've had the privilege of working with you directly on, as we ourselves are strategizing on our pricing and our packaging.

So my question for you is what are the biggest opportunities that usage billing presents for SaaS companies in 2025 and potentially beyond?

Ethan DeSilva: Yeah, two things come to mind. The first is a little bit more generic in terms of just really enabling land and expand. And the second one is a relatively newer one, which is monetizing GenAI functionality.

On that first one, I think it really simply it put is that, you know, you're reducing barriers to adoption. I think Ira kind of touched on that and then driving revenue expansion growth, basically, as the value deliver grows to your customers. I think, you know, looking past looking at the past year or so, there's several companies that I've worked with Insight's portfolio that didn't start out with usage-based models, but their product portfolio and value proposition evolved to a point where it was very compelling to transition to a usage-based pricing model. And I think the learning there is to constantly be evaluating whether your ability to monetize and grow your business. Scales with how you deliver value.

The second one, in terms of monetizing GenAI functionality, I think, you know, my experience working with several portfolio companies in the last year and this is that, you know, GenAI definitely creates an opportunity to leverage usage-based pricing.

But, you know, if you aren't thoughtful in terms of how you get there, it could potentially be a net negative in the short term. One portfolio company comes to mind that launched several agents in the second half of last year. And we're looking to aggressively monetize those agents on usage-based pricing like a lot of companies and we did a lot of primary research, talked to customers, talked to talked to sellers and just did a diagnostic of what their systems look like, and it was very clear that customers lacked a mental model of how to ascribe value to these agents. And, you know, usage-based billing could be potentially scary to them for something that is very variable for, for their costs. And the other side of it, you know, they definitely did not have the capability to reliably rate meter and bill at scale. And so, because of that, we made a decision that, you know, 2025, we're going to take a more conservative approach, prioritize adoption and charge, you know, monetize primarily the platform piece.

There's more really - one of those hybrid subscription models and buy ourselves time, build a mental model of value from a customer perspective, work on how we pitch and build the systems up so that in 2026 we can launch a more credit based model, more, you know, complex model where I think finally customers and systems have caught up to enable that so the takeaway there is really consider a crawl, walk, run approach to to monetizing GenAI from a usage-based perspective.

Brad Mortimore: That makes a lot of sense. So I think, you know, what I'm hearing is obviously there's a boom in an adoption of GenAI across, you know, companies, products, obviously companies like open AI, their model is actually usage-based, right? They build based on tokens and things like that, which may seem like an obvious way to then also kind of build your own customers in a usage-based model.

But I think what you're saying is that, hey, that might not be the, the obvious choice. And you should probably take a little bit more of a crawl, walk, run approach as it, as it comes to monetizing your potentially new GenAI features.

My second question I have is what are the common pitfalls that SaaS companies encounter with usage-based pricing models?

Ethan DeSilva: Yeah, I think it's really tied to the point you just made in that just because you can charge, two things here again, but the first one is just because you can charge for usage doesn't mean you should.

You mentioned it, you know, everyone thinks about usage-based because if that's how their costs are scaling with the you know, open AI or whatever large language model they're using. I think Rob brought up Snowflake, right? I think six, seven years ago when I was a price consultant and Snowflake really came to the forefront of everyone's minds. Oh, wow, look at that, and that with revenue retention and how fast they're growing. So sitting in a lot of boardrooms, a lot of CEOs were coming up and saying, "Hey, we want the Snowflake model."

And the simple question we would ask them is, do you have a Snowflake value proposition or, you know, obviously not that structure, but does your value feel like that? And I think, you know, the reality is, if your customers don't ascribe value to the usage metric, then you shouldn't charge that way.

And so I think I have this conversation on the monthly where a company looks, Hey, we have this issue metric. Can we charge on it? Well, you need to do the primary research. You need to think about what customers value before really going full throttle down that that path.

The 2nd pitfall that comes to mind as well is really just underestimating the systems and go to market change management necessary for success. So I already mentioned, you know it takes time to develop a system to meet a rate bill at scale, but it also takes time to build a system to surface usage to customers and to your customer success teams. And so that, you know, it makes it like they understand what they're consuming and how that how that adds value to them.

On the go to market side, I think, you know, it can be a very significant change depending on the proportion of revenue that is going to become driven by usage-based pricing, right? So everything from sales enablement to sales comp, financial forecasting, onboarding potentially needs to be revisited and reconfigured to support that model.

But again, it's very dependent on the model that you go with.

Brad Mortimore: Yeah, yeah, what what might seem like an amazing go to market strategy and pricing that's going to drive user adoption, you know, it could also be operationally, if you don't have the operation side of it down, right, you're going to fail at it, right from the quoting to a billing to a collections to revenue recognition, there's a whole systems and operations side of this process as well, which we're gonna we're gonna dive into as well.

So now we're going to talk a little bit more about some of the most common usage-based billing models that we see. Now I've been working with companies now for a decade, and so has everybody here on the panel. I'm never surprised when I see a new billing model, right? I mean, companies and people are getting more and more creative with how they want to monetize their product, but these are the five most common that we see, or at least flavors of these models.

And what I'd like to do is go in depth on each one of these a little bit and maybe uncover some of their challenges or the implications that these models might have on things like billing and cash flow and revenue recognition and customer adoption and renewals and churn.

So we'll start with the first one. The first one being pay as you go. which is probably the most simple of all of those where customers are charged based on the actual usage of their product or service. The most common model is you build monthly in arrears for the level of consumption that you had. It's a very simple rate X quantity = amount typical calculation here.

So Rob, this, I have a question for you on this one. What would you say are the key advantages and challenges is of adopting a pay as you go model for SaaS companies?

Rob Litterst: Yeah, I think pay as you go, you know, the variability of it kind of cuts both ways. I think the benefit of pay as you go is you can basically anybody can start using your SaaS product, right? So you can open it up to pretty much any customers to try to check it out and see if they get value out of it. On the opposite side of that, you know, it's, it's really hard to predict the revenue. You have a lot of people using it and a really large team kind of getting, getting after it in the software.

And so I think, I think a pay as you go is like a great way to drive acquisition. I think, you know, you see a decent amount of kind of like low end tiers that are kind of like the next step up from like a freemium tier. And freemium is actually getting more and more rare from my experience and what I've been seeing. But I think you see a lot of pay as you go is kind of like that second tier and first paid tier to allow people to ramp up into, into certain products.

Brad Mortimore: Yeah, I think when I look at pay as you go, I kind of look at it as it was the original, you know, when usage-based billing model first became a thing, this was the first model that everybody was adopting. And in some ways, pay as you go is the foundation for models two through five here, right?

If you're not operationally capable of billing or pricing on a pay as you go model, you probably aren't ready to navigate the additional complexities that come with two through five on this screen.

And I think, you know, you kind of touched on it too. I think one of the, the beautiful things about the simplicity of pay as you go is that it's perceived as fair and transparent, right? And it's a great way to adopt a customer adoption, right? Hey, just get on, start using it and pay for what you use. But unfortunately what comes with that is high unpredictability.

Right? Just as fast as any large company could scale on usage-based pricing or pay as you go pricing, customers can also immediately stop, right?

So what you typically sometimes unfortunately see is these peaks and valleys, maybe potentially when it comes to revenue recognition or just revenue reporting in general.

Which is what leads me to my, the billing model number two, which is layering on this component of minimum commitments. And minimum commitments is in some ways, I think trying to combat the unpredictability of pay as you go. So minimum commitments, just in terms of definition, is where customers commit to a baseline of usage billing, and no matter what, they're going to get billed that minimum even if they're under it. If and when they hit that minimum, they then may incur potentially some overage fees. So my question here, Ethan, how do you, how do businesses effectively balance setting minimum commitments to ensure predictable revenue, but also managing the risk of customers being dissatisfied with potentially expensive overage charges?

Ethan DeSilva: Yeah. You know, candidly, this is not my favorite model because, you know, you sort of, there's almost an expectation of overages and people just generally hate overages. You know, that being said, I think where I've seen minimum make sense usually dependent on two things. One, with the minimum contract size the sales team is willing or should be selling. And the second is using historical usage patterns to inform, you know, what would be, you know, a reasonable amount of usage to consume within within a term.

I think using the overages primarily as a way to keep customers honest on that initial commitment is usually how I've seen it work better and also not to enforce overages in that contract term to penalize customers for using and valuing their product.

I think there's obviously a lot of different ways where you can deal with overages chewing them forward and baking their growth into the next contract term is a much more customer friendly approach that I like to suggest to portfolio companies.

Brad Mortimore: Yeah, I often see companies combining this minimum commitment plus overage with potentially the introduction of tiers, right?

So rather than incurring expensive overage charges, maybe it's actually more economical to upgrade to a, to a higher level of tier with potentially a higher commitment level, but more advantageous pricing, right? Rather than incurring these potentially expensive overage charges.

Ira Golub: Okay, on that too, where we, we've seen value in our portfolio is actually combining concepts from both of those first two having a pay as you go tier paired with kind of the model you just described, Brad is a really good way to hit on both of the pros that Ethan and Rob just defined. I wanted to add some value to this conversation as long as I'm here.

Brad Mortimore: No, I appreciate you. We want to provide a growth path for our customers, right? Easy way to adopt, but also grow and scale on the platform by kind of combining it, transition into the minimum commit model here.

The, the third model here that we're going to talk about is prepaid, which sometimes in some ways blends with minimum commitment. But I think the major difference here with prepaid is that, you know, customer is prepaying in advance either by putting a large deposit down or potentially, Rob that you mentioned earlier, you know, buying these credits. And then they consume those credits at their own, at their own discretion over time.

You know, a great example here, I think most people can relate to is this, but well, maybe in the Northeast, at least, you know, for those of us who use EasyPass, right? You load your account with a dollar value in EasyPass, you're going to drive on the highways and you're going to deplete your EasyPass balance. And at some point you're going to need to replenish that balance. You're going to need to top it off.

There comes a ton of complexities here with which I'll talk. I'll touch on with, you know, as relating to revenue recognitions specifically at ASC 606. But, but Ira, this question is for you. So one of the complexities about this prepaid model is the unused balances in prepaid models.

And sometimes it can create these discrepancies and lead to potentially customers dissatisfied when they're left with these prepaid, these unused balances, in their account. So what strategies can businesses use to minimize these disputes and then maintain strong customer relationships while managing these unused balances?

Ira Golub: Yeah, I would say from, from my perspective, like rules, rules, rules is kind of the name of the game in a prepaid drawdown type of scenario. So it's not only the rules upon rollover or unused credits but it's also the rules upon replenishment. So are you in an auto replenish type of scenario? You know, what are the communications that are coming from, whether it be your sales team, customer success, et cetera, that it's creating that replenishment motion.

So there, there is a load of complexity that is added to this model on just how you structure it, where there's flexibility, where there might not be so much flexibility to the, the CFOs that are on the call, like credit breakage is a real thing and it's something that can be advantageous, you know, on a, on a P& L per se, but it's something you definitely should watch out for from a customer satisfaction perspective.

So. One of the pros to a model like this is that you'll naturally see some level of breakage somewhere. It all comes down to how you handle it and basically how you contract out with customers to define what's fair game versus what's not.

Brad Mortimore: Yeah, I think you nailed it there. Rules, rules, rules. You gotta define the rules for use it or lose it, rollover, replenishment, because all of those things, again, my mind goes to accounting, has so many implications on revenue recognition, deferred revenue, and and just reporting in general.

Ira Golub: And even furthermore to that note on valuation, this is probably of all of these models minus obviously pay as you go is probably going to be reviewed as the least recurring revenue-esque of the group. So that's an important consideration as you're looking at, you know, whatever multiple anybody would get on your, your revenue, it's going to be looked at as, as very transactional in nature.

Brad Mortimore: Yeah. From a cashflow perspective, it's great. Right. Cause you get all the cash up front. But I agreed on the on the recurring nature of it.

The fourth one hybrid model. So hybrid models, I think, combines the best of a little bit of both of these, right? Oftentimes, you see fixed recurring platform fees that include a lot of functionality from a, you know, a fixed recurring perspective while also layering on usage-based billing, you know, for potentially, hopefully value added, you know things within, within your product.

So Rob, my question for you is what makes this model so attractive and how can SaaS companies strike the right balance in a hybrid model?

Rob Litterst: Yeah, I think I was spoiled with this because my first experience in SaaS was at HubSpot, which I think did a really, really good job of using a hybrid model. It's cited a lot in pricing literature for the marketing suite, which is what I was selling back in the day.

And basically they had a three part tariff model where they had a base fee that included a certain level of contacts, which also equated to a certain number of emails per month, and then that number in the base would go up with each tier, and then there'd be a variable fee for additional contacts for each of those plans.

And between each of those plans, there was always a point where it made more economic sense just to upgrade because the variable number of contacts you would be adding would be, would end up costing you more than just upgrading to the next plan. And so I thought that was super smart.

What it also did for us on the sale side is it it really allowed us to be consultative as sellers at HubSpot. And I think this was particularly important at HubSpot because we're kind of like trying to teach people how to rethink marketing, right? Like we're trying to help them understand marketing automation and inbound marketing, and we can kind of help them understand, well, here's where you are now, as far as like contacts in your database, here's where we think you're going to go based on your existing growth and what we can help you do at HubSpot. And because of that, like, here's where we actually think you should start. We can discount you back to kind of like your current contact levels. Like we could play some games from like a negotiation standpoint, if we had that kind of subjectivity within the pricing model to, to make those kinds of decisions.

And you just don't have that with like a pure consumption model or a flat fee. The other thing is like, I think with hybrid, ideally you have, you're charging for a metric that your product is going to help increase or solve for, right? So like with HubSpot, we really wanted to help our customers grow their contact database, right?

So the idea down the road is like, well, yeah, you're going to be paying us more because you're going to have more contacts, but hopefully those contacts are going to end up as more opportunities and ultimately more customers down the road.

So I think those are some of the benefits on the customer side, I think it, it also makes it more predictable as well, and you know, if you if you're really thoughtful about those those limits for for usage and you kind of like match them with what you're seeing in your database, then you're going to avoid a lot of kind of disputes with customers or angry customers by moving in this direction.

Brad Mortimore: It's super interesting to hear your experience there with HubSpot too. And it sounds like this model, you know, provides potentially sales and go to market with a little bit more flexibility when it comes to trying to, you know, negotiate with customers and, and drive value.

Rob Litterst: Yeah, the one thing I would add is after I left HubSpot, I went to another company that started on a fixed fee and tried to reverse engineer a hybrid model where basically we were going into the install base and telling people that were paying like 50 bucks a month, that they'd be paying 500 to a thousand a month, and that didn't go over as well as as the HubSpot sales conversation.

So just be careful with it. And I would say, try to start early with hybrid if you can.

Brad Mortimore: The the last one here is really probably the simplest, right? In some ways it's calling it a usage-based model, but the definition of it is it's not usage, it's unlimited usage.

And Ira, I have the question for you here. So unlimited usage models can be appealing to customers because who doesn't love the word unlimited, right? But it also could pose risks to profitability where costs have a potential to increase while revenue might stay flat, right? So in what scenarios is this model a good fit and how should companies strategically position unlimited models?

Ira Golub: Yeah, I would, I would say my, my word of advice here is never base your price off of costs. You always want to be value based in your pricing, but always consider costs when setting your pricing. So cost to serve is a super, super important consideration, especially if you're running a higher cost of sales.

Just making sure that you are, you know, meeting a reasonable gross margin or profitable gross margin that's going to flow down and make the rest of your business profitable. So you always have to ensure that in some way. You know, if you're running with a flat model, I think we talked about chatGPT earlier, which in their, in their B2B segment, they're running, you know more variable approach. In their consumer segment, I think Sam Altman came out and said pro or plus, or one of them, one of the flat fee, consumer access, it wasn't profitable. So an example of a consideration where you need to make sure that your cost to serve can match up with whatever you're pricing.

I would say that the second side of this is in, I think Ethan covered this point as well make sure you're talking to customers. So an example of like a Netflix is that Netflix probably shouldn't consider billing per show, you know, or per episode. So make sure that you've got that value metric, right? Like you're, you're nailing the metric that you're scaling on. A lot of companies are moving away from flat fee because everybody started at flat fee. It doesn't necessarily mean that flat fee is a bad alternative. You just need to be considerate of where specific companies value proposition fits in and how customers interpret the value as it scales.

Brad Mortimore: Amazing. Well, thank you all three of you guys for all that insight and answering some of these questions.

Just to to summarize a little bit. So we've. We've talked a lot about the benefits and the challenges with different pricing models and about their potential impacts to that each of these models have on data calculations, revenue recognition, billing. And unfortunately what I've seen far too often is that accounting becomes the bottleneck, you know, for businesses and go to market teams who want to adopt a model that they believe is going to grow customer acquisition and provide a scalable monetization strategy.

And the last thing that the CFO or the office of the CFO wants to be is the bottleneck that hinders the organization's ability to grow. And that's why it's so important to implement the right tools to automate some of these processes and also provide the agility to adapt as the business changes because we know this is not the first time pricing is going to change and it's not the last. And this is where ZoneBilling has been immensely successful.

ZoneBilling is built entirely inside the walls of NetSuite. So that's your core system of record for financial transactions, your general ledger, your chart of accounts. And it's where your team typically lives on a day to day basis. And we layer on that sophistication of billing and subscription management, essentially transforming NetSuite ERP from just an ERP system into a billing and revenue platform that's capable of automating the full life cycle of quote to cash.

Okay, we are already up on time. So unfortunately we don't have time for the, the Q&A. But I just want to thank a huge thanks to the panelists, Ira, Ethan, and Rob for joining and providing some of the insights.

And thanks everybody else for joining as well. And yeah, have a good rest of your day.

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