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How to overcome the challenges of switching to usage-based pricing

The usage-based pricing model almost feels like a cheat code — it enables SaaS companies to more efficiently acquire new customers, grow with those customers as they’re successful and keep those customers on the platform.

Compared to their peers, companies with usage-based pricing trade at a 50% revenue multiple premium and see 10pp better net dollar retention rates.

But the shift from pure subscription to usage-based pricing is nearly as complex as going from on-premise to SaaS. It opens up the addressable market by lowering the purchase barrier, which then necessitates finding new ways to scalably acquire users. It more closely aligns payment with a customer’s consumption, thereby impacting cash flow and revenue recognition. And it creates less revenue predictability, which can generate pushback from procurement and legal.

SaaS companies exploring a usage-based model need to plan for both go-to-market and operational challenges spanning from pricing to sales compensation to billing.

Selecting the right usage metric

There are numerous potential usage metrics that SaaS companies could use in their pricing. Datadog charges based on hosts, HubSpot uses marketing contacts, Zapier prices by tasks and Snowflake has compute resources. Picking the wrong usage metric could have disastrous consequences for long-term growth.

The best usage metric meets five key criteria: value-based, flexible, scalable, predictable and feasible.

  • Value-based: It should align with how customers derive value from the product and how they see success. For example, Stripe charges a 2.9% transaction fee and so directly grows as customers grow their business.
  • Flexible: Customers should be able to choose and pay for their exact scope of usage, starting small and scaling as they mature.
  • Scalable: It should grow steadily over time for the average customer once they’ve adopted the product. There’s a reason why cell phone providers now charge based on GB of data rather than talk minutes — data volumes keep going up.
  • Predictable: Customers should be able to reasonably predict their usage so they have budget predictability. (Some assistance may be required during the sales process.)
  • Feasible: It should be possible to monitor, administer and police usage. The metric needs to track with the cost of delivering the service so that customers don’t become unprofitable.

Navigating enterprise legal and procurement teams

Enterprise customers often crave price predictability for annual budgetary purposes. It can be tough for traditional legal and procurement teams to wrap their heads around a purchase with an unspecified cost. SaaS vendors must get creative with different usage-based pricing structures to give enterprise customers greater peace of mind.

tips for navigating legal and procurement teams

Image Credits: Kyle Poyar

Customer engagement software Twilio offers deeper discounts when a customer commits to usage for an extended period. AWS takes this a step further by allowing a customer to commit in advance, but still pay for their usage as it happens. Data analytics company Snowflake lets customers roll over their unused usage credits as long as their next year’s commitment is at least as large as the prior one.

Handling overages

Nobody wants to see a shock expense when they’ve unknowingly exceeded their usage limit. It’s important to design thoughtful overage policies that give customers the feeling of control over how much they’re spending.

If Coinbase is worth $100 billion, what’s a fair valuation for Stripe?

Mere days after we discussed Coinbase at $77 billion and Stripe at $115 billion in the private markets, those same semi-liquid exchanges have provided a new valuation for the cryptocurrency company. It’s now $100 billion, per Axios’ reporting.

Good thing we argued last week that there could be some merit to Coinbase’s $77 billion secondary market valuation from a particular perspective. We’d look silly today if we’d mocked the $77 billion figure only for it to go up by about a third in just a few days.


The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.


Luckily for us, Axios also got its hands on a few numbers regarding Coinbase’s 2019 and 2020 financial performance, so we can get into all sorts of trouble this morning. We’ll look at the data, which stretches to the end of Q3 2020, and then do some creative extrapolating into Q1 2021 to decide whether Coinbase at $100 billion makes no sense, a little sense or perfect sense.

As always, we’re riffing, not giving investment advice. So read on if you want to noodle on Coinbase with me; its impending direct listing will be one of the year’s most-watched financial events.

We’ll drag Stripe back in at the end. Given that the companies now nearly share private-market valuations, we’d be remiss to not unfairly stack them against one another. Into the breach!

Coinbase @ $100B

Axios’ Dan Primack, a good egg in my experience, got the goods on Coinbase’s historical performance. Summarizing the bits we need, here’s what the crypto exchange got up to recently:

  • Coinbase 2019: $530 million in revenues, $30 million in net losses
  • Coinbase 2020 Q1-Q3: $691 million in revenues, $141 million in net income

It’s simple to take the 2020 data that we have and extrapolate it into full-year data. Indeed, you get revenues of $921.33 million and net income of $188 million. Compared to its 2019 data, Coinbase would have managed around 74% growth while swinging steeply into the profitable domain.

That’s a killer year. But it’s actually a bit better than we are giving Coinbase credit for. Poking around volume data compiled by Bitcoinity.org, Coinbase had its biggest period of 2020 in terms of bitcoin trading volume in the fourth quarter. Thinking about Coinbase’s 2020 from a trading perspective using the same dataset, it had a great Q1, more staid Qs 2 and 3, and a blockbuster Q4 that ramped to record highs at the end.

Paying $115B for Stripe or $77B for Coinbase might be quite rational

CoinDesk reported yesterday that crypto trading startup Coinbase is being valued at $77 billion on private exchanges. And Forbes reported that Stripe is being valued at $115 billion on secondary markets, where private shares can be bought and sold, albeit in a limited fashion.

I instantly wanted to write a piece headlined “Beware those super hot secondary market valuations, but after a little digging, I cannot. It turns out that the public markets are so hot, there is historical precedent for seemingly aggressive secondary market transactions being conservative compared to later IPO valuations. And there is further precedent for private market transactions that are more conservative in price terms than venture-determined valuations also working out.


The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.


The hot equities market is making stock pickers out of many startup investors, regardless of whether they are leading priced rounds of buying shares on modern secondary markets.

It’s hard to overvalue a startup when the public market is willing to double its valuation the moment it starts to trade.

Let’s explore the new prices for Coinbase and Stripe by starting with a look at their dated private valuations, their new, reported secondary prices and where some companies that went public with notable secondary prices wound up trading today.

This will be fun! I promise!

Overprice me, I dare you

Coinbase was last valued by private-market money at around $8 billion, per Crunchbase data back in October of 2018. More recently we’ve seen secondary transactions that value the firm at $50 billion, other notes concerning a $75 billion possible valuation, and even some enthusiastic chat from a former employee that the company could be worth $100 billion.

Its new $77 billion price tag might seem somewhat pedestrian in that mix, but recall that we’re largely discussing the valuations associated with Coinbase set by buyers not in the know; retail secondary buyers of shares in the cryptocurrency exchange are probably not its board members.

So, the public is, to some degree, repricing Coinbase. The question is whether those prices make any sense. Hold your answer: we have more work to do.

Stripe at $115 billion on secondary exchanges is perhaps bonkers, or perhaps nothing more than rationality. In its last round, a $600 million Series G that came in mid-2020, Stripe was valued at around $36 billion. And, it is rumored to be raising capital at a $100 billion valuation.