Consumption Pricing is not just about driving growth; it’s necessary for survival in 2025. CFOs are cutting SaaS spending like never before. The average number of SaaS applications companies use is trending down (see below), and the average overall SaaS spend has dropped even faster. The thing CFOs hate most is unused licenses. According to SaaS Management firm Zylo, 53% of SaaS licenses go unused each month. That’s astounding and unsustainable. In their most recent survey, “Seven in ten respondents said that reducing [SaaS license] waste is their top SaaS management priority” this year. Unused licenses occur for various reasons. Sometimes, underutilization is due to a poor initial estimate of users, slow implementation, weak training, or simply a clunky app that’s hard to use. However, other, more mundane things like employee turnover or position changes also cause significant underutilization. Do you know which applications have zero underutilization? Those with 100% consumption pricing. A company may be using an application less than it should, but it never pays for an application it is not using. When it comes to renewal time, there is a long list of unused SaaS products on the chopping block ahead of yours. Consumption pricing is also advantageous when securing a new booking in this environment. Customers are pushing to lower their commitment levels and maintain flexibility. According to the same Zylo data, SaaS contract durations have decreased over the past two years. Consumption pricing is naturally lower in commitment and fits perfectly into this trend.
I also believe SaaS consolidation is driving some of this. Leaders are becoming conscious of not only the hard costs of SaaS tools, but the soft-costs associated with constant context shifting, data issues, and extra work caused by unwieldy tech stacks. I am seeing a preference for comprehensive platforms over point solutions. Hubspot is a great example of a company that is selling against this pain point. Their latest ad emphasizes the fatigue caused by managing the customer journey across the marketing, sales, and service tech stack.
Consumption pricing flips the script. Customers now control revenue by choosing how much value they extract. However, flexible pricing won't save a product if it is not essential to your customers. If they don't need you, they will not stay, no matter the price.
Todd Gardner - with the current trends towards the adoption of at least some level of consumption pricing (up 10%+ in 2024) - the role of Customer Success (and product) to ensure product engagement/utilization is high and hopefully increasing has never been more important...and hopefully validating customer outcomes (value) is right around the corner as a top priority heading into 2025!!!
💯. Consumption-based definitely makes you more resilient to logo churn, although the flip side is that contraction can be more rapid (your customers just use less without having to talk to you). But then there's less friction about expansion too...
53% of SaaS licenses go unused each month! I thought it was high but not that extreme
Consumption pricing is super nice, in theory, but few organizations have gotten it to work and most I've spoken with aren't interested. Having underutilized apps is the domain of the enterprise as small/mid sized companies tend to run lean with core services. Ultimately, a fragmented "consumption" stack may be great from a cost perspective, but if it's not core nor being used frequently, then there is a security/overhead issue.
I wish the gym that I will inevitably join again in January would see the world like this and allow me to pay per use :-)
Well said, 💯 agree
Expert in SaaS Finance, Valuation, Pricing, and Metrics
12hI think Zylo works with large customers, and the survey reflects the mean number for those larger companies. If you're interested in consumption pricing topics, this blog is hosted on the m3ter website. https://www.m3ter.com/blog/consumption-pricing-is-not-just-about-driving-growth