Usage-based pricing and product-led growth is the ultimate growth strategy in a recession

In the depth of the 2008 Great Recession, Lars Dalgaard, the founder and CEO of SuccessFactors, announced to Wall Street that he was no longer trying to sell his software to new customers. Lars had taken the company public six months earlier, and the honeymoon with analysts was short. Lars had concluded that no one was buying software; thus, his salespeople were wasting time and burning cash.

Instead of pouring money into sales and marketing, Lars undertook a strategy we would now call product-led growth (PLG). Lars re-directed capital from sales and marketing and pushed it into product development. Soon SuccessFactors started churning out several new modules each quarter and then sold those modules to their installed base of customers.

Growth slowed, but not as much as it would have if they had relied on new customer acquisition. In addition, profitability improved substantially as the customer acquisition cost of expansion revenue was much lower than for new customers. Deploying this strategy, the company reached profitability a quarter earlier than planned.

Lars commented,

A final benefit of the strategy was that SuccessFactors exited the Great Recession with a broad product portfolio that provided them a competitive advantage for years to come.

Success Factors was not set up for usage-based pricing (UBP) at the time, but if it were, it would have been another go-to strategy to attract new customers and grow net dollar retention. UBP lowers financial barriers to customer acquisition: no budget, no problem, just try it out. If our product does not improve your business, just stop using it.

Some will argue that UBP will be problematic in an economic slowdown because economic activity (usage) will slow and drag on revenue. While that might be true to some extent, any modest usage reduction will be offset by three factors:

1) a reduction in logo churn

2) easier new customer acquisition

3) more expansion revenue.

Reduced logo churn is a byproduct of UBP. Customers whose business has slowed will automatically pay less and keep the value proposition of your product positive. In contrast, if saddled with a fixed subscription price, the economic benefit of your product could fall below its cost, causing them to churn.

Easier new customer acquisition is the calling card of UBP. When budgets are tight, its relative advantage over a sales-led process with a long subscription period and upfront payments will naturally increase.

Finally, usage is asymmetric amongst the installed base, and growing customers might well offset shrinking ones. Many businesses grow during a recession, and growth is unlimited on the upside, while lower usage tied to a downturn should average out to negative two or three percent.

The correlation between economic growth and SaaS usage is also very product specific. For example, some products, especially those with hard-dollar savings, might increase in average use during a recession.

The current economic outlook for 2022 and 2023 is uncertain. Public SaaS stocks have been ruthlessly repriced from their recent highs, and with the Fed aggressively tightening interest rates, an economic slowdown is possible, although not inevitable.

Is a recession coming? Who knows. But it's evident that SaaS companies already proceeding with PLG and UBP initiatives should continue and possibly accelerate their efforts.

Ready to deploy usage-based pricing, set up some time to talk to our team.