Mixing the consumption charging model with annual contracts for ongoing stability

In Part 1 of this article, we spoke to Chris Federspiel, CEO and founder of Blackthorn.io, a payments app on the Salesforce AppExchange, about the company’s experience with the consumption charging model for SaaS.

Chris explained that the model could be less complicated and cheaper than some traditional payment models in the SaaS space, but towards the end of Part 1, added that there were potential perils in shifting to a wholly consumption charging model too fast – it takes both a good deal of capital and nerves of steel.

We asked him, in that case, whether a mixture of the consumption charging model and traditional, usually annual, contracts, could be the way to go for SaaS businesses.

Getting the mix right.

CF:

If you can get some annual mixed in with a base of consumption, it really helps. Or if you can push customers, if you can say “Hey, you know you’re going to do this much, how about we pre-bill half of it at some reduced rate, and do the rest based on the consumption charging model?”.

The main benefit is that the source company gets their assumptive revenue, because if you don’t have your assumptive revenue, it’s hard to do budgeting. We have a revenue share with Stripe, where when our customers process payments through us, Stripe gives us a revenue share – it’s very common, working with payment gateways to do this. The customer benefits because they don’t see any of the cost, and our revenue share goes up and down based on their margins.

The thing is, if our customers all of a sudden stop processing as much, our revenue share goes down, and there’s less assumptive revenue, but over time, we can start to see the scale. So we tend to budget off the average, not off the peak, which does make budgeting a little bit harder.

Where does it stand in the long run? If you look at OpenAI, they’re charging on a hybrid model. You get a per user model, that comes with X number of prompts, or query searches. But if you want to buy more, then there are different ways to use the consumption charging model there too. You either sell the next tier, where you get Y number of prompts, but that then might lock you into the tier, which is like some hybrid between old plans and something more.

They introduced a pure consumption charging model, too. So there’s really no Magic Bullet we’ve seen. There are ways to blend some amount of assumption, which helps with cashflow so you can budget and hire employees, with customers actually getting the benefit of doing consumption.

The biggest, most famous one doing it is AWS, and that’s exactly what they’ve been doing, too. But the big question comes when people say “We’re not using a service anymore, but we still have to pay?”

What do you do? Is the company going to be altruistic and reduce your spend? It helps get renewals, to be sure, but…

THQ:

Companies have to eat and keep the lights on too?

The flexibility of commerce.

CF:

Yeah, exactly. But in a CRM world like Salesforce, there is no consumption charging model for the core platform – you can’t do it, because some organizations will make a lot of records and some won’t, just by the nature of their business. But Salesforce does use the model with its commerce platforms, and we’re going to do the same thing with our e-commerce app when it launches soon.

THQ:

We were going to say, the consumption charging model didn’t just drop out of a blue sky. You go to put gas in your car, you pay upfront for assumed consumption – boom. It’s just whether people and companies are familiar with it in this kind of business. And as we know, there are pre-existing models that they’re probably fairly happy with. What’s the carrot that gets them to jump from that comfort zone to the model that helps everybody survive these uncertain economic times, and eventually slope up to more certain prosperity?

CF:

Yeah. If the business is susceptible to some kind of seasonality, then going with a usage base is incredible, because you’re not having to outlay so much money when revenue is not coming in. Or if you’re implementing something new, you don’t know what the scaling effects going to be – we could be massive in 2 months, or it could take a long, long year before things come right. You literally have no idea. So then if you can scale, it really helps in that way.

Salesforce famously will say, “You’re buying our new product, we’re going to sell you 500 users, and they’re going to start today.” And the customers will all say, “We don’t need 500 users today!” and usually, Salesforce says “So what?” But then it says “We’ll give you this big discount if you use it ahead of time.” So that’s always been what’s brought people in.

We do this with a number of our customers now. Your contract will say we’re going to bill you this much per quarter, and then after you’re done, it becomes this thing that goes in line with their usage. I think it’s hard for a lot of finance departments to figure out usage-based charging, it rocks their internal processes.

Hearts and minds and credit cards.

THQ:

We wondered whether there was a battle for hearts and minds. That sense of “We do what we know and we’re comfortable with it. What you’re proposing looks like at least work and potentially pain, so why should we switch?” What’s the thing that wins them over to it?

CF:

Yeah, we’ve seen some cases where they start on our most expensive plan and just pay by usage. And once you get to some threshold, then we can flip you to an annual contract. But that doesn’t always necessarily work. Sometimes you might just start off with a credit card, but if you’re paying $2, 3, 4, 5000 on a credit card per month, it starts to add up.

THQ:

Apologies – we just broke out in terror-sweat at the thought of the interest.

CF:

We sold a $140,000 contract to one customer on a credit card. That… builds up your AmEx points…

THQ:

Annnd there’s the dark shiver down the spine. From your personal point of view, what’s the champion point of switching to this model? If we were to say “You have three sentences, tell us why we should do this”?

CF:

It’s not even so much a benefit for us. It’s a benefit for the customer.

What happens in a large enterprise is you get a CIO or CTO who says “Well, in the case of a million bucks for a big company, it’s not really a big deal.” Take a 500-person company, and they’re facing a $2 million-a-year spend. If they lock it in for five years, and they get it wrong, they’re going to face getting fired. So this allows you to win a champion at the company without their neck being on the line.

We’re seeing more of that as we go upmarket – you have to win over a department. If you just win over one person, it’s too much of a risk for them with their job.

We’ve been in business for seven and a half years, and we’ve always done pay per user with our payments app. What we’re seeing is a big preference towards pay per transaction, because it allows people to scale with the discounted rate. The mixture of the consumption charging model and the annual contract gets us the mix we need – say contract for 40% of the spend, and the rest based on usage? That helps us meet both needs – surviving today and thriving next year.