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- Case Study: Intercom
Hi Operators ⚙️
Usage-based pricing in B2B SaaS has doubled in the past five years, with 60% of companies fully implementing or experimenting with this approach.
This consumption model charges customers based on their actual product or service usage rather than a flat fee.
Kyle Poyar from OpenView Partners highlights how this shift to usage-based pricing can be a strategic move that will impact your companies growth and efficiency:
Companies with usage-based pricing are growing faster because it allows them to acquire customers earlier and expand with their success
This pricing model differs from traditional subscription-based approaches in several key ways:
Value Alignment: Customers pay based on the value they get from the product.
Scalability: Pricing adjusts with customer usage.
Lower Entry Barrier: New customers can start with lower costs and scale up as they see value.
A company who has successfully made this transition from seat based to usage based pricing is Intercom.
While in San Francisco this week for work, I got the chance to go to a talk with Eoghan McCabe, The CEO of Intercom. (BTW I’d rate the chat a 9/10. He’s a great speaker with first principled thinking).
A key takeaway of that chat was Intercom is all in on AI with the company planning to invest $94 million. And some of that investment has gone into Fin, Intercoms AI chatbot.
Fin plays a crucial role in the companies future. McCabe emphasizes,
"Fin ensures the customer gets a far better experience. They get instant and really consistent answers."
The impact of Fin is evident, with nearly 1,000 companies using it in over one million conversations with a 50% customer resolution rate.
(You ever get tired of answering the same question for the 51st time and want to rip your hair out? Fin might be helpful here)
And how does Intercom charge for Fin? Intercom has decided to go with a usage based pricing model. Many AI-first companies are using this consumption based pricing to scale their unit economics (and avoiding subscription fatigue).
To better understand how to shift introduce usuage based pricing to your own business, let’s dive into how Intercom introduced their Fin to the world.
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Intercom's Background and Decision to Change
Intercom was founded in August 2011 by Eoghan McCabe (CEO & Chairman), Des Traynor (Chief Strategy Officer), David Barrett, and Ciaran Lee (former CTO).
Intercom’s product is focused on enabling personalized customer interactions across three capabilities:
customer conversations
proactive support & marketing
AI & automation.
The goal of the product is to create one unified channel for all customer interactions.
Initially, Intercom's pricing was traditional SaaS: tiered, subscription-based with a focus on per-seat licensing. This model worked well in their early growth, ensuring predictable revenue and scaling as they expanded their customer base.
From 2013 to 2017, the company's annual recurring revenue grew from $50 million to $250 million. As of 2022, Intercom serves over 25K customers, including Atlassian, Amazon, and Lyft Business.
Intercom's experienced hyper-scale but recently, their journey has had its challenges. Eoghan McCabe admits,
Intercom was a giant success, but in the last few years we definitely lost our way a little. We had an unfocused strategy, the culture was a little too comfortable.
The financial impact was significant, with McCabe revealing that they were on course to lose $50 million in 2022.
The setback prompted Intercom to reevaluate its strategy, including its pricing model. The company recognized that as their product offerings grew more sophisticated and the SaaS landscape evolved, they needed a strategy that better aligned with the value they were providing.
The decision to base their new AI products on a business model of usage-based pricing was driven by several factors:
Intercom wanted better value alignment for customers by allowing them to pay for the actual value from the product, not just access.
Intercom needed a more flexible pricing model with a wide range of clients from small startups to large enterprises.
Usage-based pricing will lower the barrier to entry for new customers and encourage existing to explore more of Intercom's features.
As more SaaS companies moved towards usage-based models, Intercom saw an opportunity to stay competitive in the market.
Intercom could capture more from high-usage customers by tying pricing to usage.
They tied their pricing directly to the volume and effectiveness of interactions facilitated through their platform.
This strategic shift set the stage for Intercom's financial recovery. McCabe reported that it became cash flow positive again with $129 million in the bank.
So how does their model work?
Intercom's New Pricing Model
Research indicates a sweet spot for usage-based pricing. According to OpenView's 2023 SaaS Benchmarks Report, companies with 0-25% revenue from usage-based pricing see the fastest growth.
This "Goldilocks Zone" suggests that a hybrid approach, combining usage-based elements with traditional pricing, may be optimal for SaaS businesses.
This finding challenges the idea that more usage-based pricing is always better. It suggests that companies should calibrate their mix to maximize growth. For instance, Intercom's shift to a hybrid model, blending usage-based pricing with traditional subscription tiers, aligns with this insight.
In March 2024, Intercom introduced their usage-based pricing model for their AI products. This model is built around key components designed to align pricing with the value customers receive.
Base Subscription: Varies based on the chosen plan (Essential, Advanced, or Expert) and provides a baseline of features and capabilities for all customers.
Per-Seat Pricing: An extra charge for each team member using the platform. This maintains predictability of the old model while allowing scalability.
Usage-Based Elements: Charges based on specific usage metrics, including:
People reached: This metric captures the scale of a customer's engagement through Intercom.
Handled resolutions: Intercom charges $0.99 per resolution handled by Fin, their AI chatbot.
Channel usage: Different rates for email, SMS, and WhatsApp.
Usage-based pricing seems simple. Customers pay for what they use. However, this simplicity masks significant backend complexity.
Intercom's experience illustrates this paradox well. Des Traynor, their co-founder, explains:
"There are features we could build that we won't because they're too expensive. For example, we could use GPT-4 to summarize every conversation that every customer has with every business on Intercom. We could do that, but it would cost a lot because Intercom powers 500 million conversations a month. That's a lot of API calls, right?"
Usage-based pricing complicates product decisions, as companies must balance feature development with usage costs, requiring sophisticated tracking and billing systems.
The challenge is maintaining the illusion of simplicity for customers while managing the underlying complexity.
The cost at scale has implications for Intercom's pricing strategy. Charging per resolution for Fin allows offering advanced AI capabilities while ensuring the costs are covered by those who benefit most.
The new model includes safeguards to ease the transition for customers:
The Starter plan offers at least 1,000 unique users for a predictable base cost.
Clear documentation and tools to help customers estimate their costs based on expected usage.
A transition period allowing customers to compare costs under both the old and new models.
Usage-based pricing affects not only customer payments but also product development. Product teams must rethink what and how they build when every feature can impact billing.
Eoghan McCabe, co-founder of Intercom, says,
"It requires a different kind of thinking for us. Just because a feature is a brilliant idea doesn't mean it gets shipped. You have to think of what it might cost at Intercom scale."
This new way of thinking encourages developers to focus on features that drive valuable usage metrics, leading to more efficient product development, but also risks stifling innovation.
Companies must balance driving billable usage and creating genuine customer value.
How you can build this yourself
Transitioning to usage-based pricing isn’t just about flipping a switch; it’s a strategic shift that requires meticulous planning and execution across your organization.
Drawing from Intercom’s experience, here’s how your company can successfully make the leap:
Identify and Align Your Value Metric
Start by pinpointing the usage metric that best represents the value your customers derive from your product, like API calls, data processed, or, in Intercom’s case, chatbot resolutions. This metric should:
Scale with your customers’ success.
Be straightforward for customers to understand and predict.
Be something you can accurately measure and bill for.
Design a Balanced Pricing Structure
Conduct a deep dive into your customers’ usage patterns and revenue contributions. Understand how different segments might react to the new pricing.
This analysis will help model the financial impact and guide your strategy.
Develop a pricing model that incorporates:
A base rate to cover fixed costs.
Usage-based charges tied to your value metric.
Tiers or caps to keep costs predictable for customers.
Consider a hybrid model that blends subscription and usage-based pricing to smooth the transition.
Upgrade Your Billing Infrastructure
Invest in robust billing systems capable of:
Real-time usage tracking.
Accurate, transparent invoicing.
Providing customers with detailed usage dashboards.
Ensure these systems can handle the complexity of your pricing model and scale as your business grows.
Prepare Your Sales and Customer Success Teams
Equip your teams with the tools and knowledge to sell and support the new model:
Train them on the benefits and mechanics of the new pricing structure.
Revise sales compensation plans to align with customer lifetime value rather than initial deal size.
Provide tools to help customers estimate their costs and see the value.
Communicate Clearly with Your Customers
Develop educational materials and tools that:
Explain how the new pricing works.
Help customers forecast their costs based on usage.
Roll out the new pricing in phases:
Start with a small customer group or new sign-ups.
Gather feedback, refine the model, and then expand.
Usage-based pricing isn’t static. Continuously collect data, gather customer feedback, and be ready to adjust your model as you learn what works best for your business and customers.
Transitioning to usage-based pricing impacts every facet of your business. It demands thorough planning, collaboration across departments, and a willingness to adapt.
However, when done right, it aligns your revenue with customer value, enhances customer satisfaction, and drives growth.
Conclusion
The key takeaway for COOs and BizOps professionals is this: usage-based pricing is not just a pricing strategy, but a fundamental shift in business operations.
It requires rethinking everything from product development to sales compensation to financial forecasting.
When implemented thoughtfully, it can drive substantial value for customers and your business.
As the SaaS industry evolves, those who navigate this shift will thrive in the competitive software landscape.
The future of SaaS pricing is usage-based, and it’s time to start preparing.
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