Usage Based Pricing + Chief Monetization Officer - with Chris Mele, CEO Software Pricing Partners

**Ray Rike** (0:00)
Hello, I'm Ray Reich, Founder and CEO of RevOp Squared, and your host of the Metrics that Measure Up podcast. We talk to a wide variety of B2B, SaaS and Cloud thought leaders, executives, investors, and people just like you to discuss the metrics and benchmarks they use to make metrics-informed decisions. Now on to today's show.
Welcome to today's episode of the Metrics It Measure Up podcast. Today, we are joined by Chris Mele, Managing Partner at Software Pricing Partners. Today, we're going to be covering three main topic areas. One, pricing as a strategic value lever. Two, usage-based pricing, opportunities and pitfalls. And three, usage-based pricing, where do I start, and how do I measure the business impact? Chris, please take a moment to give a brief background overview of your journey to becoming a guest on the Metrics that Measure Up podcast.

**Chris Mele** (1:08)
Hi Ray, thanks for having me. So I started as a founder in the late 90s, when I started my own software company, and we were largely on-prem software. And maybe the funny side story is in 8 when we decided to move to the cloud over the market crash of 09, we reinvented our software and asked ourselves the question, if we've streamlined everything else, how do we really start thinking about making a good high-growth story with a lot of profitability? And I ultimately hired Software Pricing Partners in 08, and that's actually how I ended up here.

**Ray Rike** (1:39)
Interesting. So you were a customer. And it's interesting with your career journey, right? You've seen, I think, multiple incarnations of software deployment models. You've seen it from a on-prem model. And I'm not sure you're quite as quote unquote experience, i.e. old as I am, but I saw software deployment models in mainframes. Then we moved to client server. Then we moved to web apps. Then we went to SaaS subscription pricing, which was based upon traditionally users. And now we've got this trend about consumption and usage based pricing. Are there any common insights you have across all those different software deployment for pricing models?

**Chris Mele** (2:21)
Yes. So I started my journey in Cobalt Programming, Ray, back in 94 And so maybe not the mainframe, but close. It was what they call CICS screens. And along that way, when I think of consumption and really, it's something that's been at the sort of part of all of this since 1982, is this idea that consumption is not a thing, it's actually a gradient.
And you can be extreme in your consumption approach. For example, I'll be ridiculous for a moment and say, well, I'm going to charge you every time you log into my software. Or I'm going to charge you in five second intervals that every time you use my software. And no buyer would agree to that. However, that can be a form of consumption. And arguably, a form of consumption can be, well, I'm going to charge you based on the number of locations that you have, and what you're consuming, therefore, is the number of locations of your facility. And so consumption is a gradient. And I think the big thing that I keep seeing over and over and over is, if you get, as we say here, too close to the wire, then selling becomes extraordinarily difficult on a consumption strategy. And so I think many companies that on the surface are touted as successful consumption approaches actually may be doing something very different on the sales floor and inside their partner channels, which if we really broke it down, has very little to do with consumption.

**Ray Rike** (3:44)
Chris, let's double-click down into that, because I hadn't thought about it quite like that. And I know I just read an article about HubSpot, and they kind of modified their pricing. And I won't say it went to pure consumption, but it was from the number of contacts in your database to the number of active or marketable contacts. Is that an example of a gradient? And honestly, how do you think that's went for HubSpot?

**Chris Mele** (4:09)
So when I had my software company, I was one of the first batch of inbound marketing believers, and we were in the remodeling industry. And that HubSpot journey, I can tell you from close personal experience, the manner in which they're counting, in this case, the number of contacts, it just doesn't match with the way that value is extracted. And the simple litmus test that you can just think about is, here we were serving Europe and North America. And if we had a thousand people download in Japan, I mean, we didn't have an operation in Japan, we weren't servicing anybody in Japan, we weren't even selling in that region, but HubSpot would want to charge us for the thousand contacts in the database. In a second example, we had caught wind of Home Depot. And literally, overnight, we had, I think it was close to about 11,000 people download, and this was in their retail and remodeling division. And it would be years before we would penetrate that account in any sort of meaningful way. But guess what happened at the end of the year? At the end of the year, who wanted to get paid for those 11,000 contacts? And then, of course, when we caught wind of Lowe's and ProBuild and others, like it just kept growing. But, you know, these enterprise deals, these whales, you know, they take a long time to go. And so the big message here is that when you are counting the wrong thing, you can actually get very far ahead of your customer and value delivery such that you will be billing for value not yet delivered. And I think HubSpot is a classic example. And there are many others of a model that basically says, I'm charging you by the contact. And therefore I'm saying all contacts are created equal. And anybody that's done any selling can tell you contacts are not all created equal. Some for the reasons I just described, but also for other reasons. In addition, their partners and resellers have horrible challenges. And I think the litmus test doesn't mean it's not a great company. I love everything about HubSpot and the culture and the sort of message. But, you know, the practice of the manner by which they have geared their, quote, consumption model. I think the litmus test is pick up the phone, call HubSpot and get on the sales floor, and have a conversation with a salesperson. And I'd be willing to bet in under five minutes, you're probably going to hear something like, hey Ray, it's a really great time to buy software. And I think I can get you a special deal if you can make a decision by the end of April. And right there, you know, the consumption strategy is not working.