Metronome: Making SaaS Pricing Easy

The SaaS model is both the present and the future of technology. Even if you don't know what SaaS (Software as a Service) is, odds are you interact with several SaaS products every single day.

If you're a student and you have Zoom classes, you interact with a SaaS product.

If you have a job and you need to file your taxes using Intuit Turbotax, you interact with a SaaS product.

Even if you simply open PDFs using Adobe Acrobat, you interact with a SaaS product.

SaaS is a term used to describe the business model of companies that sell as a software as their primary product. For example, we pay money for a Zoom subscription in order to use their video conferencing software. Like Zoom, most SaaS companies license their software to users on a subscription basis. In other words, you don't have to download and maintain SaaS product - instead, you simply subscribe to access the software over the internet.

These SaaS products are often priced on a usage basis. For example, a developer that wants to use Amazon's AWS pays according to how much he or she uses AWS services. If he or she only wants to store 5 images in AWS storage, and only accesses these images a few times a day, the developer will not have to pay a significant subscription price. On the other hand, if the developer is making millions of accesses a day to a database that stores data about millions of users, the developer will have to pay more.

That's what makes several established SaaS businesses so attractive to clients; you only pay for exactly what you use.

However, for growing SaaS companies trying to implement such a usage-based model, the financial logistics become a nightmare. While Amazon has the engineering capacity and financial resources to build a scalable usage-based payment system, not every company is Amazon. Amazon is the outlier, not the standard.

If SaaS represents the future of tech companies, and usage-based pricing (UBP) is one of the main draws of SaaS products, why is implementing a scalable usage-based model still such a challenge for the majority of SaaS companies?

That's where Metronome comes in. We'll evaluate the company with a framework based on 4 T's: TAM, team, timing, and traction.

TAM:

TAM, or total addressable market, represents the market size of customers who would benefit from Metronome's product. Who is Metronome targeting, and will this target market be willing to pay for the product? Is this target market a segment that will grow in the future, and in doing so help Metronome grow with it?

For example, consider AWS. The market for AWS is every single small or corporate business that needs cloud-based services. Billion-dollar unicorns like Snowflake and Databricks make use of AWS service. My group project in a college class made use of AWS services. The target market is massive; in fact, you would be hard pressed to find a tech business that doesn't need cloud services these days. At the time Amazon started working on AWS, cloud services was also a market primed for rapid growth. Not every business was aware of how they could leverage the cloud, but it seemed likely that when viable solutions were in place, it wouldn't be long until the whole business world took notice of what the cloud had to offer. We're talking a multi-billion dollar TAM, with significant room to grow.

Let's look at Metronome through the same lens. Many billion-dollar SaaS tech companies, especially those that have been around a while, already have the infrastructure in place. For example, Snowflake and Twilio, two of pioneers in usage-based pricing. Such companies have no pressing need to look at Metronome as a solution; they have solutions that work already. They are relatively set in their business models, and do not need the flexibility to easily iterate on pricing strategies. Their solutions are already scaled, and they have the resources in place to continue scaling.

With that in mind, the TAM may not be as ubiquitous as that of AWS, or any other established cloud service provider.

That being said, not every SaaS business has the resources of Snowflake or Twilio. Most don't, but still want to implement flexible billing structures. If business can make payment processes smooth and efficient for customers, they improve retention rate and even attract new clients. This is a universally true statement; it applies to all SaaS businesses, no matter what the exact product is. Metronome's solution helps solve exactly that problem.

The SaaS industry as a whole is worth $145 billion according to Gartner, and has shown 5x growth in the last half decade. This growth isn't slowing down, either, with the industry expected to hit 17% CAGR by the end of 2022. The US alone has more than 16,000 SaaS companies (most of which, again, aren't Snowflake or Twilio). According to Boston-based VC firm OpenView, 45% of SaaS companies surveyed in 20221 reported using some fort of usage based flexible pricing model, up from 34% in 2020.

We see clear markers for success:

• The SaaS market isn't slowing down any time soon, and it's already a massive, multi-billion dollar industry. One of my favorite quotes I've read about evaluating companies is that "large markets are great, but growing markets are better." The SaaS market is both large and growing, a promising indicator for Metronome.

• Usage based pricing is growing in popularity within the SaaS market. 55% of a $150 billion industry is not using usage-based pricing yet, and that number is going down year by year. That's a massive market to capitalize on for Metronome, especially considering that SaaS market size is expected to surpass $350 billion by 2025.

• The number of SaaS companies is growing rapidly as well. With the success of usage priced pricing demonstrated by industry leaders, most new entrants are likely to evaluate such a pricing model. If Metronome makes this evaluation simple and pain-free, the TAM grows even further.

Team:

Metronome was founded by Kevin Liu and Scott Woody. At a quick glance, both Liu and Woody have outstanding academic credentials. Liu completed his BS in Economics from Wharton (no bias here!), while Woody did his BA in Physics from UC Berkeley and then his graduate studies in the Stanford Graduate School of Business.

After graduating, Woody founded a company called Foundry Hiring. Foundry was a B2B SaaS company meant to make job recruiting simple for large companies; it was acquired by Dropbox in just 2 years. Liu founded a company as well: Predictive Edge, a B2B SaaS company meant to help other companies with A/B testing and price optimization. Predictive Edge was also acquired by Dropbox.

Both Liu and Woody then worked for Dropbox for several years. Dropbox is one of the biggest SaaS companies in the world, and is a rare major SaaS company that has not yet switched over to usage based pricing. Woody was a director of engineering at Dropbox, and Liu worked in enterprise marketing.

We see that Liu and Woody represent all the skills and experience needed for a SaaS founding team: Woody has an outstanding technical background and has previous entrepreneurial experience, while Liu has an outstanding business background and also has previous entrepreneurial experience. Both have worked at SaaS startups and major SaaS companies, and have complementary areas of expertise.

Timing:

I would argue that had Metronome been founded 3 years earlier, it might have even better prospects for success than it does today. As mentioned previously, 55% of SaaS companies have yet to switch over to usage-based pricing models; this number was significantly higher 3 years ago, leaving a larger TAM for Metronome.

That being said, there are a number of factors that still make the timing incredibly ideal for Metronome. The first is the growth in VC funding for SaaS companies. It is becoming easier and easier for founders to start companies and raise enough money to build out a legit product that needs an efficient pricing model. With the amount of funding in circulation, the number of startups that have access to the capital required to purchase a product like Metronome is growing significantly.

Second, as previously mentioned, 55% of SaaS companies haven't switched to usage-based pricing yet. Had Metronome been founded a few years from now, that number could very well by < 30%, given the 10% decrease in the last year. SaaS market growth is also accelerating, from nearly 14% CAGR in the last 5 years to upwards of 17% in the next 5 years.

Third, companies that don't use usage based pricing are just starting to indicate that they want to test such a pricing model in the future. OpenView's survey of SaaS companies also showed that 61% of companies that don't use usage based pricing yet expressed interest in launching or testing UBP in the near future. If that's any indication, 2022 could be the pivotal year for Metronome to capitalize on the UBP wave before companies look elsewhere or develop their own solutions.

Traction:

Finally, we assess whether Metronome has already shown promise in acquiring both funding and clients. While this isn't an end-all-be-all indicator of Metronome's success, it is a reasonable proxy for the team's capability to market both themselves and the product, as well as the technology's quality.

Let's start with funding. Metronome announced its $30 million Series A at $150 post-money valuation, led by Silicon Valley VC giants Andreessen Horowitz (a16z). a16z was joined by General Catalyst, and also included several corporate investors from some of the biggest SaaS companies in the world, including Snowflake, Databricks, HashiCorp, Confluent, Plaid, and Twilio. While it is fantastic to see that respected VC firms believe in Metronome, the demonstrated belief of the who's who of the SaaS industry is even more promising.

All 6 SaaS companies mentioned are billion-dollar unicorns that have demonstrated first-hand the impact that usage-based pricing can have on a business. All 6 know the ins and outs of implementing billing infrastructure to support UBS, and clearly all 6 believe that a solution to this problem is necessary.

In addition, these 6 unicorns hire some of the best engineers in the world. If the best business minds at these companies believe in the purpose and TAM of Metronome, and the engineering minds at these companies believe in the technical quality of Metronome's product itself, it's tough not to believe that Metronome is poised for success.

Consider also that any and all SaaS startups will likely look to SaaS industry leaders as example for how to set up UBS systems; if many of these industry leaders are supporting one solution, it is likely that startups will follow suit.

Apart from funding, Metronome has also attracted several big-name SaaS startups already. Clients include:

• Starburst (no, not the candy), a $3.5 billion database analytics SaaS platform

• Cockroach Labs, a $5.4 billion open-source database analytics SaaS platform.

• Cribl, a $1.6 billion big data analytics SaaS platform.

The overall traction Metronome has gained in the SaaS market in only 2 years is staggering. The most prominent investors in Silicon Valley, some of the biggest SaaS companies in the world, and a handful of the fastest growing SaaS companies in the world believe in Metronome - both the team and the product. I'm inclined to agree with them.