The concept of SaaS as a business model changed the game in tech by moving users away from buying software outright and toward paying for service availability based on time-based subscriptions, typically with per-month or annual pricing. Today, a startup out of London called M3ter that is building tools to take the next step in that evolution -- more granular usage-based pricing -- is announcing funding on the back of strong demand.
The company has raised $14 million -- a Series A that it will be using to double down on new markets like the U.S., and to build more technology for its users. Notion Capital is leading this round, with Insight Partners, Union Square Ventures and Kindred Capital -- all previous backers from its $17.5 million seed round last year -- also in the round. The company is not disclosing its valuation but CEO and co-founder Griffin Parry tells me it now estimates it has some 3-4 years of runway.
M3ter came out of stealth a little over a year ago -- a debut that coincided with the announcing of that seed round -- and in that time it has grown its business 375%.
Its customers and partners these days are typically technology businesses built around API calls, a natural fit for usage-based pricing models; they include partner payments business Paddle, as well as customers like ID verification company Onfido and fraud prevention startup Sift.
And indeed, the very concept of starting a business to help other tech companies adopt and adapt to usage-based pricing comes from the founders' own experiences: Parry and co-founder John Griffin previously founded GameSparks, a games development engine build on usage-based pricing. That startup was eventually acquired by Amazon's AWS -- arguably the grand-daddy of popularizing usage-based pricing for APIs by way of its cloud services platform.
One of the unique aspects of usage-based pricing is the granularity it gives customers: They are paying just for what they are using. At its core, that is something that has proven to be more popular especially in current, leaner times, when businesses are more cautious than ever around how they spend money, possibly at the expense of being less focused on simply budgeting based on predictable outgoings.
And while it is certainly not ubiquitous among all SaaS businesses, it has definitely grown in popularity.
Research from OpenView found that 45% of SaaS vendors in 2022 were adopting usage-based pricing compared to 33% the year before that. The prediction for 2023 had been 55%, but as Parry pointed out to me, that figure has been revised up to 61%, alongside another 10-15% growth if you add in those businesses that have said that they are considering it.
(Unsurprisingly, M3ter is not the only company looking to capitalize on that. SF-based Metronome, backed by some heavy hitters out of the Bay Area, and more legacy companies like LogiSense are among those also building out usage-based pricing platforms.)
"Software companies are looking at pricing as a strategic lever these days," Parry said. "As a customer, you don’t want to leave money on the table, and you also want to focus on growing more efficiently." Efficiently in this sense means, essentially, by spending as little money as possible to get there.
In the past, he continued, it was about predictability and knowing every month that you were paying a certain amount for a service, "but things have swung in the other direction."
Parry admits that there remains a significant cultural shift among SaaS businesses, especially those that might have already built their businesses around time-based models -- growing pains that are probably not that much different than those that software companies faced when they moved from selling off-the-shelf software to products sold on subscriptions.
But on the other hand, introducing usage-based billing also means opening the door to getting more granular data on what customers are using, and how they are using it, which in turn can inform not just what you are offering them, but what the SaaS provider is building and investing in a business.
To that end, M3ter is going to be using some of the funding to continue building out more sophisticated tools of its own. They include a data science product it's calling Cost Allocator.
Based on feedback M3ter has been getting from its users, it will let customers figure out gross margin performance on a per-user basis, which Parry explained to me will help them figure out how to adjust pricing accordingly. (The idea here is that you can create rewards or lower prices for those using more of a service, or charge more per use for those who are not power-users.)
Pricing Experimenter and Usage Forecaster are also products under development. Respectively, the former of these will let M3ter customers test pricing models in real time with simulations based on data troves it has amassed; and the latter will apply similar modeling to determine what a company might make under different business evolution scenarios. All of this can also be used to help businesses price tiers but also work out more nuanced approaches with different users, including continuing to offer some of them more traditional SaaS packages if that turns out to be a better option.
The startup's approach to product development, by working with its customers to build what they want, fits closely with the fact that at the end of the day, M3ter itself is also a usage-based business and working to be responsive to what its customers are doing.
Some of the products that partners are building using its platform include database startup ClickHouse offering usage-based pricing for its cloud offering; and subscription management platform Chargebee offering event metering, usage-based pricing, and billing capabilities for its customers in turn to use.
As I mentioned above, its customers these days are typically technology businesses built around API calls, but there is a clear opportunity for working this into all kinds of other products, from entertainment consumption through to anything a person might engage with online or in an app.
"As pricing becomes a strategic priority for more software businesses, the one-size-fits-all approach looks increasingly obsolete," said Jos White of Notion Capital, in a statement. "m3ter’s technology will power this transition towards more usage-based and intelligent pricing. Already, the company’s co-founders have laid solid foundations with an exceptional team and product, as well as deep engagement and alignment with their early customers and partners."