ARTICLE

Ways to Win in Climate Software #8: Price to Scale

Aligning pricing to customer growth is paramount in climate software

by:
Energize Ventures
December 5, 2022

Welcome to “10 Ways to Win in Climate Software,” an Energize series defining the playbook for sustainability SaaS entrepreneurs. In case you missed it, catch up on the series opener and the first two Ways to Win in our countdown: #10: When SaaS Metrics Fail in Climate Tech and #9: “You Never Get Fired for Buying IBM.”

The world of climate tech is full of budding industries on the brink of rapid growth and customer adoption. Electric vehicles (EVs), for example, are poised to grow their U.S. market share from about five percent to 90 percent in the next 10 to 15 years. Climate software companies play a vital role in enabling adoption on such a massive scale. When done right, climate software provides an easy on-ramp to new customers. Yet there’s one setback that we see time and time again: using the wrong pricing model. Rigid user- or seat-based pricing with large upfront fees are not often well-aligned to the climate software market, which is rife with nascent technologies and customers that are first-time adopters.

Here at Energize, we generally believe usage-based pricing is the most effective pricing strategy for climate software startups. A usage-based pricing model allows customers to pay for a solution based on the degree to which they’re engaging with it – such as paying by the mile for a rental car or paying by the gigabyte for cloud storage. In doing so, usage-based pricing links price to something tangible and quantifiable: unit growth. Steady unit growth is occurring across innovative climate technologies, from solar and batteries, to EVs and carbon markets. By aligning with the number of megawatts of photovoltaics built, EV charge points used, or gigawatts of batteries installed, climate software startups can keep pace with burgeoning markets and enable mass adoption of customers.

Sources: Energize Internal Analysis; BNEF Global

Usage-Based Pricing: A Case Study

Energize’s portfolio company Monta exemplifies what pricing to scale looks like in the EV charging market. Monta’s EV charging software connects and enables players throughout the ecosystem, including EV drivers, charging station installers and site owners. By providing access to smart features based on user type – from helping drivers locate nearby charging stations to allowing site owners to control charge point access and set costs – Monta has set usage-based pricing models that align their revenue growth with each EV charging touchpoint. Site owners and installers pay per charge point, while EV drivers pay per charge transaction. As Monta’s customers grow, they spend more with Monta – without paying for wasted seats.

“Since Monta’s inception in 2020, both European EV sales and EV charging station installations have increased by 200 percent,” said Casper Rasmussen, Monta’s CEO and co-founder. “By tagging Monta’s pricing to EV charge point unit growth, we’ve been able to align our revenue with our overall goal of bolstering the EV market. Our ARR has grown 3,000 percent alongside the market."

Navigating the Usage-Based Pricing Journey

Ready to begin setting your usage-based pricing strategy? We recommend keeping these tenets in mind based on Energize’s experience guiding our portfolio companies to go-to-market success:

Tag to an intuitive usage metric. When deciding which unit to tie your software’s cost to, consider: 1) Will your sales and customer success teams be able to easily explain your pricing model to customers? and 2) Will tagging your growth to this unit enable your company to grow in tandem with the industry? This is particularly important in fast-growing climate industries. For example, Energize portfolio company TWAICE offers predictive analytics software for batteries. By forming a usage-based pricing model that charges customers by the battery and analytics software usage, TWAICE has aligned their growth directly with the growth of the burgeoning battery market.

Welcome new user types. Unlike rigid pricing models, usage-based pricing allows as many customers as possible to onboard and engage with software platforms. OpenView Partners has seen as much as a 10-fold increase in the number of users in an account for usage-based software companies relative to rival companies that charge per user. This approach also allows SaaS companies to expand into emerging climate sectors more easily. Our portfolio company DroneDeploy’s hybrid pricing model has helped them to grow the customer base for their reality capture software beyond traditional use cases like construction and agriculture. By building a pricing model that encourages user adoption, DroneDeploy has been able to attract user types across the energy sector.

Explore customer insights. As more customers onboard, you can learn more about how customers behave – including their purchasing patterns, budgets, preferred features and more. And having more user types means climate SaaS companies can tap into valuable insights and data points around customer profiles and use cases. Our portfolio company Smartcar, for example, employs a usage-based pricing model based on the number of connected vehicles using Smartcar’s API and the number of times connected vehicles ping Smartcar's API. In doing so, Smartcar can collect insights around how frequently customers are pinging their API and what features customers are accessing – information that Smartcar can use to refine their software and better serve their customers’ needs.

Don’t just set it and forget it. As your climate startup matures and your software becomes embedded within customer’s processes, your pricing model may evolve to incorporate tiers, upfront payments, overages and more. Pricing models don’t need to be mutually exclusive, and usage-based pricing can still be an important player within your pricing journey. As their solar sales and design software has become a mainstay in customers’ operational budgets, Energize portfolio company Aurora Solar has evolved their pricing model to include overages, user-based subscriptions and more, while still incorporating usage-based pricing to tag directly to solar installations.

Diversify your approach. While we believe usage-based pricing is a highly effective model, it is important to recognize that it is not a panacea. For one, it limits a software company’s ability to charge customers upfront for feature development and customization; and second, it can become a slippery slope of downsell and churn if product usage falters. For climate software companies, we usually recommend a hybrid pricing approach with some combination of upfront annual commitments (which can be seat- or user-based) combined with a volumetric component for high usage enterprise customers.

The bottom line: Usage-based pricing is oftentimes overlooked in a climate SaaS company’s early years, but can be a significant unlock for ARR when harnessed strategically. The most sophisticated climate software companies in Energize’s portfolio have ~50 percent of their ARR stemming from a usage-based pricing model, demonstrating how pricing strategies can build bridges to new customers, not barriers.

Next up? Ways to Win in Climate Software #7 Don’t Skimp on Customer Success – Coming soon on Energize's blog!

This article represents the views of the author and is provided for informational purposes only. It is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Readers should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Information is subject to change based on market or other conditions.