Since February 2018, Reggie Yativ has served as the Chief Revenue Officer and Chief Operating Officer of Agora and took the company public last year. In this second post on consumption-based pricing (link to the first post with Mike Scarpelli from Snowflake), I sat down with Reggie to get his perspective on managing this model with customers and partners, and scaling the business.
Agora’s SDKs and global network enable any business to incorporate real-time engagement (audio, video and live interactive streaming) into their applications. The company ended 2020 with $134M in revenue growing by 107% y/y and currently boasts a market capitalization of ~$4B.
Anoushka: How should a business decide whether to evaluate usage-based pricing?
Reggie: You want to ask yourself whether your pricing strategy fits your audience and empowers them, and if you have the ability to drive a community to use your product. If your audience is only enterprise buyers and procurement teams, if everything they think about is in capex, a licensing model might be more suitable. These teams want to have a final fixed cost. They want to know how many users are on the product and have a clear, known cost in advance. Their MRR / ARR (ACV/TCV) models are linear.
Usage-based pricing is particularly compelling if you are serving a diversified set of users, personas and audiences. You may be serving large, midsize, small customers and everything in between. A small company that still needs to ramp up its revenue may be using significantly less resources than a multibillion-dollar company. It’s logical that they should not be charged in advance and equally to the larger company.
Usage-based pricing is also great for a world in which there are more variables for a customer. These customers may not know the scope of the success of their application yet or may have little to no historical run-rate to benchmark against. They may not know geographically where the success will be, how quickly it will scale or if it will be subject to fluctuations. They may not even fully know their own monetization model. They don’t know how fast the ramp-up time will be because they are depending on their own customers to register and consume the service. A consumption-based payment module allows you to have that period where everything remains dynamic. If your success is beyond your imagination, then you pay more. If your success is under your plan, then you haven’t paid a lot of money in advance only to discover that you need six more months to change your software or your go-to-market strategy.
In the SDK, API and open source ecosystems, one of the assumptions we have is that people want to get started quickly and without hesitation and then growth will come over time as they become more successful. I really believe in this model. We look at pricing as something that empowers developers. Agora doesn’t even charge for up to 10,000 minutes per month. You can run on Agora for free for a long time until you cross this threshold. We are trying to help developers, product owners and business owners cross the first chasm. We need to be ready to serve them even if their maturity level is preliminary. The SDK and API economy has shifted the focus to the actual customer and how they want to consume services. It is a customer-centric approach that empowers them.
Anoushka: What do you think is driving this shift? Why do you think usage-based pricing is becoming more popular now?
Reggie: Let us take a silly analogy. If you were looking for an apartment and someone tells you that a five-bedroom apartment and two-bedroom apartment will cost you the same, you would first be shocked. Second, you would most likely try to take the five-bedroom apartment because it’s the same price. However, then you realize that you’re paying more taxes, you have more maintenance, and there’s a lot of more work you need to do around that luxury that you really don’t need. There is a paradigm shift happening in buyers’ minds; they want to pay for what they know they need (or assume they need), not a rigid fixed price that the vendors will just put forward. I think that is the root cause of the change.
People are fed up paying for unnecessary costs. It’s this idea that economically, it’s easier for me to plan if I know that when my consumption, and consequently my monetization, improves, my costs will increase too. It’s much easier to build a revenue model that scales over time while considering the costs will be associated with that. Also for early-stage companies this “advance payment” creates stress and cash flow concerns, while a scaling model allows leaders to focus on being successful in building their own business. Amazon understood this concept pretty early in the game. They started offering cloud infrastructure with “pay as you go” (PAYG), and then offered discounts on the “reserved” capacity offering, and special deals on “dedicated.”
We have to be clear here — as some customers scale and get to certain volumes, they expect you to work with them and give them some perks and special terms. Until they get to that point, customers just want PAYG. Amazon was one of the first movers, but a lot of the cloud providers followed those models. I think that was part of the overall industry moving away from older models like perpetual licensing where, no matter if you use it a lot or use it once a year, you’re paying the same. The public has also seen an increasing number of SaaS and PaaS businesses educating them that they should pay for their consumption rather than just get sold into fixed in advance arrangements.
I’m not saying that in the consumption-based world, there are no discounts and no contracts. At some point, customers get to a certain scale and approach us for discounts and long-term contracts which may include commitments, volume tiers, and other terms. When this happens we are ready for them and we do have longer-term arrangements signed.
Anoushka: What have been the biggest team and organizational changes you have had to put in place to make this consumption model work well?
Reggie: We needed to bring in sales and customer success people that understand the use case of the customer very well. They need to focus more on the success of the customer and take part in the customer’s ideation process rather than trying to charge more upfront. The focus for them needs to be on winning with the customer and making sure the customer is successfully going live with Agora. This ultimately helps both us and the customer.
The type of people we need for these roles tend to be a little more product-oriented, creative and a little more mindful of how the customer wants to design their business model. They need to be more rounded personalities, more business development-oriented and have a consultative approach vs. straightforward license sellers. My experience, early in the game, was that as a leader you need to identify the “DNA” you need to have on your team to serve this customer.
We also implemented a self-service platform. If you are trying to appeal to developers, they don’t necessarily need (or like) a lot of commercial discussions in their first steps. You need to have a good infrastructure where they can actually self-serve. You need to make sure they can go online seamlessly, using their credit card and start using the technology without waiting for calls from people or asking questions over email. Many call this “low touch” but I call it the “right touch at the right time”.
Anoushka: How do you think about how often you want your account management team to be touching customers on an ongoing basis? Or is there some sort of thinking around ongoing engagement with a customer given increasing usage is so important?
Reggie: We identified that we need different profiles of people in different steps of the customer journey. For example, in the beginning, we noticed that we need people with more technical firepower, trying to ideate on the use case and sometimes determine the use case with the customer. A lot of the questions will be more technical and product-oriented and those require frequent touchpoints from our customer success and our tech solutions teams. Later on, as the accounts become bigger, you’re going more into the commercial side of the house. Each account will have an account manager and a solution architect that works closely with them. This doesn’t change large account management concepts — you will still be leveraging the same methods commonly known in marketing for handling top-tier customers.
I do believe that customer success is vital in open source and API/SDK worlds. In all the companies that I have worked for, for example Redis Labs, the customer success team was pretty big. The reason is that you want to track the success of customers and help them in very specific milestones / junctions of their growth journey. In order to do this, you need people who understand the usage patterns, the best way to leverage the technology and the product and other products within our stack the customer can use.
The paradigm is so much healthier that way vs. trying to push people to constantly buy things and shove it down their throats. The old school sales model is sell, sell, sell. Today, you need to make sure you have the right people for each part of the journey. We do keep a very close connection with our customers which explains Agora’s net expansion rate of over 130%.
When it came to getting ready for an IPO with this model, were there a couple of things you needed to think through differently? A couple of core KPIs that maybe traditional software businesses don’t report or think about that you keep a pulse on?
Some of it is internal, so I can’t really volunteer all of it. I would say that if you look at our financial reports publicly, we are talking about net expansion. We put a lot of emphasis on that KPI because we believe it tells the story and shows whether customers love the journey at Agora. Obviously, if they do, that number will keep getting better and better. I think that is a strong point to take to the investment community.
The investment community has changed as well. They will always be very interested in MRR, ARR, growth and drill down into excels with forecasts and predictions. A lot of the analytical minds today are thinking about expansion and retention because they understand it’s a manifestation of an organization that’s properly built with a happy, healthy customer base. As an organization going towards IPO, we were very mindful of that.
We were also very mindful of the top of the funnel. We wanted to make sure that our marketing and sales organizations were doing a good job bringing a lot of people to the top of the funnel to get started with their Agora journey. When your model is simple, transparent and clear, you bring developers to start working with you. Investors want to understand your trajectory and how much growth you can sustain over time. When you have a healthy funnel, it helps you predict your revenue more accurately and keep growth on track. At the end of the day, this is all a partnership — a partnership for success between you, your customers and your partners.
*This interview is part of a series of posts exploring usage-based companies. Interviews have been edited slightly for clarity.
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