How to Chase Customers Away with Licensing Metric Musical Chairs
The new and improved Legal Toolbox for Founders Newsletter.
At HeyCounsel, we’re so impressed by the lawyers who’ve joined our community, and we’re always looking for ways to show them off. That’s why we’re kicking off a new format for our Legal Toolbox for Founders newsletter.
Each week (minus the holidays), we will publish an article written by one of our community members about a topic at the intersection of early stage growth and legal strategy - topics near and dear to our platform lawyers’ hearts.
This week, Solo.io Director of Legal Laurel Palluzi writes about how to draft that important little provision that tells customers how you measure the metrics by which you bill them. Enjoy!
Earlier in my career, I would have said that the fastest way to lose a customer in 10 days1 was with a crappy support model. Even if you have the greatest product in the world, customers leave when they do not feel supported to succeed in using new technology. Then I experienced a product-driven need to amend customer contracts annually – not only one year – but basically every year. There was even one year where the measure/technique used to bill customers (also known as licensing or billing metric2) changed three times, and so the exercise of internally tracking ‘which customer’ was on ‘what metric’ began.
To say this was an operational nightmare is an understatement, but even that took a back seat to its impact on customer satisfaction. Even the happiest of customers became frustrated when presented with yet another amendment for the third year in a row.
The difference between pricing and licensing metrics
Now, if you’re thinking “companies change the way they license their technology all the time”, you’re right. For instance, consumption-based pricing (also known as usage-based pricing) has nearly doubled over the last five years.3 Many companies that previously used seat-based or other methods have modernized their SaaS billing by transitioning their licensing model to one based on how much a customer consumes or uses. One can only assume that the advent of artificial intelligence (AI) may have the same impact over time.
However, that’s not what we’re discussing here. Instead, we are talking about a much more nuanced topic: how are you calculating the metrics that your pricing model uses.
No one4 is suggesting pricing should remain static from year to year, but the calculation by which you measure usage should have some semblance of stability. Ideally, it should be precise enough that your customers cannot reasonably argue that some of their usage is outside the scope of the agreement, and flexible enough that you also will not have to revise the language every time you add a new feature to your offering.5
Let’s walk through an example:
“Billable Unit” = one GB of use by customer
But what is “use”? It’s broad but probably too broad. Is it a GB that is transferred? So if I upload content of 1 GB, but then delete it promptly - is that still one billable unit that the customer pays for?
A better way to define could be the following:
“Billable Unit” - transfer, upload, ingest, or other action resulting in 1 GB of data stored, viewable or actionable by vendor for more than 1 minute in the platform
This definition is still broad, but it’s precise.
A few other tips for keeping sanity with your licensing metrics
Consider your roadmap. Try not to just think about your offering as it exists today. Build the future in now. It’s easy to not bill for a non-existent use but it's a headache to add them in mid-term with a customer as each type of use becomes available.
Stay out of the body (of your agreement). For the sanity of your customers, investors, sales and legal teams, please do not codify the calculation in the body of your legal terms. At a minimum, you should include them in the ordering document so you can change them at each renewal. As a best practice – and depending on your customer base’s appetite for linked terms – put them on a webpage6 with a statement that you reserve the right to modify with [insert some reasonable number] of days’ notice (but not more than X times in Y period).
Resist the urge to change. Only change the calculation when you feel you absolutely must.7 Determining the right way to future proof your calculation should obfuscate the desire to change it frequently.
If, in the words of Cher, you could ‘turn back time,’ the above are the steps that company should have taken at the beginning of their journey. Instead, they cemented their calculation into every negotiated agreement with each customer, resulting in agony for all parties every time the calculation evolved.
And customer dissatisfaction is only the beginning of the list of potential consequences. It should also be a major consideration if your ultimate exit plan is to be acquired. Acquirers want to see contracts that either:
(1) have licensing metrics similar to their own, or
(2) can be easily modified (for example, at each renewal) so the acquirer can move those customers over to their preferred licensing model.
Since no one has a crystal ball about what company may desire to acquire them in the future, Option (2) is the more practical choice. I have heard stories of acquirers walking away because a target’s customer contracts reflected too many different licensing models and the contracts were not easily modifiable in bulk (i.e., updating a web page linked in an ordering document). In one instance, the acquirer was still willing to move forward but only by decreasing the purchase price by more than thirty percent - yikes!
So chuck that calculation to the order form, or better yet, a web page. Not only will your customers thank you, but you’ll find your need for lawyers like me to be less too.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice of the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
If you are easily put off by sarcasm, movie quotes, song references or puns in otherwise ‘serious’ content, my style may not be all that appealing to you. For the rest of you with a sense of humor, I hope you enjoy it. There’s no need to make the legal stuff any more boring.
https://radixhaven.com/billing-metrics/#:~:text=Billing%20metrics%20is%20a%20set,opportunities%2C%20and%20potential%20revenue%20leakage.
https://openviewpartners.com/usage-based-pricing/
Except that one customer. . .
This is where we pretend that creating porridge that is ‘just right’ is as simple as Goldilocks made it out to be.
To index or not to index, that is the question.
The addition of AI capabilities to many products is a great example of when you've added functionality that genuinely requires revision to your overall licensing model.
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