All change at New Relic as founder Lew Cirne hands over CEO seat to the architect of the firm's new pricing strategy

Profile picture for user slauchlan By Stuart Lauchlan May 14, 2021 Audio mode
Summary:
The man credited with New Relic's shift to a new customer-friendly pricing model is taking up the reins to see there transition through.

New Relic
Cirne and Staples

A change at the top for New Relic as founder Lew Cirne steps aside as CEO, replaced by Chief Product Officer Bill Staples. Cirne, who will stay on as Executive Chairman, said in a statement that this shift has been in mind since Staples joined the firm last year:

When we recruited Bill into the company, we thought that he would be the natural successor to me as CEO at the right time. With his immediate and profound impact on our platform and our Product organization, and now more broadly across the company with his inspiring vision, strategy and passion for our customers and their success, Bill has exceeded our highest expectations as a strategic thinker and operational leader, making now the right time to make this transition.

Staples has been credited as the prime mover behind the firm’s New Relic One platform strategy and the overhaul of its pricing policy, with the main product suite repackaged into just three categories.

The executive changes were announced as the firm turned in its Q4 and full year numbers. Q4 revenues were up 8% year-on-year to $172.7 million, with a GAAP net income loss of $61.7 million, while full year revenues were up 11% to $667.6 million, with a GAAP net income loss of $192.6 million.

On the post results analyst call, Cirne and Staples drilled down further into the reasons for the change of leadership at this time. Cirne said:

It was a very transitional year for us, where we made bold bets to do transformative things for our company with an eye towards the long-term success and growth of the business. We have more conviction than ever than ever in that strategy, which really was the brainchild of Bill Staples.

In terms of the transition to the New Relic One pricing, Cirne said that around 60% of users have made the move as of the end of March, with an expectation that this will top 80% by March 2022:

At that point, we’ll be pretty well done, other than we do have contracts that are multi-year agreements where those will time out and as they expire over the next couple of years, they’ll transition to consumption billing. So, we’re very pleased with the fact that we’ve got more than half of our business now on the consumption model and by the end of the year, we’ll be getting to effectively the whole business there.

That said, he cautioned that there are still some transitional headwinds in play:

We continue to face headwinds as we’re getting through the next two quarters. We’ve got Q1 and Q2. We introduced this new program last August. So, at that point, we’ll have our first cohort of customers that just is anniversarying. And so, at that point, we’ll have a full year book behind us. And then, as we look out at consumption, we look out at the trends we’re seeing, we’re confident that revenue will accelerate in the back half, starting in the second half of the year, Q3 and then Q4.

Customer shift

As for when existing customers who've transitioned start to deliver the same revenue run rate under the new model, this varies according to customer, but Staples said:

We have been studying over the last 2.5 quarters that we’ve been in that model for the customers who’ve adopted. What we’re seeing is it takes about a month or so for them to rightsize their consumption based on users and data, the new pricing meters. And then, once that rightsizing is done, the first month usage begins to steadily grow. And as we’ve noted before, starting with data, ingesting more data because of the low cost per gigabyte that we offer, and then attracting more users. And now, we’re seeing both data and users grow healthy for the customers within in the model for several months.

There are also now two clear sets of customers in play, added Cirne:

One where customers are converting over from the historical model that was subscription-based, host-based pricing, primarily APM-driven, that we’re migrating to a platform, to a consumption model. And then, we have another cohort of customers that is brand new to the New Relic. They came on with the New Relic platform as their only knowledge of New Relic and the consumption model as their core pricing mechanism.

The behavior of the two customers is quite different. The customers that convert over, in their minds, they have a value prop, a legacy spend level. So they’ll be, in some ways, influenced by what they used to be doing, what they used to be spending, and we’ll see some behavior modifications where it looks like they’re trying to do some gymnastics to fit in that spend or do some things because they’ve got that historic perspective.

New customers on the other hand tend to come in and embrace the platform and start to grow data and users right from the get-go.  Those growth rates are what we think will be more indicative of the future, once we’ve gotten everyone migrated over and people, again, get out of that historic perspective of a host-based and an APM-only and a siloed type view of the product.

Change within

In terms of how the company itself has adapted to the new pricing model, Staples said that there has been some recent training focus for the sales team:

We spent the first month of our fiscal year, so the month of April, in a lot of sales enablement training, onboarding to the new compensation model for them, spent a lot of time talking through the shift to consumption, the value that holds for customers and the best ways to engage customers to help them solve their business problems.

Universally, the feedback that I heard out of that sales training and enablement was very positive. I think it really changes the nature of the relationship that our sales relationship managers get to have with the customer, shifting away from these more competitive, negotiation-type conversations to really, 'How can we solve your business problem? How can we put New Relic to work with you?', and then, unlocking that value with the customer, which drives consumption now fully aligned with their compensation model. So, it’s really a win for the customer, a win for our sales team and I’ve seen a lot of enthusiasm and engagement by the sales organization on the new model.

The firm is also looking to hire more technical sales people, he added:

The importance of having our technical sales field involved in those conversations on an ongoing basis is more important than ever. And so, we’re hiring there. As well as relationship managers that have a history of nurturing ongoing supportive relationships with customers versus sometimes you see the pattern of more aggressive kind of negotiation-type sales leadership, with the consumption model really pivoted to focusing on long-term relationships and value realization. And so, those vendors that are more indicative of that model are the ones that we’re recruiting from and also a shift to more technical sellers as well as our solution consultants.

My take

Every founder, they dream for their company to have success. When I started New Relic nearly 14 years ago, I exceeded my highest hopes to get to where we are today. And yes, like any other company, you really help hope that your company outlasts you. And at the right time, when there is a time for a next leader, that that person matches and aligns with core values…I truly believe we’re just getting started, and that all of the hard work we’ve done in the last year is now ready and well set to bear fruit.

So says Cirne as Staples steps up to the plate. The end of an era? Perhaps, but also what looks like the start of a prepared-for next phase of the company’s development. As the prime mover of the revamped platform and pricing strategy, Staples is clearly the right person to see this transition, which has been bumpy as it was always expected to be, through to its conclusion. The 60% number is encouraging and as Cirne noted, once a lot of historical customer behaviors are shaken off, the prize in terms of growth should be achievable. Cleary fiscal 2022 is going to be one to watch for New Relic.