Domo looks to consumption pricing shift to overcome its "historic barriers to adoption"

Stuart Lauchlan Profile picture for user slauchlan August 28, 2023
With a "handful" of enterprise renewals looking dubious, a consumption pricing model could be a critical strategy for growth.

Josh James

Wall Street gave analytics firm Domo a pummelling late last week after Q2 numbers and cautious outlook spooked investors and sent the firm’s share price down by 40%. 

On the face of it, the Q2 numbers appear to show improvement. The net loss was “about” $800,000 vs $8.2 million a year ago, while revenue was up five percent year-on-year to $79.7 million. But there were enough short term concerns to produce a negative reaction from analysts. 

On the post earnings analyst call, CEO and co-founder Josh James attempted to steer towards “our longer term growth prospects”: 

First, I'm confident that we have the people and technology to get back to the growth we've experienced in the past and to do so responsibly by managing our costs. I continue to spend my time on the road with our current and our prospective customers, and the conversations I'm having in the market are reinforced by optimism. We hear time and time again that Domo can solve complex data problems that our competitors simply can't, and we do it in record time. 

Second, I believe our increased focus on consumption-based pricing can be a growth driver and create stronger relationships with our customers as we've removed the limitation on number of seats in an account by granting access to all employees of a customer and only charging for data usage, similar to Snowflake, AWS and others. Because we can charge for usage while offering seat licenses and visualization for free, consumption pricing solves many of our historic barriers to adoption and more directly aligns our pricing to the value realized by our customers. Thanks to this, consumption pricing is opening more doors for upsell opportunities.

As of July, around ten percent of the Domo customer base - some 250 customers - are on the consumption pricing model, he added: 

Over the past year, we have seen almost a 30% increase in contract size for new logos going on consumption-based pricing compared to new logo customers going on seat-based pricing. Also, for customers renewing who have converted to consumption pricing from seat-based pricing, we are seeing almost a 60% increase in the number of user accounts created and, somewhat surprisingly, a higher log-in rate of the total users on the consumption model versus the seat-based pricing model.

We're also seeing momentum in increasing the percentage of new logo customers who choose consumption pricing. Fifty percent of our new logos in Q2 were priced on a consumption basis. That's up from about 30% of our new logos in Q1, and we are targeting 75% this quarter in Q3 and even higher in Q4, setting us up well to have a substantial impact on the way we go to market and even convert renewing customers to the consumption model aggressively next year.

Renewal concerns

But James conceded that tougher competition and the wider macro-economic climate is having an impact on renewals, including a “handful” of larger customers that the firm expects to leave:

The IT spending environment remains challenging. Enterprises are carefully scrutinizing vendors, and many are consolidating their spend among fewer vendors. We're seeing sales cycles elongate, and even satisfied customers are being asked by their IT and finance departments to evaluate their spend upon renewal….We’re also evaluating our renewals on a granular basis and while each one is unique, we do see some risk to some of the larger renewals, which we have incorporated into our guidance for the second half of the year.

We would not expect to see some of these discussions in a more normal spending environment or in an environment where these customers were already in a consumption model. And then on the new business front, as an indication that this is purely macro-driven, we saw conversion rates fall across each stage of the funnel, which is further evidence of the challenging IT spend environment that we're facing. 

He insisted that this isn’t “some kind of systemic problem that we have”:

If you go look at our Top 50 customers, there's only a handful. It's only five, six customers that you're worried about, and you have great relationships with the rest of them. And we have great relationships with the four or five that we're worried about, but the four or five that we're worried about, we know there's other vendors in there. We know that they're talking about vendor consolidation. We know that they're beating us up on price, that they're negotiating. And so again, [we are] just trying to hedge the right amount and make sure that we're being conservative enough. 

The AI bit

Inevitably there was an AI pitch to come with James citing it as a future growth driver: 

Domo gives you the ability to apply the power of AI to your business now. For capacity planning, if a company needs to know the number and type and timing of employees they need to hire to achieve a business goal, they can do that right now. If a company wants to run simulations to dynamically price and bundle their offerings, they can apply AI to that problem in Domo now. If a lender wants to perform a risk assessment model on patterns of behavior and other factors, they can use AI to apply that to the data they have in Domo right now.

Success will depend on usability, he added: 

Data and technology are important foundations, but real transformation comes from making them useful and reliable in the hands of many. Domo.AI is championing a future where AI-powered data experiences truly transform business by amplifying a very powerful asset, human curiosity. The hurdle I think many businesses will need to overcome is building in the safety and efficiency required to effectively democratize AI. That's why Domo's approach goes beyond wiring OpenAI to the end user experience. It's about embedding AI responsibly into the very fabric of the entire business.

Our suite of AI tools empowers users with chat-style data exploration and provides flexible model creation, efficient model management, seamless deployment and superior governance and security. Domo's AI service layer lets businesses capitalize on the power of AI without getting bogged down by its complexities. Users can easily manage, deploy and optimize any AI model they choose right in our data experience platform to support real-world use cases that matter to everyone.

My take

There’s a lot riding on the shift to the consumption pricing model. James is inevitably upbeat about the prospect for growth here, but that’s far from guaranteed: 

It's still early to talk about exactly what kind of uptick we're going to see in those consumption deals, and we need to go through a couple more quarters of that, but we're very sure that there is an uptick from consumption. And as we work with customers and go through a big chunk of renewals, then we'll understand exactly what that number is. 

That’s assuming Wall Street holds its nerve long enough to get to such understanding. It would be ridiculous to write Domo off, but it’s in for a bumpy few quarters. 

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