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Usage-Based Pricing and Net Retention

Under consumption pricing, revenue moves with customer use, so net retention reflects optimisation as well as seats. Snowflake as the worked case.

Selborne Research · Software coverage: 11 guides, 6 company profiles, a primer and Excel model

Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.

On this page
  1. Consumption Pricing Makes Net Retention a Demand Meter, Not Only a Seat Meter
  2. Snowflake as the Worked Case
  3. The Two-Year Cohort Definition
  4. What RPO Still Tells You on a Usage Book
  5. Reading Net Retention in a Downturn

Consumption Pricing Makes Net Retention a Demand Meter, Not Only a Seat Meter

In a seat subscription, recurring revenue from an existing customer mostly moves when seats are added, removed or repriced. Under usage-based pricing, the same customer can spend more or less by changing how much capacity they consume. Revenue is recognised as that capacity is used. Net retention therefore moves with optimisation and workload as well as with logo retention.

That is why a capacity-cohort net retention figure is a different instrument from a renewal rate on annual contract value. The gross versus net split still applies; the consumption layer sits on top of it.

Snowflake as the Worked Case

Snowflake recognises most of its revenue as customers consume, although capacity customers are typically billed a year in advance. The FY2026 filing (period ended 31 January 2026) is the clean illustration in this set.

ItemFY2026 figure
Total revenue$4.7B ($4,684M), +29.2%
Product revenue share95.5% ($4,472.3M / $4,683.9M)
Net revenue retention125% (126% a year earlier)
RPO$9.8B ($9,771.5M), from $6,867.5M (+42%)
Current share of RPOabout 46% due within twelve months

Product revenue is the consumption line. Services and other amounts sit outside the 95.5%. When customers draw more compute or storage, product revenue rises; when they tune warehouses down, it falls, even if every logo renews.

The Two-Year Cohort Definition

Snowflake does not use a simple trailing-twelve-month ARR ratio for the 125%. The filing defines a measurement period of the trailing two years from the current period end. The cohort is capacity customers that used the platform at any point in the first month of the first year. Net revenue retention is product revenue from that cohort in the second year divided by product revenue from the same cohort in the first year. A customer that used nothing in year two stays in the cohort and contributes zero.

Two consequences follow. First, a year of optimisation shows up inside the ratio, not only logo churn. Second, the figure is not interchangeable with a one-year ARR net retention from another filer without restating both. The definitions guide is the place to keep that footnote.

What RPO Still Tells You on a Usage Book

Remaining performance obligations still matter under consumption pricing: they are contracted amounts not yet recognised. Snowflake’s RPO grew 42% to $9.8B in FY2026, with about 46% due within a year. Contracted capacity and prepaid credits can build RPO even while near-term revenue recognition waits on drawdown. Commitment length therefore moves RPO and cRPO without proving that next quarter’s consumption will match the contract shape.

A model that treats RPO conversion as automatic seat revenue will overstate the next year’s recognised line when customers slow their use.

Reading Net Retention in a Downturn

Because expansion and contraction are both consumption events, net retention on a usage platform can fall faster than a seat renewal rate when customers economise. The reverse is also true when workloads ramp. A multi-year model should keep a separate consumption assumption rather than pasting a seat-SaaS retention path onto a capacity business.

Snowflake’s research profile keeps the 125% next to the definition that produced it, so the figure never floats free of the two-year cohort.

Software Sector Primer

Consumption pricing needs its own retention and RPO reading; the primer models usage platforms with a consumption shock and no deferred-revenue inflow by default.

17 sections, from the recurring-revenue roll-forward and retention disclosure to stock pay, the Rule of 40, usage pricing, the licence-to-cloud transition and serial acquirers
42 pages
a seat SaaS grower, a usage-priced platform, a licence-to-cloud platform and a vertical-software acquirer, all fictional
4 worked valuations
listed software companies on filed margins, stock pay, free cash flow and backlog, each with its fiscal year
6-company screen

The Excel model is the primer's recurring-revenue DCF live across 13 sheets: a seat SaaS grower, a usage-priced platform, a licence-to-cloud platform and a vertical-software acquirer, all fictional, plus a column for a company of your own in any of the four business models. Revenue rolls forward from gross and net retention and new-customer revenue, fading to terminal levels that set perpetual growth. Margins move in a straight line to year 10, and stock pay is charged as a cost or counted through dilution. A licence base migrates to the cloud at a conversion ratio you set, and an acquirer's deals earn their own margin. A reverse DCF reads the growth a price requires, and the sensitivity grids re-run the model in every cell.

See what's in the Software Sector Primer →

£25 PDF · £59 with the Excel model · £159 for all three Technology industries

Frequently Asked Questions

How does usage-based pricing change revenue recognition?
Under consumption pricing, product revenue is recognised as customers use capacity rather than as a fixed seat subscription accrues. Prepaid credits or capacity contracts can create deferred balances, but the revenue line still moves with drawdown and optimisation, not only with logo count.
Why does net retention swing harder under consumption pricing?
Existing customers can expand or contract spend without adding or dropping seats. Optimisation, warehouse sizing and workload shifts move the retained cohort revenue even when the customer list is stable, so net retention absorbs demand and efficiency changes that seat models push into expansion sales cycles.
How does Snowflake define its net revenue retention?
For FY2026 Snowflake reports net revenue retention of 125%, measured over a trailing two-year period on a cohort of capacity customers that used the platform in the first month of the first year. Product revenue from that cohort in year two is divided by product revenue from the same cohort in year one.
What share of Snowflake revenue is product (consumption) revenue?
Product revenue was 95.5% of Snowflake FY2026 total revenue ($4,472.3M of $4,683.9M). The remainder is not the consumption line the net retention cohort is built on.

Read next

Net Revenue Retention: How Filers Define It

Why two retention figures can share a label and measure different things: cohort, period, ARR or revenue basis, and customer threshold.

Gross vs Net Revenue Retention

Gross retention is capped at 100% and ignores expansion; net adds upsell and usage growth. Attrition and renewal rates are gross-style measures.

RPO and cRPO in Software

ASC 606 requires disclosure of contracted revenue not yet recognised. Current RPO is the next twelve months; contract length moves RPO without changing demand.

See it applied

These company profiles apply the concepts from this guide to real public companies.

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