Cloud-based software solutions enable businesses of all sizes to build technology and business architectures quickly and efficiently. But while software innovation has progressed at stellar speed, associated business strategies have not kept pace. Stemming from the model of the 1990s and 2000s – when customers mostly bought perpetual software licenses at a fixed price – cloud-based products remain primarily marketed on a multi-unit-of-account basis, with a commitment under the form of annual or multi-year subscription.
These approaches are often inflexible and difficult to predict or scale. They lead to situations of under-utilization (shelfware) or overpricing of overruns, customer frustration, and challenging discussions when renewing contracts. By comparing the services accessible by subscription or subscription to the services counted for use in our personal lives, we can illustrate the benefits of the transformation undertaken at the forefront of the software industry.
Amazon Web Services (AWS) Is The First Service To Adopt A Consumption-Based Model
Thus, the commitment to a telephony package meeting our multiple needs initially induces many assumptions. In most cases, we forecast our usage inaccurately based on our short-term needs, only to find over the months that our use of roaming by region, telephony, SMS, and data is either very significantly oversized or at the lowest level. Otherwise insufficient, depending on the situation.
We are dissatisfied in both cases because we either wasted our money or had to pay unforeseen surcharges. Compare this to the way we use water in our homes. This resource is always available, and you can adapt your consumption as you wish and in real-time. If you decide to take a long hot shower, you consume what you need and then pay the bill according to the additional value you received. It’s intuitive and predictable.
Amazon Web Services (AWS) is the first service to adopt a consumption-based model, believing that only products used and that provide value to customers should be billed. Since then, other leading and fast-growing software companies have followed suit, including Twilio and Snowflake. The data confirms this trend: According to the 2021 Software Pricing (SaaS) survey conducted by OpenView Venture Partners, 39% of software as a service (SaaS) vendors charge usage-based pricing.
Place The Value Created For The Customer At The Heart Of What You Do
As technology stacks and SaaS solutions become more complex and interdependent, consumption-based pricing offers a fair, flexible, easy to understand, and predictable model companies can build, adjust, and develop their software solutions. This is hardly a surprise as this model is built around the customer and their value by using a product.
It, therefore, allows publishers to align their business model more closely with how customers use their software. This model radically simplifies and clarifies the # 1 objective of each employee and each business unit of the publisher: to place the value created for the customer at the heart of what you do.
This consumer-based business model represents my future and will establish itself as the de facto standard for software service providers. Consumption fundamentally changes – and for the better – the relationship between publishers and their customers. By aligning their income with consumption, software companies recognize that they will only be compensated if they create products that customers love and whose use brings them value.
Companies that continuously innovate and deliver differentiated value will be rewarded with accelerated revenue growth and customer loyalty, creating a virtuous circle. For publishers, consumption is more than a business, pricing, or revenue model: it is a commitment to focus every function of the company on customers’ success and to ensure that they derive value.
The real added value of the platform and the products offered. Here are three reasons why consumption will gradually establish itself as the preferred model for SaaS software publishers and their clients – from hyper-growing startups to large international groups:
Quick and easy start-up, While unit-linked pricing is generally prohibitive for SMEs or emerging businesses, consumption-based pricing allows for gradual ramp-up, as needed. Some companies will use free tools before migrating to the paid version, knowing they can take this step when they’re ready.
In addition, this model saves sales and customer service teams from spending time negotiating complex contracts. Thus, they can do everything they can to ensure that customers quickly derive value, working together to ensure the suitability and increased use of products closer to customer needs.
An Approach Aligned With Customer Needs
The all-or-nothing aspect of subscription or subscription pricing can harm customer satisfaction and loyalty. Indeed, companies needing to reduce their expenses risk no longer honoring a package that has become too expensive. By opting for consumption-based pricing, companies can adapt their initial commitment and usage according to their needs and modulate their consumption in real-time, according to requirements.
This approach improves their experience and sustains engagement. It also simplifies software administration and gives back control over initial costs. In other words, the customer has complete control over his spending. For example, the hotel sector suffered from the pandemic crisis, which led players to reduce their activities and modify their offer model to cope with sluggish demand.
This is particularly the case with timeshares, a system in which vacationers typically pay an annual membership fee and are required to use their points to purchase a yearly stay or travel during a specific week. When the pandemic began, vacation clubs had to adapt to meet the new needs of their customers and deal with an unprecedented number of postponements or cancellations of stays.
These professionals adapted because it was (and still is) the best thing to do with their clients. The future will tell whether timeshare systems will recover their pre-crisis model or whether they will offer more flexibility. Scalable and flexible solutions for the high-tech sector, today’s startups may be the multinationals of tomorrow.
Consumption-based pricing is an attractive option for companies that aim for rapid growth. Just as it allows them, where necessary, to reduce their consumption, usage pricing gives customers the means to evolve rapidly and to support sustained growth. This model allows businesses to implement land and expand strategy, starting small but fostering growth through consistent unit value. In short, this approach combines intuitiveness and predictability.
Finally, the flexibility of a consumption model is ideal for dealing with the sudden and rapid growth of digital activities and the acceleration of innovations triggered by the pandemic. Sometimes, in just a few days, businesses have had to expand their digital presence faster than ever before, from meal delivery apps, video conferencing tools, online education apps to video streaming platforms, exercise apps, etc.
With the flexibility and scalability of the consumption-based model, the path to meet customer demand was apparent. The migration to this model marks the latest step in the software industry’s three-decade journey for putting customers’ best interests at the center of everything it does. The most visionary software publishers will perpetuate this model. Those who do not evolve are at risk of eroding their bottom line and the trust and loyalty of their customers.