In early times, organizations needed to invest in both hardware and software as upfront initial investment as a part of their IT journey. Servers were bought and software licenses were purchased as a pre-requisite to embark on their enterprise transformation journey. So, organizations need to make that investment and calculate the ROI over multiple years. There was also the need for office space and security both in terms of server maintenance and to avoid any security encroachments that needed to be taken care of. Overall firms needed a huge initial investment but also a large team to maintain and manage all these internally.
With time, organizations were trying to move out of the initial high investment and look for other models which would help them in the enterprise journey. Different vendors to solve this brought in a subscription-based model in which the organizations need not make that initial investment. In this model, the customer registers a particular service for a period and pay a recurring fee for the service. The payment streams vary by license types – Upfront, Equal installments and Pay-as-you-go. This allowed both the supplier and the customer organization to budget easily as the amount to be transacted is fixed per pay cycle. Suppliers prefer this model as these drives
a. Acquiring new customers due to low startup costs
b. Recurring income areas
c. Product maintenance and support
But there are a couple of concerns that the model brings along with it specially for the customers. It is found that high usage customers get more than their share whereas the low usage customer are not getting enough. The other thing that the customer is highly concerned is the under usage or no usage of a particular service at any time of the year with the cost of the service remaining same for both high and low usage periods. To reduce costs in such scenarios they need to modify their subscriptions at regular intervals which is also an issue.
With all these concerns in place, the adoption of the subscription-based model was not complete and there was a need of a new model by which the customer usage of a particular service can be charged or measured. Thus, invent of the consumption-based model is a service provision and payment scheme in which the customer pays according to the resources used. In this, the supplier tracks the services used by the customer and bills them on the amount of usage. For a customer, it leads to
· Reduced start-up capital cost & risk
· Less waste & overprovisioning
· Simpler system design with faster resource scaling and
· Consolidated billing
· Provides agility for change to business needs
· Improves customer retention by upgrades or downgrades
This can be also defined as usage-based pricing, pay-as-you-go billing or metered billing. There are various pricing models that have also evolved with this model and some of the primary ones in the technology space are as below:
a. No Commitment: Just a pay-as-you-go service with no obligations of either limits or term or rate.
b. Uncommitted Contracts: Contracts focused on a rate and a term with no commitment on spend.
c. Committed Contracts: Contracts focused on spend, rate and term.
d. Committed & Uncommitted Contracts: Hybrid structure having both committed and uncommitted spends in different service areas
But to implement all of these, we need to look at various principles –
a. Product : Mapping of product investments to revenue generating expenses
b. Marketing: Connect with product & user community on the change
c. Sales: Consumption is the motto
d. Customer Success: Look for indicators for future success
e. Finance: Reinvent the pricing models
With consumption being tracked and priced, it is very important to have data which will form the building blocks of success. This data would need to come from the Meters which is the foundation for instrumenting applications & services for usage. This will help analyze usage and drive data-based strategic decisions. A modern, cloud-native metering system should provide a standardized metering interface across your technology stack, deliver accurate results, is cost effective, and fast, so that you can take proactive actions w.r.t. changes in customer’s usage patterns.
Transitions like this are not simple and there need to be strategic and transformation drivers to reach there. There also need to be an identification of the key areas with their best practices which need to be implemented to have a smooth transition.
a) Planning: Plan for challenges, dependencies, cost changes and revenue impact.
b) Strategy: Analyze customer pool, put a proposal, and map out impacts on sales & customer-facing.
c) Sales Compensation: Compensation model for sales aligned with consumption usage.
d) Reporting: Develop system dashboards to track usage for the customers
So, the question here is for the supplier organizations is whether they have the alignment within their organization, across all departments to transition to the new model and the customer organizations is whether they are ready to move into the new model reducing their initial investment and tracking the level of usage for the services needed. Mixed models can also work. For e.g. – in case of an organization for software and hardware enablement, the software would come as a subscription whereas the hardware comes in with automated capture of usage & billing with easy customer user interface.
So where does your organization stand? Have they already transitioned? Or are they on the way?