Consumption-based Pricing: Ensuring Every Customer’s Value and Success

Consumption-based, aka usage-based, pricing is hardly new. Anyone with an electricity, gas, or water bill knows that the amount you pay each month varies depending on your usage. More recently, disruptive companies have pushed other industries (transportation, hospitality, communications, and insurance) to transform by providing usage-based products and services via software applications. As consumers, we see this all around us, when we hail an Uber or choose a short-term rental on AirBnB. 

However, it was the cloud providers that truly upended the IT market in the last decade by providing hardware and software via the consumption model. Amazon pioneered this model by charging customers based on how much cloud storage or services they use, and other providers such as Microsoft and Google followed suit.

But most SaaS providers did not do the same. Since the early days of SaaS, vendors have relied on a subscription model, which requires customers to pay a recurring price for a set number of licenses or seats to use their software. While subscriptions work well for ensuring predictable revenue for SaaS vendors, this model can be challenging for customers. They must estimate upfront how many licenses they may need and pay a monthly fee without any guarantee they will use all of the licenses or features they contracted for. 

While SaaS delivery and the subscription model are now viewed as mainstream, customers deserve stronger value than what subscriptions can provide. That’s why the consumption-based model makes sense now more than ever. It’s a great opportunity to extract more value from your software investments, gain a competitive advantage, and develop true partnerships with your SaaS vendors. 

With the subscription model, sales teams are incentivized to push more licenses and upsell. Sales tend to follow the same pattern: the account team lands a deal, a contract is signed, and the customer is then passed along to a support or customer success team. 

If the subscription is too large and some seats go unused before renewal, the account team isn’t on the hook. His or her payment comes from the size of the subscription, not actual usage of the product or service. The salesperson has no skin in the game after the customer signs.

On the flip side, imagine the quota and commissions of your vendor’s account team is tied directly to your consumption, and therefore your success. Suddenly, it’s in the account team’s best interest for you to not only buy, but also to consume the solution and derive high value from doing so. That account team is leaning in and saying, “How do we get you into production faster?” And they are working hard to enable you to optimize for efficiency and do more with the solution, such as deploying additional data workloads and revealing new business use cases.

What’s most remarkable about the consumption-based sales model is this natural alignment between Sales and customers around incentives. That’s because the account team knows that the best way to drive revenue is by understanding your timelines, how you deploy technology, when you can go into production, and what data workloads you’re bringing in. Your account team becomes your day-to-day advocate and an integral part of your project team, working hard to earn your business every day. 

Obviously, you can’t obtain this kind of alignment or these benefits with traditional licensing or subscription-based models. Only when account teams become customer-centric and act as true partners will they invest in customers from start to finish. 

As with every new sales model, fresh challenges exist around buying and using a consumption solution. So, here's what to look for in a vendor to confirm they offer true, usage-based pricing.

• Your account team is invested in your success. Vendors with a usage-based model will inspire account teams by including two main components in their sales contract: one is sales and new business, and the other is consumption (or revenue). The latter keeps incentives aligned with you, the customer. 

You’ll notice the difference immediately. Account teams will treat the sale as the beginning of a long-term relationship. They will be curious and work hard to understand your business and your needs. That’s because the account team will be rewarded when 1) you begin to consume the SaaS solution, and 2) you sign a second or third agreement because you’ve experienced real value, recognize that it’s a great relationship, and are even more committed to using the product or service. 

• Try-before-you-buy. As a prospective customer, you want to be educated on the benefits of consumption. I’m a firm believer in the “show, don’t tell” approach to demonstrating value, which is why I recommend customers first run a realistic data workload with the SaaS product in their environment before buying. This hands-on experience provides you with a better sense for what a solution can do for your business. 

Your contract with the vendor should reflect a price per unit of data storage and compute by estimating this in advance. Of course, you’ll only be charged for what is actually used, but the benefit lies in locking in a better rate through this early estimation.

• The SaaS provider educates your finance team. Historically, customers buy fixed-resource products with a fixed amount at a fixed price. And, if more resources are needed, it’s a purposeful event that can be budgeted for in advance.  

Usage-based consumption requires a mindset shift by finance teams. While the consumption model is advantageous for the customer because there’s no financial waste (you only pay for what you use), this reality requires budgets to be variable rather than fixed, and expenditures become operating expenses (opex) rather than capital expenses (capex). Your SaaS provider should help with this education, if needed.

• Contracts and consumption. Hand-in-hand with the financial mindset shift is a new way of thinking about how contracts are made. The consumption model eliminates worst-case scenario selling, where you pay more year-round to account for your heaviest product usage, which may only be a few days a month or quarter.

That also means the barrier to entry is much lower, and you don’t need to be exact around your business forecast. The solution is elastic and can react as needed. Therefore, if you decide to underbuy and stick to a lower-commitment contract, that’s perfectly fine. If you run through the units and associated pricing you’ve agreed to in your contract, it’s easy to buy on-demand or update the contract. Understanding the tradeoffs of different contract approaches will help you make the right decision for your business.

• No customer success team. With the usage-based model, the account team stays engaged post-sale to make sure you are consuming and getting value out of that consumption. Your account team should be excited about helping you solve real-world problems and discovering new use cases. It’s all about making you successful by building the right team around you from the get-go.

At the same time, you should consider investing in the vendor’s professional services and training offerings once you become a customer. They can be invaluable in helping you get the most out of their SaaS solution and getting data workloads into production.

• Forecasting your usage is tied to data. With a consumption model, every SaaS customer is unique. There’s no easy way for the vendor to tell you exactly how much of the service you’re going to use over time, as outcomes will vary depending on your use cases and workloads. 

However, data is the saving grace. Any usage-based vendor should use data and data science to make sure you understand your current consumption and help forecast your future usage. Once you’re in production, your account team can work with you to analyze your usage patterns and properly scope additional workloads or projects.

Without a doubt, the consumption model represents the future of sales. While three of the biggest companies in the world—Amazon, Google, and Microsoft—are running this model, what’s even more important is that it represents what customers want: usage tied to value.

We are constantly in conversation with SaaS companies and application providers that want to learn more about the consumption model and how to transform their businesses. I also have daily conversations with customers who want to use the consumption model to monetize their applications and data sets. 

This technology wave is coming, and as a customer, you will soon have the opportunity to benefit from consumption-based products and services across industries. However, it’s important to work with SaaS vendors that align incentives internally, so your account team will be by your side from start to finish. Vendors that execute properly are most likely to develop true customer partnerships with staying power, and customers are more likely to benefit the most from the SaaS products they consume.