Customer-centricity is preached by every software company. However, the subscription pricing model used by most cloud software is far from customer-centric.
Customers must opt into paying a recurring monthly fee in a subscription pricing model. Before purchasing software, the recurring fee is determined. It’s usually calculated by multiplying the price of a license by an estimate of how many units of that license will be needed in the coming year, or over a longer contract term.
These subscription models benefit the software provider because they are paid for the duration of the contract, even if the software is not used. This isn’t ideal for you, the customer. You’re wasting money on shelfware if you use too little. You’ll face overage penalties if you use too much.
Consider how we use water in our own homes. You can throttle your usage based on your needs, and the resource is always available. When you decide you need an extra-long, hot shower or you have visitors, you simply consume what you require and then pay for the added value.
It’s simple and straightforward, with a price that reflects the value you receive. Consider what would happen if we paid a monthly fee for a certain amount of water usage. Why should you be charged for water you didn’t use because you upgraded your showers to be more efficient?
That’s simply unjust. Worse yet, why take the chance of running out of water because your visitors took a long shower? That doesn’t make any sense.
At work, software has taken on the role of a utility, similar to how water does at home. As a result, software consumption pricing is increasingly becoming the norm. A good example is Amazon Web Services (AWS). It popularized consumption pricing, in which customers pay only for the capabilities that they use and value from. Twilio and Snowflake are two high-profile, high-growth software companies that have successfully adopted this model since then.
Consumption- or usage-based pricing fundamentally alters the relationship between software companies and their customers, moving away from inherently unequal subscription models and toward an inherently equitable exchange of value. Software companies that align revenue with usage understand that they won’t get paid unless they build products that customers enjoy using and gain value from with each use. Companies that continue to innovate and provide differentiated value will be rewarded with increased revenue and customer loyalty, perpetuating the virtuous cycle.
Consumption is more than a business, pricing, or revenue model; it is a commitment by a company to focus every function on making customers successful and ensuring that they get true value from its platform, products, and/or services.
Customers will continue to accept consumption pricing as the preferred business model, from hyper-growth startups to the largest global enterprises, it is clear today.
All software companies will eventually adopt consumption pricing as the de facto standard. It’s the latest step in the software industry’s three-decade journey to prioritize customers’ needs in everything they do. It’s all about aligning with the success of your customers. As true vendor partners, forward-thinking software companies will continue to embrace this model. Those who do not evolve risk losing not only their top-line growth, but also their customer trust and loyalty.