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The Importance of Providing Customers Choice – Subscription vs Consumption Cloud Billing (IDC)

Posted by Pam Miller on Mar 24, 2016 11:59:21 AM
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This blog was contributed by Pam Miller, Research Director, IDC.

Business customers want in their business life the same techno logy advantages that they enjoy in their personal life. This includes paying for services as they use them.  If your electric bill was a flatfixed fee based on some arbitrary criteria created by your utility company you would most likely be unhappy, unless you had the biggest house with the most kids in your neighborhood. The same applies in the new cloud economy. Consumption pricing better matches utility to expense, and is rapidly becoming more important as SaaS services expand and use cases diversify.

Meeting Customer Demand

Most business cloud services today are sold on a subscription basis with a fixed price paid each month, quarter or year based on number of seats or processors or servers employed.  A fixed price may be in the customers' advantage or disadvantage depending on the use case. Understanding the customers' exact use case may help channel partners advise their customer on the best purchase model for each circumstance. Some customers will want a predictable monthly or quarterly invoice, while others will only want to pay for just what they use.  This may depend on each customers’ budget structure and goals.  The ability to offer consumption rather than subscription pricing may be a critical decision driver in some circumstances.  For example, if a service is part of a project where detailed cost accounting is required, consumption pricing is probably the best choice.  As trusted advisors, solution providers need to ask the right questions, to help their customers determine which pricing model best meets the customers' needs in each situation.

Increasing Flexibility, Reducing Waste

Companies of all sizes are increasingly relying on a continually changing pool of employees, and project-based workers and other requirements, making it hard to predict what services/software will be needed at any one time. Fixed fee subscriptions can result in customers paying for a month of a service when only a week is needed. Accumulation of these used partial monthly subscriptions can have a significant impact on the bottom line.  With consumption pricing enterprises are able to use any product, at any time, as much as they need, without having to pay for software they don’t use.

Matching Value to Expense

The move from lump-sum, upfront sales of software licenses, to the recurring revenue model associated with time-based subscriptions, has already been a big change for channel partners. The addition of consumption pricing will create some new challenges for partners and vendors alike.  However, the ability to match expense to the value received should outweigh the challenges. Understanding exact usage down to a desktop level, allows channel partners to employ training and enablement to optimize utilization, increasing the value the customer receives.  Customers are more likely to continue to use a service where they know they are getting value. The broader the breadth and depth of the utilization the more value the customer receives and the more likely the renewal will and the happier the customer will be.

The Bottom Line

The consumption pricing model is very different than subscription pricing, which is a dramatic change from the old software license model and change is difficult.  But those solution providers that embrace this important customer option will benefit with happier customers and lower churn. As customers demand more value, greater flexibility and lower costs, consumption pricing may well be just what the market needs.

Avnet’s Cloud Marketplace provides the ability for partners to offer cloud-based services to their customers on a pay-as-you-go (consumption) model or on a fixed-price subscription model. We believe this is the first consumption-based distributor marketplace offering of SaaS in the industry.

Read the IDC Whitepaper, The Avnet Marketplace and IBM: The Foundation for a Successful Cloud Business to learn more about the Avnet Cloud Marketplace.

Tags: Cloud, Business, IBM