Usage-based pricing models enable customers to better understand cost drivers of a given product or service. In addition, Technology vendors may capture revenue lift from usage-based pricing that otherwise may be left on the table under a traditional tiered fee or flat fee pricing model.
Tickers mentioned: GOOG, SNOW
The tiered subscription pricing model favored by many Software companies doesn’t provide customers with much visibility into pricing drivers nor does it help companies explicitly align revenue with product usage and data consumption. For example, many are familiar with the pricing model where Software Company “ABC” offers access to its software along the lines of $50 per month for X users, $99 per month for X-plus users and $199 per month for “Enterprise” access. This pricing model is becoming antiquated, especially for Software vendors that store large data sets in the cloud (i.e. on its servers). As data proliferates, the cost for Software vendors to securely manage that data (whether it be customer data, third-party data and/or enterprise data), is increasing on a dollar basis even as unit data storage costs decrease.
Therefore, why not charge customers explicitly for data storage as well as the number of users whom access the data? Doing so would help Technology vendors capture revenue lift as data and usage grows. A baseline fee could be introduced for new products that have yet to capture critical mass. This baseline fee would ensure profitability on day one, or breakeven, or accelerate the payback period depending upon the outcome the vendor desires. A baseline fee combined with transaction fees beyond a certain usage or transaction threshold is common for a variety of products and services amongst Fintech and Info Services companies. Many of today’s Payments and Advanced Analytics companies leverage a variation of usage-based pricing via transaction-based pricing models with built-in thresholds. The Advanced Analytics companies refer to “transactions” as “API calls”. Same concept, different vernacular.
Google (tkr: GOOG) and Snowflake (tkr: SNOW) leverage usage-based models. Google for example recently recalibrated its Google Photos pricing model as the service had subsidized the cost associated with user-generated content for years. SNOW charges separately for usage and stored data.