In his experience, customers want to pay directly for exactly what they're using, instead of shelling out for features they don't need, he said. The pricing model also helps buyers make sure they're getting the most value for their money, according to Tien Tzuo, the CEO of the subscription-management company Zuora. It also allows customers to start using new tools without a lot of risk: "You can start off at a very small scale and rapidly scale up as you start to see success," he said. Usage-based pricing, meanwhile, is "the next wave" because the vendor is "always on the right side of the customer," Shipchandler said. "With a SaaS product, there are a bunch of features out of the box, but if you don't use those features, you pay for them anyway," he told Insider. Twilio Chief Financial Officer Khozema Shipchandler went as far as to say that the subscription-based model was "by and large dying" because usage-based pricing provides customers better deals. Scott Guthrie, Microsoft's executive vice president of cloud and AI, told Insider that customers prefer usage-based pricing. He and other execs say that one of the benefits of the usage-based model is that customers love it. This has become the dominant model for tech companies and proved wildly successful for years.īut then, cloud providers became some of the first to charge based on usage of their computing services in a really granular way: "For every second of compute you're using, you get billed for it," OpenView partner Sanjiv Kalevar told Insider.įor example, Azure cloud charges "pretty much entirely per usage," Scott Guthrie, Microsoft's head of cloud and artificial intelligence, told Insider. Then, as cloud software became more popular, many tech companies shifted from a traditional licensing scheme to a subscription-based pay-as-you-go model, pioneered by companies like Salesforce in the early 2000s. Firms would charge users for a perpetual license, meaning they would have access to the software forever but wouldn't get updates or new editions without spending more. The first wave of tech pricing started with buying boxed software hosted on company devices or data centers. The subscription-based model is 'by and large dying' Under CEO Frank Slootman, Snowflake has followed a usage-based pricing model since its founding. But many analysts and executives, including those from Twilio, Microsoft, Stripe, and Snowflake, think usage-based pricing is here to stay. It gives customers more flexibility regardless of when they experience peak demand and doesn't force them to pay for product features they don't use, he said.ĭespite the myriad benefits to offering this model, there are some drawbacks including unpredictability - meaning it's not the best fit for every company. It's "the only model that made sense," said Christian Kleinerman, the senior vice president of product at Snowflake, which has followed a usage-based model since its founding. "I think what the pandemic did was remind people - both the vendors and their customers - that their usage could be highly variable and the licensing model didn't generally reflect it," John Santoro, a Gartner analyst, told Insider. Now, analysts and tech executives say enterprise tech's future is in the usage-based model. Snowflake, Twilio, and Stripe - as well as the cloud providers Amazon, Microsoft, and Google - were some of usage-based pricing's pioneers, and companies like Informatica, New Relic, and Splunk are some of its newer adherents.īut as the pandemic-spurred economic downturn squeezed company budgets and customers demanded more billing flexibility, Silicon Valley has seen an uptick in companies transitioning to usage-based pricing. It's a vastly different approach from the software-as-a-service (SaaS) model, popularized in Silicon Valley over the past decade and used by software heavyweights like Adobe, Salesforce, Slack, and Zoom, in which companies charge customers per user every month or every year. In the structure, companies charge customers based on their precise usage, like their per-second compute power consumption or their amount of storage. Usage-based pricing has been gaining steam. The shift away from buying boxed software toward subscriptions was one of the biggest innovations of the cloud era to date, but there's a new model that's winning converts and disrupting the status quo. But there are risks, including fluctuating revenue and overdependence on demand.The model better aligns companies and their customers, execs from Twilio, Snowflake, and Zuora say.The subscription pricing model is fading out, and usage pricing is the "next wave," execs say.Account icon An icon in the shape of a person's head and shoulders.
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