The software industry is undergoing an unprecedented shift with customers turning to consumption-based pricing as an effective business lever. The move, in large part, was precipitated by the pandemic - shrinking budgets have forced companies to run a ruler over expenditure at all levels while being forced to significantly increase digital investments to survive and compete.
While it is evident that Covid-19 has forced organisations to embrace online and digital sales channels almost overnight, figures in an October 2020 McKinsey report provide a telling picture of the health crisis’ impact on business.
McKinsey found that the rate of creating digital or digitally enhanced offerings leaped by a whopping 10-plus years for Asia-Pacific organisations during Covid. This means digital transformation projects that would have taken a decade to complete were achieved in 2020.
In contrast, North America’s digital adoption acceleration was six years while Europe was seven years due to the pandemic, according to the McKinsey report, How Covid-19 has pushed companies over the technology tipping point and transformed business forever.
Organisations have also come to recognise that their ability to scale up or down, and allocate additional computing resources instantaneously has a huge impact on both business performance, and the end user and developer experience.
As consumption models work in real-time, they also force organisations to assess the value of an application or workflow regularly. The amount of value that the business is getting from resources allocated to a particular activity will become very apparent, and enable the business - and indeed engineers - to make informed decisions to avoid ‘bill shock’.
Usage, or consumption-based pricing offers greater transparency and equity for customers, as opposed to the subscription route. If they are getting true value from a vendor that translates to strong business outcomes, a higher cost for the services will be warranted. Conversely, if the organisation is not getting the return on investment from the vendor that they had hoped for, then they might start researching alternatives.
This operating model - which drives value for organisations of all sizes, users and data ingest requirements - has resulted in a different dynamic between those creating the software or services, and those consuming it. Vendors have become far more accountable in delivering the kind of service levels and innovation that their customers demand.
Customers, in turn, only pay for what they consume.
In comparison, traditional subscription models are inflexible - it requires upfront commitment at a set rate and time period. Customers are constrained and unable to meet fluctuating demands of ever-evolving market conditions due to this antiquated approach.
Amazon Web Services (AWS) was one of the first vendors to offer consumption-based pricing many years ago, and others in the industry such as Twilio, Snowflake and Stripe have followed suit.
New Relic’s CEO Bill Staples recently emphasised that consumption models are changing the fundamental nature of the relationship between the vendor and the customer: “The vendor understands that if they don’t build great products that customers enjoy using, they won’t get paid,” said Staples. “And consumption isn’t just a revenue model. It is the explicit understanding that if we aren’t focusing every function in the company around making our customers successful, we aren’t living up to our commitments or our ability.”
Once an organisation adopts consumption-based services, empowering employees to make educated financial decisions requires buy-in from finance. To understand what a reasonable dollar figure is, technology and finance teams need to jointly develop standard policies across the board.
This applies to everything from provisioning an AWS server, to a CDN, an observability instance and even a mobile phone. Once the business has those principles in place, they can democratise it so that every department can consume technology within company guidelines, without going through arduous approval processes that negatively impact on efficiency.
By setting up a culture of consumption accountability, staff feel empowered to deliver the meaningful growth and innovation that the business has set out to achieve. Employee empowerment leads to enhanced productivity, increased retention rates and happier teams - inevitably resulting in a healthier bottom line.
By Ben Goodman, New Relic Senior Vice President, Sales and General Manager for Asia Pacific and Japan