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The business benefits of consumption pricing

The business benefits of consumption pricing

Credit: New Relic

Ben Goodman, New Relic Asia Pacific and Japan SVP and General Manager

As more and more companies look to Software as a Service (SaaS) to drive the growth of their businesses, technology vendors are starting to realise that the subscription pricing model traditionally associated with SaaS is broken.

Most businesses are using more than 650 SaaS applications at once, which makes for a costly endeavour if they aren’t being used to their full potential. Instead of continuing to implement misaligned pricing meters and expensive licences associated with the subscription pricing model, the industry is beginning to make the shift to consumption pricing.

New Relic is spearheading this industry-wide shift, and after introducing consumption pricing in 2020 we’ve seen some remarkable business benefits for engineers, business leaders and the wider technology ecosystem. Here’s why we made the switch, as well as some business benefits that we’ve seen as a result.

Strong partnerships are created

Consumption pricing creates a strong sense of partnership between customers and vendors for a number of reasons, but the primary one is that the model is based on cost transparency. Prior to this type of pricing, tech teams were forced to predict upfront just how much data they were planning on using over the course of single and multi-year contracts.

Traditionally, many companies sign contracts with their SaaS providers which force them to predict how much ingest they plan on using across a projected headcount. When we moved to a consumption pricing model, we halted the guessing game that our customers were playing. It was leading to one of two negative consequences: use too little and waste their budget, or use too much and face financial penalties.

Additionally, vendors who use consumption pricing move away from the short term mindset of closing business deals, and instead shift towards implementing proof of concepts for the long term, while maintaining customer relationships.

This customer centric approach reaps rewards for tech teams and vendors, with research from OpenView Partners indicating that consumption led businesses have the ability to grow with their customer base at extremely high rates. Top-quartile net retention for companies with no usage-based pricing sat at 109%, while those with a pricing model largely user-based were 13% higher at 122%.

A focus on facts, not forecasts

Subscription based pricing struggles to predict how much data will be used when a customer first signs up to a service. Instead of forecasting how much data a customer will need, consumption focuses on the actuality of customer spend, providing a pay as you go service.

This creates a clear link between cause and effect, which enables tech teams to leverage their internal skill sets and build strength and competency within the wider business. By creating scalable companies that are able to adopt technology to facilitate growth, a much healthier relationship between vendors and their customers is created, and tech teams are able to instrument more data and achieve stronger results, all without needing to allocate more budget.

The role of systems integrators

Vendors certainly don’t go it alone when it comes to creating a consumption ecosystem. By engaging with systems integrators who are aligned on consumption pricing, a synergy is formed that creates better outcomes and a seamless end user experience.

The AWS Marketplace is one such platform that provides a one stop shop for third-party software solutions, with its digital catalogue enabling tech teams to pay as they go. By making SaaS offerings easily available and accessible via the marketplace, it creates business benefits for customers and software providers alike.

Consumption pricing has remarkable benefits for tech teams and the wider business community, thanks to its ability to remove the burden of technology ownership and scale as the customer does. By taking away the traditionally prohibitive cost of SaaS adoption, companies create stronger partnerships with their technology providers, pay for only what they use and can lean on the valuable resources of a wider ecosystem.

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