(Bloomberg) — Business software pricing is starting to look less like a monthly subscription to Netflix and more like your water bill at home.
Economic uncertainty and tightening budgets are accelerating the shift to consumption pricing, which charges software customers based on how much they use the product rather than a recurring annual or multi-year subscription fee. The model, popularized by Snowflake Inc., has been adopted by a growing number of software makers, including C3.ai Inc. and Autodesk Inc.
Analysts have traditionally viewed pay-as-you-go as a liability for providers, thinking that customers can dial up spending more quickly when times are tough. But with the current market slowdown, consumption model cheerleader Snowflake says it continues to attract new clients to its data storage and analytics products who want to pay only for what they need on a tight basis the money instead of being locked into a big contract. On the other hand, subscription model stalwarts like Salesforce Inc. and ServiceNow Inc. has reported a slowdown in new business acquisition.
Slowing sales cycles helped push C3.ai, an enterprise software provider led by industry veteran Tom Siebel, to move all new business to consumption pricing. Signing up new customers is easier now that the first purchase is cheaper and requires less executive approval, Siebel said. “In a recession, you have to talk about pennies not millions.”
Siebel, which sold its eponymous customer relationship management company to Oracle Corp. in 2006, said that the pricing change would reduce revenue in the short term before accelerating growth. Last month, Mike Cikos, an analyst at Needham & Co., said it was a challenge for companies to change the way they sell their products, and that C3.ai’s components “will likely remain in limbo until we have line of sight with others. part of the transition.”
Cloud-computing providers such as Amazon.com Inc., Microsoft Corp., and Alphabet Inc. has long charged customers based on how much server space is used, but this pricing model has expanded to a wider variety of software services, according to a 2021 report by venture capital firm OpenView Partners . More than half of software companies said they expect to use consumption pricing by 2023, according to a survey it conducted. Other notable examples include customer communications provider Twilio Inc. and the OpenAI image generator Dall-E.
Software stocks have been battered this year as traders bet on increasingly aggressive interest rate hikes from the Federal Reserve. The iShares expanded software ETF is down 38% this year compared to a 214% decline in the broad-based S&P 500. The lack of profitability, long accepted among high-growth companies, is a particular black mark. to software companies like Snowflake this year, with a basket of money-losing tech companies assembled by Goldman Sachs Group Inc. down 59%. With this economic backdrop, it’s no wonder technology leaders are willing to try new pricing strategies to sustain growth.
Not all executives are convinced. The Co-CEO of Atlassian Corp. said. that Mike Cannon-Brookes that the pricing model does not make much sense for collaborative applications, especially when no specific resources such as server space are being used. Customers expect a simple per-user subscription cost for workplace tools that are part of a typical business day like Atlassian’s Trello, Cannon-Brookes said. “I don’t feel the need to get away from it.”
Consumption pricing doesn’t work well when users are discouraged from using the service by ever-increasing costs — also known as the “taxi-meter effect” — according to the OpenView report. They pointed to Adecco Group AG’s platform Hired.com, where recruiters posted fewer job listings when pricing was pay-per-hire. Customers may also be put off by high cost variability and prefer a more simplified purchasing experience, according to OpenView researchers.
Snowflake bills sometimes surprise customers as well. Many social media posts share stories of high charges from the company or business tips on keeping costs down. Earlier this year, Snowflake executives said improvements to its products would lower customer costs.
Usage-based pricing is less common in applications than in infrastructure, but that may change. Autodesk, known for its architectural design and manufacturing programs, last year introduced a one-day “Flex” license. Under this plan, AutoCAD — one of its core applications — costs $21 for each day of use compared to the standard $235-a-month subscription plan. Chief Executive Officer Andrew Anagnost said that about 40% of users of the flex pricing model are new.
“It’s a great tool for small businesses that can’t afford the full subscription to everything we do,” Anagnost said. “I think ultimately, most everyone will end up on some type of consumption plan.”
Snowflake Chief Revenue Officer Chris Degnan started as the company’s first salesperson in 2013, and remembers that it was “not easy” to sell the consumption-based product to companies that had never heard of it. Snowflake even had to develop its own billing system, as most payment processors focus on handling subscriptions.
Today, Snowflake looks like the elder statesman of pay-for-what-you-use pricing. Degnan says he gets a lot of executives calling him to ask about moving their companies to the Snowflake model.
“There will be software-as-a-service companies that don’t make that transition that will fail,” Degnan said.
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