One of the most fascinating, yet relatively unchartered areas of cloud computing’s all-out assault on today’s enterprise is the complex beast that is the consumption-based pricing model.
Technical, operational and of course, security issues aside, it is easy to see how the advent of pay-for-what-I-use, which is commonplace in pretty much all of the leading Public Cloud IaaS services, coupled with a shift from capex to opex spend is extremely attractive to enterprise IT leaders who are looking for new and innovative ways of aligning their IT costs to actual usage. In fact, I would be surprised to hear from any enterprise IT leader who wasn’t sick and tired of shelling out on huge investments in infrastructure and application portfolios, along with their equally steep yearly operating costs, only for some variable percentage of that solution to sit dormant, idle, under-utilized or in some cases, just collecting dust as plain old shelfware.
There has been plenty of excellent discussion recently around whether a growing maturity and accelerated adoption of cloud computing services will have massive shrinking effects on IT budgets. It’s an interesting topic and one to which I am sure you have drawn your own conclusion (as have I) so I will not labor those points, nor wake the learned Mr Jevons again from his well deserved eternal slumber.
But..something doesn’t feel quite right.
For me, the promise of this new financial flexibility in the Cloud, be it IaaS or PaaS, sits on my shoulder like an ethereal vision of an angel, beckoning me ever closer. On my opposite side, there sits a cunning devil, one who promises to unshackle me from the misery of traditional enterprise software, but one who has a very dark and sinister side. His name is SaaS. To the untrained eye, he’s the nicest of devils, quite charming and approachable, but he has two major flaws – he has an identity crisis and he doesn’t understand scale.
Take a look at many of the popular SaaS offerings that are out there today and you will quickly spot a recurring model, sometimes known by the portmanteau word “Freemium”, and often categorized across the “Personal > Business > Enterprise” silos. It may go something like this:
Sign up for FREE ! $12 Per User Per Month ! Call For Pricing !
These omnipresent models are absolutely fantastic if you are a one-man-band, a small organization or have a real niche need for a SaaS-based service within a large organization. It’s the last three words that cause me to wobble. Call For Pricing. I’d rather not. Honestly.
In so many ways, SaaS providers are the antithesis of traditional software vendors. Their shorter product cycles, hassle-free operation, intuitive UIs and UXs, cross-device and cross-platform support and automatic upgrades not only make them attractive propositions, but almost indistinguishable from their ancestors. However, it appears that the DNA runs deep and and leads to an alarming inability for some of these newer players to transcend the “small organization to enterprise” divide whilst understanding that “enterprise doesn’t mean committing to 5,000+ licenses on day one just to get to a lower cost per user in aggregate”.
Here’s a quick example.
Take one large organization, say 15,000 people. Take one “cool” SaaS product, say cloud storage. Take one cost structure of $12 per user per month.
Do a simple linear equation, without calling for pricing. 15,000 * $12 * 12 = $2,160,000 per year.
That’s a lot of money for a simple service that does pretty much one thing. Of course, it assumes that all 15,000 people are active users, daily, but nobody of sound mind would ever pay that much per user for so many users. So, what are the options ? Oh yes, call for pricing.
My guess is that if I did call for pricing, I would be able to negotiate a better aggregate cost per unit, but to do so, I would likely have to commit to a volume of users that I can not guarantee would be using the service on day one (or at all). So now I am not paying for what I use, I am back to a hedging scenario – a lower unit price, but a higher overall commitment and once again, my costs are out of direct alignment with my usage. It is no longer consumption based, as my unit of consumption measurement (my users) is more than are actually using the service. Hmm.
The challenge in all of this is to find a fair model that is palatable for both the customer and the provider. A model that allows the customer to grow into scaled-up actual usage of a service at a price point that is acceptable, representative of the service’s value to the organization and does not dis-incentivize adoption. Sadly, I have no magic formula, but the default position of enterprises having to call for pricing, spend a lot of time and effort to negotiate and then potentially walk away from attractive solutions because the mechanics of the deal “feel too much like the olden days” is something that is causes me to wonder whether this is a phenomenon that is harming enterprise adoption of certain “cool” SaaS products much more seriously than the triumvirate of bogeymen named Security, Compliance and Trust ? 
Hello,
The example given in your post assumes that the licensing model is per user. For something like storage this is probably the wrong licensing model. It would be better if the price calculated was not per user but per GB of storage and the amount of bandwidth used.
This would make the model quite cost effective on any scale. From a one man shop to a 15,000 user enterprise.
Ali
Hi Christian,
You put in words something that, I think, is bothering a lot of people.
I think the analog you’re looking for is traditional outsourcing. In an outsourcing deal, there is always a “ramp up” phase — no outsourcing company has the capacity sitting around to take on an enterprise deal. It’s too costly to have idle capacity.
The challenge here is SaaS companies can’t have infinite capacity available, just waiting for an enterprise customer to come along. So they hedge their bets. And some of them haven’t built up enough customers to realize the economies of scale they have built into their pricing models. So they have to play an “if we build it, they will come” game, which carries risk.
The other analog to outsourcing is that outsourcing is not always an obviously cheaper solution. It represents an opportunity to realign costs (CapEx to OpEx) or finding a partner who can do what you need better than you can do it yourself.
Bottom line: SaaS *is* outsourcing. It’s not like the traditional enterprise software model. Signing up 15,000 seats of *anything* is NOT trivial. So, calling for pricing makes sense to me.
Alan Berkson
Intelligist Group