Are consumption-based SaaS business models becoming more prevalent?

They are, and it’s worth thinking about.

We actually sort of started there. The first big SaaS success wasn’t Salesforce, it was WebEx before that. Salesforce learned from WebEx, just like many of us learned from Salesforce.

And WebEx started off with a consumption-based model. It made sense, because back then, “minutes” had a high variable cost.

From 2003:


$0.45 a minute for video, plus $43.20 just for the audio portion of a one-hour meeting with 6 participants! Woah!

It took falling network prices (and competitive pressures) for WebEx to gain the confidence to move to semi-consumption and then flat-rate pricing.

Salesforce took that and ran with it, and trained an entire generation of buyers to pay “per seat”. This created some degree of certainty in pricing over consumption-based models — with a trade-off that the vendor (Salesforce) actually came out ahead. Salesforce got everyone trained to buy all the seats you might need now, even if you didn’t really need them for quite some time. I remember one customer in particular paid Salesforce $20m a year for a license it needed well over a year to deploy, given all the change management required. So that first year, 1 seat probably would have been enough on some level, given that no one was truly live on Salesforce in Year 1 of the contract.

Fast-forward to today, and SaaS is no longer new, or early-adopter, or confusing. SaaS is software.

And Amazon trained a whole ‘nother generation to get comfortable with consumption-based pricing, especially for developer-centric products. Is AWS cheap? And is it cheaper, because it is consumption based? Not — it is not, at least not today. But most of us now “prefer” consumption-based pricing for roughly similar products.

And today, people want to buy the way they want to buy. Some products they use intermittently. Some products they are used to paying variable pricing for. Some products, importantly, they can bundle up with charges they pass on to customers.

Slack, interestingly, does both. The original Slack audience was very product-centric (almost developer-centric), and adopted consumption-based pricing. You only pay for the seats you actually use, and unused seats aren’t billed. But as it’s gone more enterprise, it’s also adopted more traditional enterprise-license pricing. Each segment can now buy they way they like to buy.

Today, most SMEs and enterprises already use 100+ SaaS applications. So what they really want is to try, pay and buy that way the use similar applications. If the application most similar to you is consumption-based, start there. If it’s per-seat base, start there. And if it’s a hybrid, again, start there.

Let customers buy the way they want to in 2018. We’re all SaaS veterans now.

View original question on quora

Published on September 18, 2018

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