May 31, 2016

The Shift to Consumption Economics

My customer is asking for “utility” pricing.  How should I respond?

I get this question a lot.  My initial reaction is to respond back with a series of questions.   Are you sure they are asking for utility pricing? How is the customer defining utility pricing?  Utility pricing can mean different things to different people.

It has been my experience that the term utility is over used and what most customers are really asking for is an alternative way to pay for their compute needs.  What is utility pricing?  Most people agree that true utility pricing is a 100% variable pricing model with no fixed minimum payment, no fixed term, and the price can go up and down based on consumption.Consumption pricing chart

Utility pricing is not necessarily a cloud solution or a managed service solution.  Cloud solutions and managed service solutions are more about how the service is being delivered versus how they are being priced.  In a cloud solution the customer has access to the infrastructure and resources but they don’t own them and generally only pay for what they consume.  However, even some cloud solutions use flat rates. 

Some customers will have a very clear idea of what they are asking for.  Others aren’t entirely sure but say that your competition is offering utility pricing.  Which only means they are offering a pricing model that they are calling a utility pricing model.   It may or may not be a 100% variable solution.

What is the customer really asking for?

In order to answer question you also need to understand why the customer is asking for utility pricing.  Pricing is the financial part of the sale, which has become an increasing important part of the overall sales process.  Most customers are looking for a combined technical and financial solution; it’s not just about the technical sale.

What financial or business drivers are they trying to solve?

Typical financial/operational drivers

  • Budgetary limitations
  • Capital expense or operating expense
  • Ownership risk
  • Capacity management
    • Predictability (or lack of) compute needs
    • Flexibility
  • Procurement
    • Ease of procurement
    • Speed of procurement

The majority of customers asking for utility pricing are not looking for 100% variable pricing.  In fact, most customers don’t really want 100% variable pricing.  Although 100% variable pricing is flexible it can be expensive and is hard to plan and budget for.

Generally, customers are looking for the most cost-effective and efficient way to acquire their technical solution and are usually comparing it to paying cash or net 30.  The slide below is one that I have used for years to help explain to sales teams and to customers the interrelationship between price and risk/flexibility.

Consumption Economics

Understanding what the customer is trying to solve will help you match the best acquisition model to meet their needs.

Matching use with cash outflows – There are a variety of solutions available to customers looking for ways to match use with cost and many of them include traditional forms of financing.

If it’s about ease of procurement and ownership risk – Operating leases and hybrid utility solutions shift the ownership risk from the customer to a third party.  They can also facilitate the requirement to have excess capacity onsite available to use but customers don’t have to pay for it until they actually start using it.

TFP has years of experience helping customers manage the transition to consumption models.  Let us know if we can help as you make the transition.


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