There are several new trends in the market that are having a significant impact on how customers want to buy and pay for new technologies:
- Accounting changes – under ASC 842 / IFRS 16 for end user/lessee, lease obligations are now on book
- Migration to the cloud – many customers are in the process of moving or planning to move at least some of their workload to the cloud
- Utility/usage-based/pay-per-use payment schemes
For customers, there are a lot more nuances to consider than just the traditional CapEx vs. OpEx determination, and how much budget is available. Many customers are operating under great uncertainty regarding the number of workloads in scope, and how quickly to migrate to the cloud. Meanwhile, savvy customers are also trying to optimize value on every dollar they spend regardless of the type of budget.
The implication to technology vendors in this era of increasing complexity is clear: making a successful sale today requires a lot more than just having the best technology at the lowest price. Vendors who can skillfully combine their technical savvy with the ability to evaluate customer economic and budget constraints in light of the evolving economic requirements are better positioned to increase their batting average, and at the same time gain customers’ trust as a good partner.
Consider this recent hard-won sale: a large enterprise customer with global operations had plans to move some of their workload to the cloud. They planned to begin the move in two to three years but the pace for the transition was unclear. In the meantime, the customer was expecting continued growth. Although the customer had typically either purchased outright or leveraged vendor payment options to spread spending over the useful life of the technology, they were also intrigued by the idea of a utility model where they have the ability to dial usage up and down and pay accordingly as they transition to the cloud.
By working closely with TFP, who serves as the vendor’s in-house financial sales consultants, we were able to quickly draw out the pertinent information and limitations from the customer and develop a series of financial models to lead the customer to the right decision for all parties.
As it turns out, for this customer, operating budget spending commitments cannot exceed 12 months at a time, but the customer requires an economic model of a five year contract for the numbers to pencil out. This made leasing not an economically viable option as a 12 month lease with option to extend would have been expensive. On the other hand, utility or usage-based models would give customer the flexibility to dial down and pay accordingly as they migrate to the cloud at whatever their pace of migration would be.
We worked with the customer to model out several scenarios, laying out the economics side by side to the technical options. We determined that a utility model would be inherently riskier for vendors, and thus are priced at a premium to compensate for potential loss from low volume.
In the end, given this customer’s migration plan, purchase would be the lowest cost given the planning horizon. A payment option to spread out the cost of the purchase further increased the short-term ROI and shortened their payback period. By asking the right questions, which led to a clear understanding of customer’s needs, planning horizons, budgeting process, and most importantly, their financial metrics, we were able to develop a model that led to a win-win solution for both the vendor and the customer. And, along the way, the vendor sales team jumped a couple of notches in the “trusted advisor” meter.