In early March, just as the COVID-19 pandemic was taking hold, we wrote about how many B2B tech companies selling into enterprises can navigate the current market uncertainty with a cloud-native, go-to-market playbook. By using a bottoms-up sales strategy targeting developers as initial users, and then offering fast “time-to-value” through a freemium, cloud trial, these startups can build fast-growing businesses in a cost-effective way.
But just structuring your offering as a cloud product isn’t enough. You also need to re-think your pricing model to appeal to a different type of buyer who likely views value differently than a traditional CIO—and requires more flexibility from you.
In many of our conversations with early-stage, cloud companies, we find many don’t think through pricing models early enough. Many also aren’t transparent enough, explaining very simply what the return-on-investment for their product will be. We discussed in our Open Cloud report earlier this year how we believe transparency builds trust with customers, and obviously leads to sales. That’s truer than ever today, with many enterprises struggling to cut costs and survive a brutal economic environment. Without flexible, transparent pricing, you won’t get very far today.
So, in this second installment of our Cloud-Native Entrepreneur’s Playbook, we’ll evaluate the most-common pricing models used by enterprise-focused, cloud companies and consider how companies can best think about, and articulate, ROI for users in the current market. We call this journey finding “pricing-market fit”.
The big cloud providers upend pricing
Business and pricing models for enterprise-focused tech companies have changed significantly in the last several years, partly because of the rise of cloud computing. The growth of now-entrenched services like AWS, Google Cloud and Microsoft Azure means many companies are now consuming core computing via pay-as-you go pricing, much as you pay your local utility for how much electricity you use at home. And this means cloud-native startups can essentially piggyback on these big cloud services and offer similar pricing models.
At the same time, what we call the new “OpenCloud” framework for enterprise IT is evolving: the trend of tech startups leveraging the best practices of ubiquitous open-source software as well as the efficiencies of cloud-delivery models. This is also impacting pricing and ROI for cloud startups.
So which pricing models are most ubiquitous, and effective? We outline some below. Generally, pricing models in enterprise infrastructure can be bucketed into those focusing on “users” and those tracking actual “usage.” Defining your unit of pricing early will increase transparency and help you communicate perceived value.
Per-user pricing is typical for products focused on things like collaboration and productivity. Examples include technology sold by companies like Atlassian, PagerDuty, Postman and Snyk. While many of these companies focus on selling to a single, corporate persona early on–the developer–tying pricing to the number of users inside an organization allows vendors to quickly expand their footprints as the technology proves more valuable. Different types of users, like support engineers or DevOps or QA experts, might adopt a successful product, or the original users of the product might start using more features. All this leads to more revenue.
The perceived ROI for many user-based solutions is mostly a function of cost savings. Productivity and collaboration drive increased efficiency with your developers and across your entire organization. With developers costing perhaps $250K per year each in salary and benefits, paying $25 per user per month, or $300 per developer per year, for a solution that saves your company physical engineering resources and time can be very valuable.
From the start-up perspective, the incremental cost of adding a new user to the platform is low. The underlying platform cost is incurred upfront and early on; marginal, ongoing costs are primarily based on new user acquisition and can be highly accretive. Several user-focused solutions are also built with virality in mind, so additional user acquisition happens organically, and margins can be even more attractive. That said, it is critical to understand how developers or users are engaging with your product. Monitor usage so that your solution becomes part of a daily or weekly workflow. This will drive customer retention and expansion. Given that many product decisions are made upfront, we believe making these decisions on pricing and communicating ROI need to be done early on.
Linking pricing to usage of a technology is typical for data-intensive solutions such as storage, compute, analytics or logs. Prices can be tied to either the volume of data used or compute usage to complete specific tasks. Companies that charge by volume charge by the transaction or cost-per-unit—you might pay for every API call, for every node you have hosted, every event you have logged, or by every gigabyte of analyzed data. Data-focused companies like Splunk* and Datadog* price their product this way.
Other companies price according to how a technology is consumed, and for the storage of data or amount of computing power required for a task. Snowflake, for example, bills customers for compute usage on a per-second basis. Ultimately, usage-pricing models are consumption-based. In a modern, cloud-native world, this is the most flexible pricing option as it’s aligned to customer needs—customers are basically paying for what they’re using. More often than not, usage of well-designed products spirals up quickly, leading to the enterprise CxO chasing you down to “lock in” an annual deal rather than you, the vendor, having to chase down procurement.
Often, start-ups can also leverage cloud-marketplace partnerships to bill against a consumption contract that AWS, Azure or Google Cloud may have with a customer. Recently, the large cloud vendors have encouraged their sales reps to be compensated on actual usage, not an upfront commitment, which makes them aligned with pushing start-up products that drive high usage. It’s a win-win-win situation for the start-up vendor, cloud partner, and the customer.
The ROI of these models is obvious: quick time-to-value without a lot of commitment. The perceived value of technologies sold this way grows with increased usage, and the cost of usage decreases with scale. Usage pricing also allows customers to bring their own license, meaning they can pay monthly or enter into long-term contracts depending on their preference. The low barriers of commitment to convert customers from free to paying, and/or to allow them to slowly scale up usage at their own pace, represents flexibility over the legacy vendor with whom they may be locked in with a perpetual license. And that’s one of the core tenets and principles of cloud computing and open-source software that so many enterprises are finding compelling today.
The key takeaway: Focus on making pricing as easy and predictable as possible for customers. Too many startups over-think this. There are downsides here, like some unpredictability in your revenue stream if you’re using dynamic pricing. But you’ll likely more than compensate for it with faster customer on-ramping and a natural upsell path to longer-term contracts when early usage is strong. Especially in times like these, flexibility—and transparency–helps the customer right-size their usage, rather than churn altogether, and return when their budgets might free up post-COVID.
Pricing and the pandemic
Recently, we’ve seen several prominent enterprise-software companies adjust their go-to-market strategies to become more transparent and flexible. Cloud-native cybersecurity company Crowdstrike, for example, recently unveiled a lightweight freemium product through which company administrators can install Crowdstrike’s Falcon Prevent agent on employees’ home computer systems—clearly a boon right now, with most people working from home.
GitHub has made all of its core features, including private repositories and unlimited collaborators, free for everyone; PagerDuty offered a six-month free trial period for new customers signing up during the pandemic. Our company Expel*, also in the security sector, announced month-to-month pricing for the first year of usage with easy cancellations for any new customers. All these examples demonstrate that enterprise-software companies today are acutely aware that potential customers 1) may need short-term coverage over the next few months, 2) might have uncertain budgets and visibility 12 months out, and 3) likely have new pandemic-related purchasing hurdles introduced into their buying processes. Other cloud-native startups should consider emulating these practices and be long-term greedy!
As Satya Nadella, the CEO of Microsoft, said in his company’s recent earnings announcement, “we have seen two years’ worth of digital transformation in two months.” Being embedded into a customer’s daily or weekly workflow, and offering good product design and flexible pricing, will pay dividends on the digital- transformation upswing post-COVID.
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