Embracing the Future of Consumption Pricing Models

The future of consumption pricing models for competitive success

Transitioning from traditional transactional models, companies are now evolving towards subscription and consumption-based pricing models. This strategy is based on the principle of pricing based on usage. 

The importance of this shift is highlighted by the fact that subscription management software is currently a $3 billion market. The future promises further diversification, with prospective outcome-based pricing models that can enhance customer engagement and value.

Providing flexibility and value with consumption pricing

Several industries are adopting consumption models. Notably companies like DataDog and Snowflake, underlining the appeal of flexibility in pricing. Other companies like Twilio charge based on messages, users, and API usage.

An example of an approach that companies can take with consumption models is the concept of prepaid consumption credits with drawdown. This allows customers to buy credits they can use throughout the year for different applications, maximizing flexibility and ensuring that customers get value for their money. 

The 4 pillars for consumption-based pricing success

The cornerstone of consumption models is the ability to manage usage data. In this digital age, the decision revolves around the best mix of subscription and consumption and communicating that pricing model effectively. 

The essential pillars needed to succeed with consumption models are: 

• Capture and consolidate usage events 
• Define a value metric
• Ensure optimal pricing and packaging
• Align sales and customer success teams

The need for mediation to capture usage events

At the heart of a successful implementation of consumption pricing models lies customer transparency. Mediation, converting raw usage data into actionable information for billing and reporting, plays an important role in ensuring customers understand where they are with current usage. Tightly integrated metering data with billing systems can provide a better customer experience.

Being able to analyze usage data in near real-time is a competitive advantage. The right mediation engine offers real-time rating, meter agility, and AI-enabled anomaly detection in the mediation layer to ensure accurate data presentation and threshold notifications. 

Value-based pricing

While pay-as-you-go models reduce upfront risk, the ultimate goal for companies is to secure recurring commitments. Successful, fast-growing companies initially attract customers through a pay-as-you-go model, then drive recurring, long-term contracts. 

By adding consumption to subscription models and implementing usage metrics to offer different price points, this approach effectively bridges the gap between price paid and value received, while also helping businesses to avoid unpredictable revenue, which is crucial for success in modern organizations.

Related: Value-based pricing’s impact on B2B growth

Impact of consumption pricing on AI offers

AI products, although still developing, often come with a premium price, revealing the need for creative strategies to deliver value to customers. Many companies struggle to monetize based on the actual value delivered to customers by a particular AI service. 

For example, some customers may use the AI tool or product multiple times daily, while others use it a few times a week, making a per-seat pricing model ineffective at delivering on a clear exchange of value with the customer.

Innovative new strategies are emerging for how businesses are redefining the way customers perceive value, such as rate card systems offering more product access flexibility. One company on the frontlines of innovative rate card models is LivePerson, introducing the notion of “daily active relationship” as their unique measure of value. 

Monetizing AI offers successfully hinges on the ability to measure and communicate value efficiently.

Related: Why a consumption-based model is key to monetizing AI for SaaS

Revenue recognition for consumption pricing models

Revenue recognition plays a critical role in consumption pricing models. With variations like pay-as-you-go, prepaid consumption with drawdown, and accommodating variable consideration and credit management, revenue recognition gets complicated quickly. 

Companies performing manual consumption revenue recognition will quickly realize the added risks and costs associated with this complicated process. Consumption-based transaction processing, reporting, dashboards, and analytics allow companies to operationalize and automate consumption revenue recognition policies. 

Look for technology that can handle your consumption data and automate processes at every step, from capture through to revenue recognition. This enables revenue accounting teams to better predict, forecast, and mitigate financial risks related to taking on the consumption-based pricing models. 

The right technology to support your consumption strategy 

Companies in the future will compete not just on products and services, but also on creative approaches to measure and communicate value to customers. Consumption models offer a path to achieving competitive success in the evolving business environment through a flexible, customer-centric approach.

Zuora for Consumption is designed to address the pillars of consumption model success, and provides comprehensive support to companies adopting consumption pricing.