Companies Look to Pay Tech Vendors Based on Business Outcomes, Not Usage

While nonetheless removed from the norm, the uptick in such pricing fashions has put strain on these distributors to supply extra versatile pricing choices to draw and retain more and more budget-conscious prospects, analysts say.

Outcome-based pricing fashions cost prospects some p.c of reaching a enterprise aim like elevated income or price financial savings.

Value-based fashions, which may overlap with outcome-based fashions, are additionally turning into extra extensively adopted as alternate pricing techniques. They embody issues like progress in registered prospects or the quantity of information for synthetic intelligence.

Recent curiosity in outcome-based pricing—which has been round for many years however not gained widespread traction in know-how—is being pushed by tighter know-how budgets and buyer pushback in opposition to huge cloud-computing expenses, analysts say. Most cloud suppliers cost prospects based mostly on the quantity of computing energy they use, on an as-needed foundation, however that may result in large, surprising cloud payments when utilization surges.

Forty-three p.c of leaders at know-how distributors mentioned prospects are altering their focus from shopping for options to outcomes, and 23 p.c mentioned prospects are placing extra give attention to enterprise worth, in accordance with a survey final yr by analysis and consulting agency Gartner. Forty-six p.c of tech companies face challenges in reaching income objectives, Gartner’s survey this yr discovered, and might anticipate to make extra pricing concessions consequently.

At the identical time, value hikes for subscriptions to enterprise software program—nonetheless the commonest technique of charging for software program—have reached will increase of 20% or extra in contrast with earlier years, some company know-how chiefs say. That has put IT leaders within the scorching seat to seek out methods to barter offers or lower prices.

“Where price strain is excessive, value-and outcome-based pricing is high of thoughts,” said Rafee Tarafdar, chief technology officer of Infosys, a business consulting, IT and outsourcing services firm.

Granica, a startup that helps companies save on their cloud costs by compressing cloud storage, charges customers a percentage of what they actually save on those costs, said co-founder and Chief Executive Rahul Ponnala.

Nylas, a provider of email, calendar and contacts integration,negotiated a rate of 25% with Granica, said Troy Allen, the company’s senior vice president of engineering. “Even paying them 25%, that’s still 75% of the savings we couldn’t gain on our own,” he mentioned.

Startups and smaller companies view outcome-based pricing as a option to woo prospects from bigger opponents, particularly as these suppliers proceed elevating costs and searching for aggressive contract renewals.

In latest years, chief data officers have develop into more proficient at utilizing information and AI to trace their IT spending and tie it to enterprise outcomes. “They’ve been difficult these suppliers,” said Jagjeet Gill, a principal in Deloitte’s technology, media and telecommunications group. “I’m paying so much in consumption, but ultimately I need your services to really impact the outcomes I’m trying to achieve.” Deloitte is a sponsor of CIO Journal.

In different sectors, outcome-based pricing is obtainable up as a approach for purchasers to offset their monetary threat when signing on with a selected vendor or making an attempt a brand new product.

German agricultural-chemicals and pharmaceutical large Bayer, which acquired Monsanto in 2018, has been testing for a number of years an outcome-based pricing mannequin the place, for example, farmers share the extra income with Bayer if yield from a crop is best than predicted, or obtain a refund if yield is lower than predicted.

The mannequin is pushed by Bayer’s information on how crops carry out in sure environments, and depends on AI to offer tailor-made rising suggestions for every farmer and determines how a lot they need to web from utilizing Bayer’s seeds and pesticides, mentioned Jeremy Williams, the corporate’s head of digital farming and industrial ecosystems. The mannequin is new in agriculture, the place most farmers are accustomed to paying a unit value for seed, he mentioned.

Still, in outcome-based fashions, attributing a income improve or price financial savings enchancment to 1 specific vendor is usually a important problem, mentioned Gartner senior analysis director Ron Burns. “I can solely think about the authorized battles that would come up,” he said.

In addition, products that depend on and connect with many systems and other providers are too complex to price based solely on outcomes, said Carlos Naudon, CEO of New York City-based Ponce Bank. Those kinds of technologies are the backbone of the bank, he said.

And for some CIOs, outcome-based models that charge based on a percentage of revenue or savings are just as unpredictable as usage-based models, and even introduce financial risk.

“That’s probably my least favorite pricing model,” mentioned Fletcher Previn, CIO of networking and software program supplier Cisco Systems. “If you’re a giant firm and also you make 100 billion {dollars} a yr, if your online business goes up 5 p.c, that’s 5 billion {dollars}.”

A regular charge per user is “the easiest and generally the most efficient” type of pricing, mentioned Sharon Mandell, CIO of networking and cybersecurity agency Juniper Networks. “It’s easy and predictable.”