Tying your outgoings to your revenue is the stuff of dreams, right? Not with consumption-based billing. Masstech’s CTO, James Whitebread outlines how it works and the business benefits to both provider and consumer.
There are three main pricing models used by businesses throughout the world, each with their own pros and cons. In this blog, we will be taking a look at the principles behind one model, consumption-based billing, and some of the benefits it brings to users of intelligent storage management systems. But first, let’s take a look at those 3 models I just mentioned:
One time: Usually capex where the costs of a purchase are typically paid in full at point of purchase. This model is usually associated with an additional, ongoing annual support arrangement.
Consumption: Consumers are charged based on the metering by usage of one or more core elements of the service being provided e.g. storage or processing power.
Subscription: Usually a monthly-based commitment to accessing a service or product in exchange for a periodic charge, this model often includes support, usage and licensing elements as a single package.
Traditionally, billing in the M&E industry has been based around the capex model. Purchases under this model have tended to be significant investments, requiring considerable research and often significant business process change before purchase and implementation.
As such, assets purchased using capex often remain on the books for a number of years within a business in an effort to gain a return on initial outlay through usage. These kinds of investments are often accompanied by a secondary, complimentary purchase. For example, a large investment in software tends to be matched by significant hardware investments. This obviously increases the overall initial outlay for those assets, and, when combined with the depreciation of those assets, could result in them being on the company’s asset register for even longer before they are considered as having provided a return.
As a result, these traditional billing methods often result in slower adoption of new technology or indeed delayed upgrades and changes that would better enable a business to adapt to market and business needs.
What is consumption-based billing?
Businesses in the modern world are moving away from the concept of paying for a service in full before they can see or use it, instead opting for a model of paying for a service on demand, only when it is needed or consumed. This removes the need for high upfront costs or ongoing regular payments as the business only pays for what they use, when they use it.
With this model, businesses can now not only focus on reducing their costs for their own usage of a service but also for when using the service on behalf of their customers.
Here’s an example: a post-production company might spin up a transcoder in the cloud only when they have received an order from their own customer to deliver a transcode and delivery service. Because the cost is on demand, they would only be billed for the consumption of the transcoder, i.e. as long as it takes to transcode the files.
How is it calculated?
Consumption-based billing is implemented through the use of metering which allows the service provider to track and understand the services that are being consumed by one or more customers. In many cases this involves directly tracking customer consumption of a service, but it can also include service dependencies where underlying services such as bandwidth or cloud services are utilized.
What can the service provider offer through consumption-based billing?
As outlined, consumption-based billing allows the service provider to only provide a service when the customer needs it and allows the customer to only pay when they consume the service.
This not only creates a highly attractive market proposition for customers, it also allows the service provider to more easily scale pricing based on real-time usage data collected through metering. For example, the service provider could move the customer to a lower price point once they have consumed a certain amount of data transfer or storage.
Whereas with traditional, upfront billing methods, the predicted usage over the life of the product or service within a business isn’t a consideration, this real-time data capture of consumption enables the service provider to track usage and better understand the customer and their usage habits, and to use that information to tailor the service to better serve the customer.
How can consumption-based billing benefit the customer?
For the customer, the main benefit to consumption-based billing is that it represents an opportunity to align business spend with revenue. Only spending on services as and when business demand dictates keeps costs at a minimum. However, there are a number of other benefits to switching to this pricing model:
Low up-front commitment: Customers only incur cost when they consume or provision a service.
Link to revenue: Services can, as we mentioned already, be linked to revenue. When the revenue is there, services can be spun up to support that service delivery, and then spun down to avoid cost after those services have been delivered. For example, a customer can pay to store a petabyte of content for a month or use a media asset management platform along with all of the associated storage management and storage locations for a month while they need it, and scale back or simply shutdown the service the moment the demand is over.
Affordability: Services can be priced in line with the budget of the customer allowing them to consume the services they need at a price that they can plan for and afford
Agility: The ability to switch services on and off on according to demand gives incredible agility to the customer. If something is working well, delivering a profitable service and ultimately revenue, then it’s easy to continue the operation; should the business need to pivot, services can be quickly shutdown.
In summary, for a business with unpredictable demand for services, consumer-based billing provides a way for them to tie their costs to their usage levels and remove the need for high initial investment which may not be recouped within the lifetime of the product/service implemented. Consumption billing promotes service agility, and ultimately leads to a more efficient, streamlined provision for the customer.
Consumption billing for Kumulate
Over the past few months we’ve been working on the underlying structure of Kumulate to enable us to deliver consumption-based billing, and its advantages, to our customers. As discussed in a previous blog, we’ve been working to implement microservices and the containerized structure that allows on-demand service deployment, and we’re pleased to say that we’ll very shortly be announcing our new consumption-based pricing. If you’d like to know more, just send me an email, and I’d be happy to talk you through it.