We were lucky to have a front-row seat at AWS during the early days of the cloud computing movement driven by Usage-Based, Pay-as-you-go (PAYG) pricing models. While building and operating tier-1 AWS services, we saw first-hand, both the technology and business side of what it takes to successfully build, operate, and grow Usage-Based Metered business models. The view and learnings were profound, seminal and eye opening.
We have since held a steadfast belief that it is only a matter of time before businesses en masse shift to Usage-Based Pricing (UBP). UBP is a far, far superior business model compared to anything that’s come before it. For starters, it is more fair, transparent, and a win-win for both businesses and customers.
For customers, nothing can be better than - “pay only for what you use”. Usage-Based is the proverbial holy grail of pricing models. Customers pay, only for what they use. It provides transparency, puts the customer in control of what, how much, and how often they use. It eliminates shelfware, and drives true value to cost.
For businesses, UBP drives the highest levels of product adoption and revenue growth by lowering the barrier to entry, reducing overhead costs, empowering and delighting customers, and driving organic growth. Some are starting to also discover that UBP leads to internal operational efficiencies that were never possible with a traditional model leading to increased profitability, margins, and competitive levers.
We are, of course, super passionate about Usage-Based Pricing and consumptive business models. But why? What is it about Usage-Based business models that drives our passion? For me, it comes from what I personally saw and experienced while building and operating AWS services at Amazon, leading me to my steadfast belief that Usage-Based is the best business model, a win-win for customers and businesses alike, and the world will inevitably shift to it.
On the surface, and rightfully so, the driving factor of why businesses want to shift to Usage-Based Pricing is to respond to customer demand who increasingly want consumptive, usage-based pricing. However, there is another major underlying driving force that is at play, which is the main driver of the shift to usage-based pricing, and was the reason why it came about in the first place.
Whether you are even thinking about shifting to UBP or not, the mere act of running and operating your business in the cloud will lead (force) you to ultimately offer Usage-Based Pricing. Let me explain.
If you are running your technology infrastructure in the cloud, you have no choice but to align (measure, correlate and optimize) your front-end usage (how much your products and services are being used) to your back-end (infrastructure) usage (how much your back-end infrastructure is consumed). And the maturity curve of this vector ends with customer facing, Usage-Based Pricing. Here’s why?
We all know that cloud infrastructure is elastic. But how well businesses are leveraging “elasticity” as a key business operating lever, leaves a lot of room for improvement (hint: it merits a new operating framework and thereby, new technology tools). The awareness of it and then as you begin to tackle it by operating and measuring the positive impact to your topline and margins, will ultimately lead you to a shift to a Usage-Based customer facing business model, even if today, you might believe that Usage-Based may not be the right business model for you.
The traditional business model of fixed-recurring came into being when infrastructure was a fixed, capital expense, with a straight line depreciation. There was never an attempt (none, whatsoever) to align front-end, unit-level marginal usage to back-end. infrastructure unit-level marginal capacity. The business model simply did not require it. Terms were set upfront, number of users were determined upfront, duration was set upfront, and full contract term money was collected upfront. With that, there simply was no incentive to measure let alone correlate customer usage to backend capital infrastructure usage.
Margin calculations were based on the traditional - what was charged to the customers (revenue), minus - fixed costs (COGS, amortized infrastructure), R&D, Sales, Marketing, General, and Administrative. To effect change on revenue and/or margins, the available levers were - R&D, Sales, Marketing, but not infrastructure (since it was capitalized). There was no attempt made to align and measure COGS elasticity relative to variations in product usage. It was handled, at best, on a one off planning cycle (capital equipment purchase), with a huge utilization step function.
The cloud changes that. In the cloud, the equation is fundamentally different. Infrastructure is no longer a fixed capital cost. It is a variable expense. Modern, cloud-native companies realized this and quickly parlayed it into a huge competitive advantage and leverage by building an internal virtuous cycle of operational efficiency by optimizing and flattening the ratio of demand (front-end usage) to supply (back-end infrastructure consumption). Basically, by smoothening out the demand to supply curve (eliminating step functions) and keeping them aligned in proximity. The gains were material, measurable, sustainable and impactful:
Once businesses got to this point, it became self-evident that the maturity curve (continuous optimization) of this alignment leads to building a customer facing Usage-Based business model. At the maturity curve your front-end product usage has direct (unit level) correlation to back-end infrastructure consumption. That is, your products and services are also being consumed and paid for on a usage-basis just as your underlying back-end infrastructure that supports these workloads.
In my view, this is the main driving force behind a shift to Usage-Based Pricing. As now evident from a slew of companies (Twilio, Snowflake, Confluent, Databricks, and many more) who put in place this framework and continue to leverage cloud elasticity as an operating lever, to drive highest levels of adoption and revenue growth.
Once you start to develop awareness about the power and leverage of elasticity (of infrastructure) and how it can be baked into your business model and used as a brand new lever to impact margins you will want to continue to get better at it.
Thinking of shifting to the UBP model…? Start with Cloud Metering. Thinking of how to leverage elasticity as a business operations lever…? Start with Cloud Metering. If you are on a clean slate and just beginning on this journey toward UBP, this is the best decision you can make to position you for long term sustained success. If you are already down the path of UBP or have already launched it, you can still course correct and deploy a cloud metering foundation.
Metering is not monitoring. Metering is not logging. Metering is not performance management. Metering is what the name states - a Metering System. A metering system is a System of Record (SoR) that answers the following questions - accurately, reliably, every time:
What was used
Any cloud resource, application, product, feature, system, ...
User, customer, system, department, group, project, entity, object, ...
What time or time interval
Location of the resource and/or user, region, availability zone, geographical location, coordinate, ...
…for how long
Duration of use. Can be intermittent or over a period of time
...and, how much did it cost -
When combined with a pricing plan, how much did it cost (what was charged to the customer)
Cloud Metering System, when build and deployed correctly, provides a real-time System of Record (SoR) of usage and consumption data independently of pricing and billing.
I can share with you from direct hands-on experience at AWS running cloud operations and business at large scale that to achieve the desired goals and spectacular benefits of UBP you must put in place a system of record of usage and consumption data (cloud metering), independent of pricing and billing. In fact, trying to achieve Usage-Based Pricing without the foundation of cloud metering can actually set you farther back.
Taking a misguided approach to UBP (one that is not built on a solid metering foundation) will inevitably fail to deliver the right experience for customers. You’ll be mired in pricing and billing remediation issues, lack of customer trust, inaccurate, and delayed usage reports, invoices, and billing. You will lack internal visibility. You will alienate your customers and increase internal chaos across functional teams. The net result being you’ll quickly look to back paddle your way out of UBP and justify returning to the “the good old ways” of fixed, recurring business model. A double whammy, as this experience will most likely lead you to classify Usage-Based Pricing as something “not for us” in the classic case of shooting the messenger, where the problem was not with the model, but the implementation and delivery of it. To top it all, the irony in all of this might well be that Usage-Based Pricing was precisely what your business needed to drive the next level of growth and adoption.
Cloud Metering is a platform service and is a heavy technology lift. We’ll take a deeper dive and unpack some core design principles of a modern Cloud Metering Service in a later blog post, and also, what specifically, makes Cloud Metering a Platform service (and not a line item feature of another application). We’ll outline this in great detail in a subsequent blog post. We promise, it will make for an interesting read.
Cloud Metering provides you, your own, standardized (common) interface for metering product usage across your organization. It builds for you an accurate and real-time demand curve. As a platform service, it provides a System of Record with historical, present, and future (AI/ML forecasted) usage and consumption data model that is available and accessible across your organization to functional teams, and internal IT and 3rd party applications and systems via dashboards, APIs, and Connectors.
With a Cloud Metering System in place, you can put instrumentation probes (meters) just about anywhere, any number of them, and meter any amount of data. As a platform service, Cloud Metering is designed to be accurate, real-time, highly scalable, durable, and cost effective.
With Cloud Metering alone, you now have direct, real-time visibility into your demand curve - what is being used by whom, when, where, for how long. Independent of pricing and billing, you can now start to fine tune your demand to the infrastructure supply curve and begin to leverage elasticity lever to gain a sustained competitive edge.
If you are already thinking about a shift to Usage-Based Pricing, congratulations! You are leaning into the future. My view is, if you don’t, the next startup or your competitor sure is.
As you think about the shift to usage-based, be sure to factor the following into your project plans:
A Usage-Based Pricing and Billing Service built on top of a modern, Cloud Metering Platform is the only way to solve this holistically.
You cannot back your way into metering from pricing and billing. Metering is the way forward. Metering cannot be a line item feature of a billing app. Cloud Metering is the Platform, and Usage-Based Pricing and Billing is an application on top of Cloud Metering. To get Usage-Based Billing right, you first must get metering right!
If you’ve ever wondered how AWS consistently and accurately generates the AWS bill and scales it to millions of customers worldwide? The secret is a highly scalable, grounds-up, Cloud Metering Platform Service that provides a standardized interface for all services teams to use.
With Amberflo, you too can now build, operate and deliver Usage-Based Pricing backed by accurate, real-time, auditable usage and cost data, reports, invoices and billing.