Snowflake’s Pay-What-You-Use Pricing Gains Favor With Software Firms

    Business software pricing is starting to look less like a monthly Netflix subscription and more like your home water bill.
    By: BLOOMBERG
    | Updated on: Oct 13 2022, 23:14 IST
    Snowflake Inc.
    The model, popularized by Snowflake Inc., is being adopted by a growing number of software makers. (Reuters)
    Snowflake Inc.
    The model, popularized by Snowflake Inc., is being adopted by a growing number of software makers. (Reuters)

    Business software pricing is starting to look less like a monthly Netflix subscription and more like your home water bill.

    Economic uncertainty and tightening budgets are accelerating a move to consumption pricing, which charges software customers based on how much they use a product rather than a recurring annual or multiyear subscription fee. The model, popularized by Snowflake Inc., is being adopted by a growing number of software makers, including C3.ai Inc. and Autodesk Inc.

    Analysts have traditionally viewed pay-as-you-go as a liability for providers, figuring that customers can more quickly dial back spending when times get rough. But in the current market slowdown, consumption-model cheerleader Snowflake said it continues to attract new clients to its data storage and analytics products who want to pay just for what they need when money is tight rather than being locked into a big contract. Subscription-model stalwarts like Salesforce Inc. and ServiceNow Inc. by contrast have reported a slowdown in acquiring new business.

    The slowing sales cycles helped push C3.ai, an enterprise software provider led by industry veteran Tom Siebel, to switch all new business to consumption pricing. Signing up new customers is much easier now that initial purchase is cheaper and requires less executive approval, Siebel said. “In a recession, you need to talk about pennies not millions.”

    Siebel, who sold his eponymous customer relationship management company to Oracle Corp. in 2006, said the pricing transition will flatten revenue in the short term before accelerating growth. Last month, Mike Cikos, an analyst at Needham & Co., said it's a challenge for companies to change the way they sell their products, and C3.ai's shares are “likely to stay in limbo until we have line of sight to the other side of the transition.”

    Cloud-computing providers like Amazon. com Inc., Microsoft Corp., and Alphabet Inc. have long charged customers based on how much server space is used, but this pricing model has expanded to more kinds of software services, according to a 2021 report by venture capital firm OpenView Partners. More than half of software companies said they expect to use consumption pricing by 2023, according to a survey it conducted. Other notable examples include customer communication provider Twilio Inc. and OpenAI's image generator Dall-E.

    Software stocks have been battered this year as traders bet on increasingly aggressive interest rate hikes from the Federal Reserve. The iShares expanded software ETF is down 38% this year compared with 214% drop in the broad-based S&P 500. Unprofitability, long accepted in high-growth firms, has been a particular black mark on software companies like Snowflake this year, with a basket of money-losing tech companies compiled by Goldman Sachs Group Inc. down 59%. In this economic backdrop, its unsurprising tech leaders are willing to try new pricing strategies to keep growth going.

    Not every executive is convinced. Atlassian Corp. Co-CEO Mike Cannon-Brookes said the pricing model makes less sense for collaborative applications, particularly when there's not a specific resource like server space being consumed. Customers expect a simple per-user subscription cost for workplace tools that are a part of the typical business day like Atlassian's Trello, Cannon-Brookes said. “I don't feel demand to move away from it.”

    Consumption pricing doesn't work as well when users are discouraged from using the service by continually climbing costs -- also known as the “taxi-meter effect” -- according to the OpenView report. They pointed toward Adecco Group AG's platform Hired.com, where recruiters posted fewer job listings when pricing was pay-per-hire. Customers may also be put off by high cost variability and prefer a more simplified buying experience, according to the OpenView researchers.

    Snowflake bills sometimes also have surprised customers. Numerous social media posts share stories of high charges from the company or trade tips on keeping costs down. Earlier this year, Snowflake executives said improvements to its products would lower customer expenses.

    Usage-based pricing is less common in applications than infrastructure, but that may be changing. Autodesk, known for its architectural and manufacturing design programs, last year introduced one-day “Flex” licenses. Under this plan, AutoCAD -- one of its flagship applications -- costs $21 for each day of use compared with a standard $235-a-month subscription plan. Chief Executive Officer Andrew Anagnost said about 40% of the users of the flex pricing model are new.

    “It's a powerful tool for small businesses that can't afford a full subscription to everything we do,” Anagnost said. “I think eventually, most everyone's going to end up in some kind of consumption plan.”

    Snowflake Chief Revenue Officer Chris Degnan started as the company's first salesperson in 2013, and remembers it was “not easy” to sell the consumption-based product to companies that had never heard of it. Snowflake even had to build its own billing system, since most payment processors were geared toward handling subscriptions.

    Today, Snowflake looks like the elder statesman of pay-for-what-you-use pricing. Degnan said he gets many executives calling him to ask about switching their companies to Snowflake's model.

    “There are going to be software-as-a-service companies that don't make that transition that will fail,” Degnan said.

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    First Published Date: 13 Oct, 23:14 IST
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