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Pay Attention to Pricing Models: The Other Disruption in Communications
The steady pace of change and innovation is what makes enterprise communications interesting. But these changes aren’t limited to technologies. Innovations in pricing models are easy to overlook, but they can be as or more disruptive. Usage-based pricing models are poised to be the next big change in communications.
There’s an episode of the Brady Bunch (see below) where Mike Brady installs a payphone in an attempt to lower telecom costs. He was implementing usage-based pricing intending to reduce costs. Usage-based pricing isn’t a new concept— telecom has a long history of usage-based pricing on the carrier side. For equipment, the enterprise comms sector was built using a capital expense (CapEx) model. Here, the customer purchases the equipment, such as a PBX, and depreciates it over time—often 10 years or longer.
The cloud blurred these boundaries by virtualizing the equipment and including it in the service. Most cloud-delivered services are considered operating expenses (OpEx), while UCaaS and contact-center-as-a-service (CCaaS) subscriptions are typically charged under a per seat per month model.
OpEx is treated differently from an accounting perspective, and it has changed the way organizations view and consume technology. The preference for OpEx is so strong that now even premises-based providers offer rental models that are considered OpEx.
OpEx increases flexibility and replaces depreciation. If a customer’s strategy, requirements, or the technology itself changes, then the depreciation schedule becomes an anchor to legacy. That’s because many organizations won’t consider a major change until an asset is fully depreciated. OpEx is considered more flexible, even with a contract, and that flexibility is so valuable, that some companies are willing to pay a premium for it. For example, a higher monthly OpEx commitment being preferable over a lower long-term, monthly depreciation charge.
The vast majority of cloud-delivered services are billed as OpEx services. A twist on the OpEx model is freemium. Providers allow customers to use products or services for free with the hope that some will upgrade to paid plans with enhanced features, storage, support, or other benefits. Freemium plans can be viewed as a form of marketing, similar to advertising or other promotions.
Freemium models aren’t the same as free trials. A freemium solution doesn’t have a time limit. This is particularly important with collaboration solutions because a proper evaluation takes a village. First, one user installs the application to evaluate the basics, but more users must be recruited to evaluate its usefulness regarding collaboration. This process takes time, and it’s a harder sell if it involves a credit card and a time limit. Freemium models eliminate those barriers so users can evaluate (and propagate) the service without a time limit.
The Freemium model has proven to be very effective for Slack and Zoom. By eliminating the purchasing complexity, freemium plans bypass the usual gatekeepers, and can be particularly effective with line-of-business organizations. They can solve their problem on their own, and if the app works well, then justification is easier.
Usage-based pricing is another form of OpEx pricing. Instead of a flat rate per user per month, the actual consumption of services determines the cost. Usage-based pricing models are building traction in cloud-delivered services such as Azure, GCP, Snowflake, and Stripe as well as within enterprise communications from providers such as Twilio, Vonage, and Amazon Connect.
Usage-based models allow a user to start at a low cost, and scale without reworking the arrangement. This makes the approach particularly attractive with developers as usage-based models provide a low-cost, scalable solution for experimentation and proof of concepts. Per seat models offer the benefit of predictable costs which are better suited to an operations mindset.
Rather than counting seats, usage-based models count minutes, storage, API calls, or other metrics of consumption that can determine the price. That means usage-based systems require more analytics and billing infrastructure. It can be complicated to compare the costs of services. Amazon Connect, for example, charges for consumed minutes as opposed to the number of agents making it difficult to easily compare with alternatives that charge per seat per month.
Usage-based models efficiently tie pricing to value. Flat rates leverage their inefficiency via averages. Providers bank the low-cost periods (or users) to subsidize the high-cost periods (or users). Usage-based models don’t depend on averages, activity and value directly correlate to the price.
Usage-based pricing is common today with APIs and other simple metrics, but it will inevitably replace what’s now charged per user, per month. Mike Brady’s payphone could be reimagined as a complete UCaaS implementation—a service with a nominal monthly fee and a charge per completed call.
I can also foresee usage-based models extending into equipment. Many providers today offer equipment as a service, and it’s typically charged a flat rate per month. If an organization isn’t convinced it needs hard phones, for example, a simple response is ‘let’s find out.’ They could be installed on every desk and billed per use.
We’re already seeing it in CCaaS, I’ve discussed UCaaS above, but meetings also seem well-suited for usage-based models. Meetings with the cameras off consume less bandwidth and processor resources than meetings with cameras on. Transcription and other AI services also impact the price. Flat rate models were convenient, but the cloud may be evolving past them.
Usage-based models are coming, so there may be a cost or real expense to ignoring it.
Dave Michels is a Contributing Editor and analyst at TalkingPointz.