A slowly increasing number of corporations are pressuring technology vendors to base their pricing on performance as opposed to set subscription or per-user fees. That, and an increasing concern about technology budgets, is forcing vendors to endure conversations about being more flexible in their pricing, said The Wall Street Journal.
Outcome-based models charge customers some percent of an achieved business goal, such as increased revenue or cost savings. They can overlap with value-based models – which weigh the number of registered customers, the amount of data for AI or other factors. They’re also gaining traction.
In addition to budget concerns, outcome-based pricing is being driven by pushback against cloud-computing charges. Most cloud providers charge customers based on the amount of computing power they use on an as-needed basis. That that can lead to huge, unexpected fees when usage spikes unexpectedly.
According to a survey by Gartner, 43% of technology-vendor executives said customers are changing their focus from buying solutions to outcomes, while 23% said customers are putting more focus on business value. Meantime, 46% of tech vendors are struggling to reach revenue goals, and so expect to more pricing concessions.
Subscription fees for business software have increased 20% or more, some CIOs said, increasing the pressure on them to be more aggressive in their deal-making. Technology startups and smaller vendors see outcome-based pricing as a way to attract customers from larger competitors, especially as they continue to raise prices.
“Where cost pressure is high, value- and outcome-based pricing is top of mind,” Infosys CTO Rafee Tarafdar told the Journal. However, tying together something like revenue increases or cost savings to a vendor’s technology can be challenging, said Gartner Senior Director of Research Ron Burns. And, added Carlos Naudon, CEO of Ponce Bank, products that rely on multiple systems are too complicated to price on outcomes alone.
What CIOs Think
Another factor: CIOs are more likely to track IT spending and tie it to business outcomes for reasons outside of contracts or other business agreements. “They’ve been challenging these providers,” said Jagjeet Gill, a principal in Deloitte’s technology, media and telecommunications group.
Cisco CIO Fletcher Previn called outcome-based pricing “probably my least favorite pricing model.” If a large company makes $100 billion and business increases 5%, it could owe a vendor $5 billion, he said.