Striking a smarter balance between “fair price” and “fair value.”
By Amr Salem, CEO & Sridhar Gadhi, Founder & Chairman of Quantela
Technology companies have traditionally sold their products in much the same way as physical commodities. There was little or no difference between buying a toothbrush from your local supermarket or MS office for your computer. We can call this model of transaction – where the customer pays a certain price for a certain product and considers it the end of the story – Consumption 1.0.
After the financial crisis in 2008, however, technology providers had to find innovative ways to deal with drastically reduced IT budgets, and increase their addressable market by lowering the barrier to entry for smaller customers. The introduction of cloud computing made it possible to deliver “anything as a service” (XaaS), and new flexible consumption models have emerged that are far more economical. This model, where a subscription gives you the right to use MS Office rather than paying the full cost upfront, can be described as Consumption 2.0. Like Microsoft, most tech companies such as AWS, SAP, Oracle, IBM, and Cisco offer their products on a subscription basis, and for many there is no longer even an option to purchase the product in any other way.
Many companies, however, continued to innovate this consumption model by offering customers the opportunity to only pay for what they actually use. This, in turn, lowered the barrier of entry for smaller customers and increased the addressable market for firms such as SAP, which entered the SME space after it was known for years as the Rolls Royce of ERP, only accessible to large enterprises. These “pay-as-you-grow” consumption models offer customers a minimum entry point based on their needs today, and as they grow and their requirements change, they can then buy more licenses, storage, processing power, features or bandwidth as required. These models were not necessarily restricted to XaaS or subscription pricing structures, but have also been applied to some perpetual or CAPEX based pricing offers. Let’s call this Consumption 3.0.
Throughout this evolution, customers became better educated and empowered, and we have seen a power shift towards the user, who increasingly questions why they have to pay for the technology they consume, and not just pay for the value they are getting out of it.
Technology companies have traditionally sold their products in much the same way as physical commodities
Aspired, Offered, and Economic Value
This is the right question to ask. Customers are seeking quantifiable value from their technology investments. Before technology buyers commit to a new technology investment, they must identify the outcomes they are looking for, and convert these outcomes into economic value. This Aspired Value is the value gained by the buyer from the economic outcomes generated by the technology implementation.
Once the buyer’s aspired value is understood, the technology provider needs to deliver on those desired outcomes. This is the Offered Value by the supplier.
Logically, the relationship between the Offered Value and the Aspired Value should define the price the buyer should pay to the supplier. A solution from “Supplier A” that has a higher Offered Value than a solution from “Supplier B” should be more expensive to acquire by the buyer, as long as it is aligned with the Aspired Value and the outcomes the buyer is seeking. This brings us to how technology companies should be re-thinking their pricing models and offerings so that they reflect a clear co-relation between Aspired, Offered, and Economic Value.
When a technology provider understands the outcomes desired and can convert these into economic value for the buyer, they are able to effectively use that projected economic value as collateral, enabling customers to obtain internal buy-in, approvals and financing by justifying the budget ask with data.
Smart City technology is a case in point. The benefits of deploying these to optimize assets usage, reduce cost of maintenance and generate additional revenues, are widely recognized, yet most cities seeking to implement these struggle with finding the needed budget.
Therefore, Smart City solution providers are looking at collaborative ways to unlock economic value, which could, in turn, be used to finance the capital required to deploy the solution. Smart Lighting is a good use case here, where savings generated by lower energy consumption due to LED lights efficiency and smarter controls reduce operating costs associated with street lighting. These savings can be used to guarantee and repay the debt of financing the city borrowed to deploy the smart lighting infrastructure.
This most evolved outcome-based consumption model, where the initial financing is guaranteed and repaid by the sought economic value outcomes from the technology solution, can be called Consumption 4.0, where customers are not paying for consumption, but rather become collaborative partners with the technology provider, as both strive to achieve mutually beneficial goals and KPIs.
Outcome-Based Financing is the vehicle used by technology providers to address this emerging trend. This is a sign of maturity in the technology industry, which will push providers to focus everything they do from R&D to advertising on the value and outcomes they are delivering to the market. This model is still in its early stages, yet we are already seeing many examples of long-term concessions for Smart technologies, Public-Private Partnerships (PPPs) being formed to share value between private and public sector, and advertising revenues financing digital signage projects in large malls or stadia.
In the not-so-distant future, this evolution will come to a head, and we believe most technology providers will gradually pivot towards some form of Outcome-Based model which aligns the goals of all stakeholders. This will not only generate the best economic outcomes, but also democratize access to technology and generate extra value that filters down to individual citizens and benefits society at large.