Usage–based pricing is the model the IT industry has adopted to deliver software as a service (SaaS). But as Griff Parry, CEO and cofounder of m3ter points out, software is changing. He says: “You’re seeing massive innovation in software.” This, he says, is pushing IT providers to reconsider how best to price software. “In the software and tech world there is a dynamic environment for pricing design,” he says.
Parry says IT firms should always aim to make pricing of their products and services as value-based as possible, which is a shift from the cost-based approach traditionally associated with software licensing fees.
He feels that a usage-based metric can be more closely aligned to value. “At one end of the extreme, you’ve got pricing that is absolutely based on usage, like AWS, where you pay for the IT infrastructure you use. What you pay doesn’t really have anything to do with the value that you get from using that infrastructure.”
According to Parry, the same is true when AI (artificial intelligence) firms base their pricing on the volume of tokens used to query their AI model and the output that model generates.
He says IT providers are starting to move towards pricing based on a valuable action or a value proxy. As an example Parry says: “If you are an AI company that provides automated call centre agents, the value proxy may be the volume of phone calls processed or how many phone calls are processed that do not require human intervention.
“At the far end of the scale, there’s genuine outcome-based pricing, which is where the vendor is paid based on a share of the outcome that the customer realises.”
The challenge for the software industry is that while there are aspirations to moving to value-based contracts, many software firms are failing to get the basics right with consumption or usage –based pricing,
A recent PwC UK and m3ter survey of over 350 software firms found that over 50% of surveyed business-to-business (B2B) software leaders amend pricing twice or more per year, reflecting an increasingly experimental approach to AI monetisation, with multiple models often tested in parallel.
At the same time, pricing structures are becoming more complex. Over half of respondents operate usage or hybrid models in some form, and companies are testing an average of 1.7 monetisation routes for their AI capabilities. The most common approaches include embedding AI within premium tiers or embedding it to standard tiers to justify price uplifts.
With software providers experimenting more frequently and adopting multiple complex pricing and packaging models, many feel their billing process is falling short. In fact, 63% of the 350 companies surveyed say they lack confidence in their billing process. Over a third (34%) admit to lacking full confidence in their billing operations and cite improving usage tracking as a top priority over the next 12 months. PwC and m3ter say the poll illustrates the growing revenue capture challenges associated with consumption-based models.
When asked about why billing software based on usage is proving so challenging, Parry says: “The full amount isn’t charged on the bill because not all the usage is captured and delivered into the bill calculation process. This might be because people aren’t recording the usage, which happens surprisingly often.”
For instance, there may be a fixed price for a certain allowance and an extra change if usage is exceeded. But, that overuse is not included in the bill. There is also a range of issues that can occur between collection of usage metrics and billing for that usage. Parry says that some products do not actually record the usage; sometimes usage is being recorded, but is not being processed and presented to the bill calculation mechanism in the right way.
Another common problem which can occur is when an organisation has been a customer for a long time. “Imagine if you have a customer who has been with you for a while and you you agreed a renewal which involved a price increase. The problem is that the contract is signed and then filed away and wherever you’re calculating the bill, the pricing for that customer isn’t updated, which means you’re using out-of-date pricing in your bill calculations,” he says.
All of these issues lead to misunderstandings between IT buyers and the companies providing software-based products and services.