https://www.techtarget.com/searchcloudcomputing/definition/consumption-based-pricing-model
A consumption-based pricing model is a service provision and payment scheme in which customers pay according to the resources they use. The charges are based on one or more metrics that are measured in units such as the number of application programming interface (API) calls or the amount of storage used. The provider tracks how many units their customers use and then bills them for the amount of services consumed.
Consumption-based pricing -- also referred to as pay-as-you-go billing, metered billing or usage-based pricing -- is relatively new to computing. However, this approach is common in many traditional business types. For example, municipal utility companies, such as water or electricity services, charge consumers a fee based on the amount of resources they've used. They might include a base service fee as well, but the bulk of the charges typically follow a consumption-based pricing model.
Consumption-based pricing is common in cloud computing and utility computing. Such services are often treated as commodities that make it possible to rapidly deploy workloads, as well as scale up or down based on demand. Platform as a service (PaaS) and infrastructure as a service (IaaS) often use consumption-based pricing to maintain a cost advantage and profitability, although this model has also made significant inroads into the software as a service (SaaS) market.
Consumption-based pricing is often used in place of a subscription pricing model. With subscriptions, customers pay the same amount for access to a service regardless of how much or how little they use it. An example of a subscription service is cable television, where customers pay the same amount per month no matter how much TV they watch.
Vendors have traditionally offered their software products as one-time purchases or as subscriptions. With the emergence of SaaS, however, vendors are increasingly applying the consumption-based model to their products.
Consumption-based pricing tracks and bills how much a service or product is used, based on one or more metric units. The exact details of what is tracked can vary from product to product and provider to provider. Often charges are quantitated by factors such as time used, resources consumed or number of active users.
Providers might offer a certain amount of use for free, while others require a minimum commitment. Some providers might track and bill for services based on multiple factors, which can sometimes make the total bill difficult for customers to predict. The following pricing models demonstrate some of the more common approaches that vendors take:
These are by no means the only approaches that providers are taking when adopting a consumption-based pricing model. They might also combine multiple strategies. For example, a vendor might combine tiered pricing with overage pricing to provide customers with the ability to purchase units if they exceed the top-level tier.
Vendors might also base charges on multiple metrics, require a minimum commitment from their customers, require customers to prepay for their services, or take other approaches. There is no one standard for how service providers should approach consumption-based pricing.
Vendors use different metrics for billing their customers, depending on the nature of the service. They might also mix metrics or offer their customers multiple options. The following metrics are some of the more common units that providers use:
Consumption-based pricing is increasingly attractive for customers because it provides them with more flexibility and better ties their costs to the value received. If the product is a cloud-based service, customers also avoid the capital expenditures that come with building their own systems. These savings can be especially beneficial to smaller organizations, startups or even departments in larger organizations. Vendors are also highly motivated to assist customers in getting the most out of their services, so customer service is often better.
Many cloud service providers now offer some form of consumption-based pricing. Cloud services offer customers more flexibility in responding to market trends and fluctuating demands. Customers pay only for the services they consume, rather than tying up capital in traditional subscriptions or hardware. They also pay only a single bill, which is simpler than managing hardware, software and other service costs separately.
The advantages of a consumption-based pricing model can be summed up as follows:
Despite the advantages of consumption-based pricing, customers also face a number of challenges:
Many service providers have moved from subscription-based pricing to a consumption-based model. Some offer both pricing models, while others are considering various consumption-based options. SaaS providers in particular have shown a growing interest in adopting consumption-based pricing for their services. Service providers are increasingly using cloud services themselves, in which case consumption-based pricing can help them align their customer billing and provider costs more accurately.
Consumption-based pricing models often lead to better customer retention and revenue than a subscription-only model. Consumption-based pricing also provides customer-use metrics that help to determine where to expand and improve. In addition, vendors who offer consumption-based pricing often have a competitive edge over those who don't because many customers prefer this approach. Even investors have begun to take notice of vendors that offer some form of consumption-based pricing.
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07 Feb 2024