Snowflake’s Pay-What-You-Use Pricing Gains Popularity with Software Vendors

(Bloomberg) – Enterprise software pricing is starting to look less like a monthly Netflix subscription and more like your home water bill.

Economic uncertainty and tighter budgets are accelerating the shift to consumption pricing, which charges software customers based on their use of a product rather than recurring annual or multi-year subscriptions. The model, popularized by Snowflake Inc., is being adopted by a growing number of software manufacturers, including Inc. and Autodesk Inc.

Analysts have traditionally viewed pay-as-you-go as a liability for providers, arguing that customers can reduce spending more quickly when times get tough. But in the current market downturn, the Snowflake consumer model cheerleader said it continues to attract new customers to its data storage and analytics products who want to pay just for what they have. need when money is tight rather than being locked into a big contract. Subscription model stalwarts like Salesforce Inc. and ServiceNow Inc., on the other hand, reported a slowdown in new business acquisition.

Slowing sales cycles prompted, an enterprise software provider led by industry veteran Tom Siebel, to switch all new business to consumer pricing. Signing up new customers is much easier now that the initial purchase is less expensive and requires less management approval, Siebel said. “In a recession, you have to talk about pennies, not millions.”

Siebel, who sold his eponymous customer relationship management company to Oracle Corp. in 2006, said the price transition would flatten short-term earnings before accelerating growth. Last month, Needham & Co. analyst Mike Cikos said it’s a challenge for companies to change the way they sell their products, and shares are “likely to remain in limbo. until we have line of sight to each other.” transition side.

Cloud computing providers like Inc., Microsoft Corp. and Alphabet Inc. have long charged customers based on the amount of server space used, but this pricing model has expanded to more types of software services, according to a 2021 report by the venture capital firm. OpenView Partners. More than half of software companies said they plan to use consumer pricing by 2023, according to a survey it conducted. Other notable examples include customer communication provider Twilio Inc. and OpenAI’s image builder Dall-E.

Software stocks have been battered this year as traders bet on increasingly aggressive interest rate hikes from the Federal Reserve. The iShares extended software ETF is down 38% this year, compared to a 214% decline in the broad-based S&P 500. Unprofitability, long accepted in high-growth companies, has been a particular black mark for software companies like Snowflake this year, with the basket of losing tech companies compiled by Goldman Sachs Group Inc. down 59%. In this economic environment, its unsurprisingly technology leaders are ready to try new pricing strategies to maintain growth.

Not all leaders are convinced. Atlassian Corp. co-CEO Mike Cannon-Brookes said the pricing model makes less sense for collaborative applications, especially when no specific resources such as server space are consumed. Customers expect a simple per-user subscription cost for work tools that are part of a typical workday like Atlassian’s Trello, Cannon-Brookes said. “I don’t feel the urge to walk away from it.”

According to the OpenView report, consumption pricing doesn’t work as well when users are discouraged from using the service by continually increasing costs – also known as the “taximeter effect”. They pointed to Adecco Group AG’s platform, where recruiters posted fewer job openings when pricing was pay-per-hire. Customers may also be put off by high cost variability and prefer a more streamlined shopping experience, according to OpenView researchers.

Snowflake bills have sometimes surprised customers as well. Many posts on social media share stories of high company fees or business tips for cutting costs. Earlier this year, Snowflake executives said improvements to its products would reduce customer spending.

Usage-based pricing is less common in applications than in infrastructure, but that could change. Autodesk, known for its architectural design and manufacturing programs, introduced one-day “Flex” licenses last year. Under this plan, AutoCAD – one of its flagship applications – costs $21 for each day of use compared to a standard subscription plan of $235 per month. CEO Andrew Anagnost said about 40% of users of the flexible pricing model are new.

“It’s a powerful tool for small businesses that can’t afford a full subscription to everything we do,” Anagnost said. “I think eventually almost everyone will end up adopting some sort of drinking plan.”

Snowflake chief revenue officer Chris Degnan started as the company’s first seller in 2013 and recalls it was ‘not easy’ to sell the consumer-based product to companies that didn’t have one never heard of it. Snowflake even had to create its own billing system, since most payment processors were designed to manage subscriptions.

Today, Snowflake looks like the old pay-per-view statesman. Degnan said many executives call him asking to transition their businesses to the Snowflake model.

“There will be software-as-a-service companies that don’t make this transition that fail,” Degnan said.

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