Companies Look to Pay Tech Vendors Based on Business Outcomes, Not Usage

A growing number of technology providers are pricing their products and services based on a promised outcome rather than charging customers set subscription fees or on a per-user basis. 

While still far from the norm, the uptick in such pricing models has put pressure on those vendors to offer more flexible pricing options to attract and retain increasingly budget-conscious customers, analysts say.

Outcome-based pricing models charge customers some percent of reaching a business goal like increased revenue or cost savings.

Value-based models, which can overlap with outcome-based models, are also becoming more widely adopted as alternate pricing systems. They include things like growth in registered customers or the amount of data for artificial intelligence.

Recent interest in outcome-based pricing—which has been around for decades but not gained widespread traction in technology—is being driven by tighter technology budgets and customer pushback against big cloud-computing charges, analysts say. Most cloud providers charge customers based on the amount of computing power they use, on an as-needed basis, but that can lead to huge, unexpected cloud bills when usage surges.

Forty-three percent of leaders at technology vendors said customers are changing their focus from buying solutions to outcomes, and 23 percent said customers are putting more focus on business value, according to a survey last year by research and consulting firm Gartner. Forty-six percent of tech firms face challenges in reaching revenue goals, Gartner’s survey this year found, and can expect to make more pricing concessions as a result.

At the same time, price hikes for subscriptions to business software—still the most common method of charging for software—have reached increases of 20% or more compared with previous years, some corporate technology chiefs say. That has put IT leaders in the hot seat to find ways to negotiate deals or cut costs. 

“Where cost pressure is high, value- and outcome-based pricing is top of mind,” said Rafee Tarafdar, chief technology officer of Infosys, a business consulting, IT and outsourcing services firm.

Granica, a startup that helps companies save on their cloud costs by compressing cloud storage, charges customers a percentage of what they actually save on those costs, said co-founder and Chief Executive Rahul Ponnala. 

Nylas, a provider of email, calendar and contacts integration, negotiated a rate of 25% with Granica, said Troy Allen, the company’s senior vice president of engineering. “Even paying them 25%, that’s still 75% of the savings we couldn’t gain on our own,” he said.

Startups and smaller firms view outcome-based pricing as a way to woo customers from larger competitors, especially as those providers continue raising prices and seeking aggressive contract renewals.

In recent years, chief information officers have become more adept at using data and AI to track their IT spending and tie it to business outcomes. “They’ve been challenging these providers,” said Jagjeet Gill, a principal in Deloitte’s technology, media and telecommunications group. “I’m paying so much in consumption, but ultimately I need your services to really impact the outcomes I’m trying to achieve.” Deloitte is a sponsor of CIO Journal.

In other sectors, outcome-based pricing is offered up as a way for customers to offset their financial risk when signing on with a particular vendor or trying a new product. 

German agricultural-chemicals and pharmaceutical giant Bayer, which acquired Monsanto in 2018, has been testing for several years an outcome-based pricing model where, for instance, farmers share the additional revenue with Bayer if yield from a crop is better than predicted, or receive a refund if yield is less than predicted. 

The model is driven by Bayer’s data on how crops perform in certain environments, and relies on AI to provide tailored growing recommendations for each farmer and determines how much they should net from using Bayer’s seeds and pesticides, said Jeremy Williams, the company’s head of digital farming and commercial ecosystems. The model is new in agriculture, where most farmers are accustomed to paying a unit price for seed, he said.

Still, in outcome-based models, attributing a revenue increase or cost savings improvement to one particular vendor can be a significant challenge, said Gartner senior research director Ron Burns. “I can only imagine the legal battles that could arise,” he said.

In addition, products that depend on and connect with many systems and other providers are too complex to price based solely on outcomes, said Carlos Naudon, CEO of New York City-based Ponce Bank. Those kinds of technologies are the backbone of the bank, he said.

And for some CIOs, outcome-based models that charge based on a percentage of revenue or savings are just as unpredictable as usage-based models, and even introduce financial risk.

“That’s probably my least favorite pricing model,” said Fletcher Previn, CIO of networking and software provider Cisco Systems. “If you’re a big company and you make a hundred billion dollars a year, if your business goes up five percent, that’s five billion dollars.”

A regular charge per user is “the easiest and generally the most efficient” form of pricing, said Sharon Mandell, CIO of networking and cybersecurity firm Juniper Networks. “It’s simple and predictable.”

Write to Belle Lin at [email protected]