thanks for writing this - timely as I was midway through writing about this but you covered most of my points ;-). This is going to create an additional advantage toward disruptors and a lot of complexity for incumbents.
One thing I didn’t figure out is why success-based is so much different than usage-based?
Both have the same problems you outlined (compensation, prediction, utilization), and there are many companies with the latter already in place.
The common solution I saw in companies we work with is a minimal commitment per year (usually the higher you commit to, the less you get per unit of usage).
Honestly it seems to be just a bit different definition of usage.
There are a bunch of similarities. IMO it's a shift from input > output and from cost-based pricing (compute, storage, API calls, etc) > value-based pricing
Predicting revenue will require an additional level of analysis: segments (Enterprise, MidMarket, SMB) by customer avg. monthly spend segmentation by quartile or quintile. Eventually companies learn what their target usage buckets are and manage towards that.
A similar approach is used to analyze take rate revenue based on transaction volumes when analyzing Healthcare Rev. Cycle Management companies and fintech payment companies.
Services get worse the more people use them, while products get better. That's why usage-based pricing will have to shift to Success-based pricing, because the outcomes are more reliable and outcomes are better for customers. This is also a great reason to think about the shift to more monetization with fintech or insurance like revenue models.
How do you think the shift to "work completed" models vs. "pay-per-seat" or "software usage" will shift the competitive landscape? My guess is that it will benefit the bigger players who have more data to train models on and greater economies of scale and make it harder for new entrants to compete.
thanks for writing this - timely as I was midway through writing about this but you covered most of my points ;-). This is going to create an additional advantage toward disruptors and a lot of complexity for incumbents.
Great post - critical point for orgs to deeply consider before going in on a solution. Inspired me to write my own post about this so thanks! https://markoehlert.substack.com/p/agents-and-architecture-and-access
Very informative, Kyle.
Great post, Kyle
Thanks, Dave!
Very interesting, as always.
One thing I didn’t figure out is why success-based is so much different than usage-based?
Both have the same problems you outlined (compensation, prediction, utilization), and there are many companies with the latter already in place.
The common solution I saw in companies we work with is a minimal commitment per year (usually the higher you commit to, the less you get per unit of usage).
Honestly it seems to be just a bit different definition of usage.
There are a bunch of similarities. IMO it's a shift from input > output and from cost-based pricing (compute, storage, API calls, etc) > value-based pricing
Predicting revenue will require an additional level of analysis: segments (Enterprise, MidMarket, SMB) by customer avg. monthly spend segmentation by quartile or quintile. Eventually companies learn what their target usage buckets are and manage towards that.
A similar approach is used to analyze take rate revenue based on transaction volumes when analyzing Healthcare Rev. Cycle Management companies and fintech payment companies.
Services get worse the more people use them, while products get better. That's why usage-based pricing will have to shift to Success-based pricing, because the outcomes are more reliable and outcomes are better for customers. This is also a great reason to think about the shift to more monetization with fintech or insurance like revenue models.
Hi Kyle,
How do you think the shift to "work completed" models vs. "pay-per-seat" or "software usage" will shift the competitive landscape? My guess is that it will benefit the bigger players who have more data to train models on and greater economies of scale and make it harder for new entrants to compete.
-James