Microsoft is due to launch their new addition to its family of cloud technologies, Azure Stacks, for which they ditched the traditional pricing model with a one-time upfront license fee (flat-fee pricing). Customers now only pay as they use the service (activity-based pricing), a common model used for cloud services.
The pay-as-you-use model is being widely adopted by especially small and medium-sized firms (studies suggest 28%), and here are some of the reasons why this may be:
Perceived Risk of Purchase
If the customer doesn’t know your service, there is a high risk of purchase: that is, the customer fears she will regret her purchase later, or find that she paid too high a price. It’s all about getting the initial valuation right, and when you pay with an upfront license fee, you need to make sure that the price is worth the utility you will get from using the service for all eternity. As you can imagine, this is not always an easy task for customers, and they might decide not to make the purchase simply because they fear they will regret it later.
With pay-as-you-use pricing, you don’t have to make this initial valuation - you can update the valuation as you go. Sure, you may have to estimate the value you will get from the service over the course of a month or a quarter, but nevertheless this customer valuation is much less complex and will encourage more people to take the “risk” of buying your service. In this way, you get a chance to show how great your service is and retain the customer.
Of course, by using a pricing model that involves less risk for the customer, you can charge an equally higher price to make sure their usage-based price will at the very least equal what they would have paid upfront.
Revealing Marginal Utility
In some cases, a pay-as-you-use pricing model involves some sort of subscription, while with for instance cloud computing, the price is directly related to your usage. In the latter case, this is a great way of having your customers reveal their own marginal utility. Diminishing as it is, all customer will be willing to pay more for the first GB of cloud storage, but just how much less utility is derived from an additional GB of storage varies from person to person - and this translates directly into willingness-to-pay. However, as it’s up to your customer when to stop buying additional units, your pricing model won’t render your service unaffordable to anyone. They will keep buying until value no longer exceeds the price.
Finally, with pay-as-you-use, there are no surprises! The customer will know how much he will be paying on a daily, monthly or quarterly basis, and spread out the cost of your service, rather than paying a substantial one-time fee upfront. It is easy to budget and easy to evaluate whether he gets his money’s worth.