August 10, 2016
As the famous phrase goes, It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself. Indeed, survival in any environment, including business, depends on the ability to manage change and respond to it appropriately. Just like banking went from transactions to experiences, various areas of businesses are transforming in response to technological advancements as well as business model evolution.
At the moment, let's focus on business model transformations that became quite noticeable – pricing models, in particular. Partially influenced by modern technologies like blockchain and partially by consumer market trends, pricing models across industries cannot remain static while customer preferences and services they use become increasingly fluid and dynamic.
In the insurance industry, for example, blockchain-powered real-time data flow from various devices opens an opportunity to automatically implement dynamic customized pricing based on changing circumstances detected by sensory technology.
In the interview on China’s insurance digital transformation, Gu Qing Shan, Deputy General Manager at Ping An Technology Insurance Innovation Platform, brought up an example of automotive insurance, saying that companies should utilize third-party technologies, to collect data and prepare for usage-based insurance.
The insurance industry will not be a sole beneficiary of transition, large companies across the board have been favoring usage-based pricing models for some time now. UBER, Coca-Cola, Airbnb, Nordstrom, American Red Cross, Dell, Salesforce, and many more cross-industry mammoths have been relying on one of the providers of intelligent and complex communications systems provider Twilio, which utilizes a usage-based pricing model for messages, calls and more. As Lee Kirkpatrick, the CFO of Twilio said, "Every message sent, every minute of phone traffic or every authentication that is processed generates revenues for Twilio."
Speaking of UBER, the company is probably a representation of the core transition happening (or forced to happen) in the society; the usage-based pricing is a byproduct of transition from ownership to access (instead of building in-house infrastructure, for example, moving to Infrastructure-as-a-Service). Ride-sharing companies like UBER & Lyft are changing the mindset of the consumer, making it more efficient and beneficial to pay for only what you use and when you use it, instead of bearing all the costs of owning a car.
AWS, which generated $2.6 billion in revenue during the first quarter, representing 64% YoY growth, is another classic example of usage-based pricing. AWS utilizes a pay-as-you-go approach for pricing for over 60 cloud services. It allows paying only for the individual services one needs for as long as the service is needed without requiring long-term contracts or complex licensing.
Not only does Amazon strongly believe in the cloud and in usage-based billing for the services it provides. The company also offers Amazon DevPay, an easy-to-use online billing and account management service that makes it easy for clients to sell an Amazon EC2 AMI or an application built on Amazon S3. The service allows usage-based pricing and tiered usage-based pricing model implementation.
Usage-based pricing models may not only have a great monetary reward for providers, they are also believed to be a positive transformation from a customer perspective. As Deloitte explains, flexible consumption business model transformation allows customers the flexibility to consume and pay-per-use. The company lists among the benefits for customers the flexibility, convenience and affordability, while vendors that offer consumption-based products, platforms and services can enjoy financial predictability, lower unit costs from aggregation and enhanced customer relationships.
But what role did the cloud play in this transition? First of all, The ensuing commoditization of traditional infrastructure necessitates a migration up the value chain, from products to platforms, software, and services. In addition, as Deloitte suggests, technological advances—particularly related to ubiquitous sensors, Internet speed and cloud computing capacity—facilitate tracking, billing, and delivery for much smaller and more dynamic increments of use across a variety of customer contexts.
When products are available on demand in smaller increments and without a large up-front investment, more potential users will be willing and able to try them. For business customers, that means products designed to be purchased as vital infrastructure assets are reoriented as services, the company explained.
Greg Cudahy, EY Global Leader, believes consumption-based pricing to be a disruptive trend, saying, Consumption-based pricing will clearly be a business process disruptor. Eventually, maybe even semiconductor companies won’t be paid on the basis of the cost of a chip, but will bill customers differently based on how often and how much the customer uses that capacity.