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In today’s digital landscape, the 2.5 quintillion bytes of data generated daily transform the way people and businesses operate.
This massive amount of data—along with the continuous shift to cloud-based applications and services—has created a need for businesses to turn to flexible consumption models that recognize the realities of a dynamic and data-driven marketplace.
What is a Flexible Consumption Model?
A flexible consumption model (FCM) is an approach to buying and paying for technology that aligns a company’s spending closely with its actual usage.
This model allows businesses to dynamically increase or reduce their IT resources as needed, based on their changing business needs.
Also called Everything-as-a-Service (XaaS), FCMs use various forms of the subscription business model, allowing customers to access services, applications, and products based on the amount they use (i.e., consumption-based pricing).
They can increase or decrease their usage as needed without worrying about the significant cost of ownership that these products would normally entail.
There are numerous types of consumption models, each with its own degree of flexible consumption:
- Pay-Per-Use: Companies pay for the exact amount of services, product features, storage, or other resources they use.
- Pay-as-You-Go Model: A service that gives users the ability to pay for usage on an hourly or monthly basis.
- On-Demand Subscription: Companies have access to a set of services and pay for these as needed.
- Multi-Year Commitment Model: Companies commit to using the services over multiple years with an option to buy additional resources as needed.
- Usage-Based Pricing: Companies pay based on the amount they use or consume a given service.
The concept came about as a result of the growing demand for cloud-based services and increasing product complexity (i.e., digital transformation).
By using an FCM, businesses can scale up or down their IT resources and services quickly and easily, without making large investments in hardware or software licenses.
That’s the main difference between flexible consumption and a traditional business model: they operate around customer needs and opportunities rather than vendor lock-in and the product life cycle.
- Flexible Consumption Business Model – The business model that allows customers to access services, applications, and products based on their usage.
- FCM – The abbreviation for “flexible consumption model.”
- Everything-as-a-Service – A business model that allows customers to access services, applications, and products based on their usage.
- XaaS – The abbreviation for “Everything-as-a-Service.”
- Pay-Per-Use Model – A specific type of flexible consumption business model that allows customers to pay only for the services they used, rather than a large upfront investment in software or hardware.
Advantages of Flexible Consumption Business Models
Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS) are all examples of flexible consumption models.
These cloud-based services allow businesses to access the latest technologies without large upfront investments or long investment cycles.
But flexible consumption goes beyond the technology industry—many other areas have embraced this approach to purchasing, from telecom to retail, automotive, and beyond.
Flexible consumption models offer several advantages to companies that employ them—namely, cost savings, rapid scalability, and simplified processes.
Selling consumption-based offerings, businesses can quickly and easily provision IT resources on-demand, using their applications and services as needed.
This provides businesses with the flexibility to respond more quickly to customer needs and market demand without incurring large upfront costs, both internally and for the customer.
If businesses predict they will need more resources or services in the future, they can easily and quickly scale up their usage without making large investments.
This ensures that businesses aren’t stuck with an investment they don’t wholly benefit from and provides the flexibility to quickly expand and contract as their needs change.
Lower IT Costs
Over 90% of organizations already deploy multi-cloud architectures.
When a company uses a flexible consumption model to access infrastructure, applications, and services, it can reduce IT costs significantly by paying for only the resources and features they use.
Companies with complex pricing models can simplify their pricing structure when they switch to an FCM. And for services that require frequent changes or updates, an FCM eliminates the need to keep track of multiple subscriptions and contracts.
This makes it easier for customers to understand and purchase services, which improves the customer experience.
Manage Product Complexities
In cloud services, no two customers are alike. By using FCMs, companies can tailor resources and services to customer needs without managing product complexities.
This reduces the need for long-term contracts and gives customers control over their own usage. It also ensures that each customer gets the right value for their investment.
Disadvantages of Flexible Consumption Models
Despite the many advantages of flexible consumption models, there are a few drawbacks to consider as well.
Difficulty Forecasting Revenue
With an FCM, forecasting is more difficult because it’s hard to predict usage levels over time and sales cycles can vary from one customer to the next.
Lack of Long-Term Contracts
Businesses that rely on long-term contracts may not be able to benefit from FCMs because customers are typically only paying for the services they need in the short term.
This makes it difficult to lock customers into long-term agreements and retain them over time.
Customers May Limit Their Usage
With flexible consumption models, the customer monitors their usage and decides whether or not the value delivered is worth the cost (something much more easily justified with a fixed-price model).
This could lead customers to limit their usage of services, resulting in lower revenue and missed opportunities for the business. And if a high-paying customer drops off for a few months, it represents a significant loss in revenue for the business.
Usage Costs May Shock Customers
If sales and onboarding reps aren’t completely transparent with customers about costs—or if customers don’t closely monitor their usage—higher-than-expected bills may erode customer satisfaction and confidence in the product.
Businesses using an FCM must focus on customer retention and continuous engagement to justify the service’s value.
They must also communicate the importance of capacity planning, so their customers aren’t met with end-of-month surprises.
Ideal Customers for Flexible Consumption Business Models
Flexible consumption works best for customers that meet the following criteria:
- Businesses that have varying resource needs and unpredictable usage patterns, including companies in industries such as retail, manufacturing, media, gaming, and more.
- Organizations that need to manage a large number of users or resources on an ongoing basis but want to avoid long-term contracts or large upfront costs.
- Businesses that value the ability to customize solutions and have needs that change over time.
A business might benefit more from a fixed-rate subscription model if:
- The customer’s use cases and requirements are well-defined and consistent.
- They can commit to long-term contracts or upfront costs.
- The customer prefers to pay a fixed rate for services over a period of time.
Implementing Flexible Consumption Models
If a business decides that a flexible consumption model is best for their business, they need to put the right processes in place to ensure that it’s implemented correctly.
Key Considerations for Implementing FCMs
To successfully implement an FCM, businesses should take into account the following considerations:
Customer-centric models require a different operating model
FCMs focus on their clientele, a stark contrast to traditional models, which focus on the product.
This key difference places different demands on the business, such as being more agile and flexible with pricing and product offerings to meet customer needs.
To successfully adopt an FCM in its operations, a traditionally product-focused company must undergo a total transformation of its capabilities to meet the specialized needs of this model (e.g., recurring billing and revenue recognition).
Shifting the operating model poses a major challenge
Migrating to a customer-centric operating model is difficult, as it requires significant changes to the company’s core processes and systems.
It also entails hiring people with different skill sets than those of traditional sales and service teams.
Businesses will have to decide whether to:
- Eat the costs and deal with the growing pains associated with shifting to an FCM, accepting that it is a necessary step to enter into the world of flexible consumption.
- Proceed with caution by giving customers the option of either a fixed-price or flexible consumption model.
- Taking a more measured approach, assessing the costs and benefits of implementation before making any big changes.
Regardless of the approach, businesses must invest in a comprehensive strategy to ensure their successful implementation of an FCM.
FCMs aren’t the best option for every business
FCMs are the target business models for many technology companies. But before deciding to switch to an FCM, a business must carefully assess whether it’s the right choice for its organization or not.
They can start by accounting for these three considerations:
- Who are they selling to? Appealing to the right buyers is crucial for the success of any new business model.
- How will they sell? Significant changes to sales engagement, including new roles for internal sales and channel partners, mean a full review of the go-to-market strategy is necessary.
- How will they monetize? Determining how the XaaS model will help the company meet customer needs while optimizing revenue will help stakeholders decide whether the switch is worth it.
Ensuring Success Post-Implementation
Many organizations that adopt flexible consumption models end up struggling to manage usage and costs effectively. To ensure that an FCM is implemented successfully, businesses need to:
- Create a usage monitoring system: Businesses should have a system for monitoring customer usage on an ongoing basis to track which customers are using the most resources and adjust their pricing plan accordingly.
- Implement automated billing processes: Automating billing processes will help businesses keep track of usage levels and costs more easily.
- Create a customer satisfaction system: Businesses should measure customer satisfaction on an ongoing basis to ensure that customers get the value they expect from the service.
- Speed up the sales cycle and customer onboarding: Making the buying experience as simple and streamlined as possible will help businesses increase customer retention and satisfaction.
Technology to Support an FCM
An important component of any flexible consumption model is the technology that powers it.
Companies should evaluate the available tools and technologies to ensure they have the right ones in place for their organization’s needs.
Enterprise resource planning (ERP) solutions are used to manage financial and operational activities throughout the enterprise. They integrate data from various business processes, such as customer management, inventory control, and financials.
Configure, price, quote (CPQ) software helps businesses create accurate quotes for their customers. FCMs have unique requirements (i.e., dynamic pricing), and CPQ solutions use rules-based logic to configure, price, and quote customer orders quickly and accurately.
Furthermore, CPQ automation provides the flexibility needed to quickly adjust pricing and discounts for different customer segments.
This allows businesses to experiment with new pricing structures without having to manage each individual order manually.
In an FCM context, CRM software tracks customer data in real-time and automates sales processes.
When businesses keep track of their sales and customer engagement data in one place, they can analyze the success of their buyer engagement efforts and the new business model as a whole.
They can also use CRM software to nurture customer relationships and continuously reiterate their service’s value—a critical step for ensuring customer loyalty with these models.
People Also Ask
What are the potential revenue risks of flexible consumption models?
Revenue risks of flexible consumption models include:
1. Misalignment between customer needs and pricing strategies
2. Failure to keep up with customer demand
3. Lack of predictable revenue due to dynamic pricing
4. Significant revenue loss due to variable usage rates
5. Customer churn due to lack of visibility into usage levels and costs
Why would someone prefer a consumption-based pricing model as opposed to a time-based pricing model?
The main benefit of a flexible consumption model is that customers only pay for the resources they use.
This allows businesses to offer more competitive prices and provides customers with greater pricing flexibility.
It also gives businesses more control over their pricing strategies as usage levels can be monitored in real-time and adjusted accordingly.
A time-based model charges customers a fixed price for its service offering regardless of variable usage.
This can be beneficial if businesses can predict customer demand but may not work well in situations where usage levels fluctuate significantly.
What is the pay-per-use model in cloud computing?
Pay-per-use (or pay-as-you-go) is a pricing model for cloud computing services, where customers are billed only for the resources they use.
This model allows businesses to scale their usage up or down depending on demand, without committing to long-term contracts or pre-pay based on estimated usage.
What is the main difference between XaaS and SaaS?
SaaS (Software-as-a-Service) is a software delivery model, where customers access applications over the internet.
XaaS (Everything-as-a-Service) is a broader term that encompasses SaaS and other cloud computing services such as IaaS (Infrastructure-as-a-Service), and PaaS (Platform-as-a-Service).
While SaaS provides customers with access to applications, XaaS allows them to use virtually any computing resource on a pay-per-use basis.