Below is 4C Principal Consultant Dave Mailer’s most recent article for No Jitter.
If you are not careful, consumption-based models can end up costing more than traditional capex-based options! Here’s how to make sure they work for you.
On the face of it, the consumption-based pricing model for cloud UC, or UCaaS, is attractive: You pay a predictable charge, based on the volume of services consumed, for a set period. But in my experience in working with clients in the U.K. and from what I’ve heard from peers across a wide geography, such pricing models often end up skewing significantly in the provider’s favor, and this model ends up not being compelling after all.
Before you can determine whether this model really works for your organization, you must first understand the basics of the UCaaS pricing model.
Key Characteristics of UCaaS Pricing
When pricing UCaaS, providers 1) generally calculate the cost by multiplying a per-user charge by the number of users, and 2) often gather features into bundles — e.g. basic, standard, enhanced — for licensing.
UCaaS providers promote this pricing model as being beneficial to customers for a number of reasons, including:
- Avoids need for major capex expenditure
- Removes complication of owning and depreciating capital assets
- Makes costs directly proportional to the volume of usage
- Provides the ability to readily right-size services throughout the contract term
- Gives certainty of cost of ownership over the full contract term
- Entitles customers to future software upgrades automatically
In contrast, the traditional capex-based pricing model requires a large upfront capex that, oftentimes, is not proportional to the dimension of the solution or services. This spending might be for hardware and servers, professional services, training, and other one-off costs. In this model, relatively low annual costs (for support and maintenance) give the impression of low operating costs. Additionally, with the capex-based model, you may need to deal with unpredictable future capex costs for expansion, software upgrades, and other significant events.
On the basis of the above, the ideal characteristics for a consumption-based model might be:
- All services charged based on the number of monthly active users
- Each user charged according to the features they use
- Ability to increase / decrease volumes at will
- Discounts automatically applied based on volume and longevity of service
- Truly inclusive pricing, including all reasonable professional services, training, service management, etc.
Watching Out for the Downsides
So, what are some of the pitfalls? Here are eight to look out for:
- Minimum quantities — inability to downsize from initial contract quantities over-estimated based on legacy telephony numbers
- Charges applied from contract date—it often takes months after charges commence to complete a UCaaS rollout and before users are actually consuming services
- One size fits all — all users have to have the same feature set even though only a small number actually require enhanced capability
- Hidden extras — base contracts might exclude features and services such as connectivity, service management, or third-party services that you need to make your service work
- Professional services charges — you’ll often incur additional fees for design, installation, training, documentation etc.
- Restrictive change clauses— many contracts specify minimum service periods for additions during the contract period
- Unexpected price variations — prices may vary according to the retail price index or currency fluctuations
- Discount models — customers often must pay multiple years’ charges up-front to get benefit of long-term contract discounts
My Best Advice
At the end of the day, you need to make sure the pricing model meets your needs, not just the vendor’s. Here are my three key tips:
- Ensure the contract enables you to vary quantities both up and down. It is equally important to ensure that additions made late in the contract term do not commit you to a significant contract extension across the board. A successful tactic that I have used is to agree to a short contract extension for the whole service when making late additions that have an equivalent monetary value to, say, a three-year term for the additional requirement.
- Ensure you have an onboarding strategy that takes account of payment triggers as well as service delivery. Do not accept a situation where you will be paying for all your services months before you migrate to them.
- Be smart with contract volumes. Do not get into a situation where you are paying for hundreds of users that never use the service. Ideally survey your users in advance of contract signature to ensure you only pay for what you need. If this is not possible, then contract for an agreed minimum volume with the ready ability to increase this later.
In summary, make sure that you are informed in respect to contract terms and pricing. Agree contract conditions early. If you must use vendor terms, then take them into account during your evaluation. Make sure you understand the contract and the implications of mid-term change. Make your vendors deliver on their stance that consumption-based pricing is in your interest. Good luck!