Geoff Soon (pictured), Senior District Manager for ASEAN, Snowflake spoke to FutureCFO about the consumption business model, how it would help CFOs with value creation, and how they could work with other internal teams to adopt this model.
Geoff Soon, Senior District Manager for ASEAN, Snowflake
FutureCFO: What is a consumption business model and why does it matter to CFOs?
Geoff Soon (GS): A consumption business or usage business model is a service provision and payment scheme in which the customer pays according to the resources used.
Using this model, the provider is charging for the consumers' usage of their service or product, and may charge a flat rate for resources used in a specific time period or may charge differently per aspect of the service. Utilities, such as water, internet and electricity, follow the same payment structure.
A common alternative to consumption business model is a subscription model that charges customers a recurring fee — typically monthly or yearly — to access a product or service.
Traditionally, CFOs focus on cost and cost control when managing the financial actions of a company.
Rather than worrying solely about the bottom line, CFOs should ask the question: If you spend more today, what will you end up creating tomorrow? The role of the CFO is evolving; every decision has a financial impact, and those choices can now be evaluated as data-driven decisions with tradeoffs.
The consumption business model is a key potential solution to help CFOs with value creation.
Finance professionals don’t need to turn to spreadsheets to forecast our revenue. Instead, they can deploy modern technologies, such as machine learning and AI and use historical customer usage patterns to make projections on future usage.
Companies can also make assumptions about future customers by applying similar usage pattern projections, based upon the type of customer and the industry.
In the days of on-premise software when companies were buying the hardware. It did not matter how much compute businesses used as everything was on a licence or per-seat model.
The cloud vendors such as Amazon and Microsoft have already adopted this new model and if companies want to compete, they will need to evolve their pricing strategy.
When making a big shift towards a utility model for a product or service, companies need to redefine their product or offering.
FutureCFO: Is there any real world case of a company adopting this model anywhere in the world or in Asia Pacific? How does the company benefit from it?
GS: Data Cloud company, Snowflake is one such company that uses a utility-based, consumption business model that charges customers by the second.
Customers pay for the actual time used and volume of data stored which results in affordable cloud rates, thus companies can scale their storage and computing independently and with flexibility.
With the subscription model, sales teams are incentivised to push more licenses and upsell.
Sales tend to follow the same pattern: the account team lands a deal, a contract is signed, and the customer is then passed along to a support or customer success team. If the subscription is too large and some seats go unused before renewal, the account team isn’t on the hook.
The payment comes from the size of the subscription, not actual usage of the product or service. The salesperson has no skin in the game after the customer signs.
On the flip side, imagine the quota and commissions of an account team are tied directly to consumption. Suddenly, it’s in the account team’s best interest to not only buy, but also to consume the solution and derive high value from doing so.
The account team is working hard to enable customers to optimise for efficiency and do more with the solution, such as deploying additional data workloads and revealing new business use cases.
What’s most remarkable about the consumption-based sales model is the natural alignment between Sales and customers around incentives. That’s because the account team knows that the best way to drive revenue is by understanding timelines and deploying technology.
The account team becomes the day-to-day advocate and an integral part of the project team and is working hard to earn and grow the business every day.
Make sure systems and technology will scale. This intrinsic capability can make or break the ability to grow with ease and can impact finances.
FutureCFO: What should CFOs do if they want to adopt this model?
GS: When making a big shift towards a utility model for a product or service, companies need to redefine their product or offering. Four factors must be considered:
● How do you price a utility model?
● Revenue model transitions are extremely painful. How will you handle this transition?
● Do you have the right processes and systems in place internally to handle the change? This is where a lot of companies will fail because there aren’t many systems that can handle these new requirements.
Data presents a huge challenge. Data is becoming so critical, and the faster companies have access to accurate data, the faster they can act upon it.
With that said, here are some advice for companies:
Make sure systems and technology will scale. This intrinsic capability can make or break the ability to grow with ease and can impact finances.
Don’t hire for the job today but for where the job is going. Companies in a fast-growth environment usually end up needing to hire above or replace people because they don’t hire for where the job will be in the future.
CFOs must establish a true partnership with the CEO. While every relationship will be different, trust and alignment are keys to success and can build clarity for the organisation as a whole.
It’s so critical to have the right team in place and to maintain a focus on the future value of investments. As CFO, it’s more important than ever to keep one eye on the numbers and the other on how to grow strategically.
FutureCFO: Why should CFOs take the lead in adopting this model? Besides IT, which functions/internal teams that CFOs need to work with when introducing and advocating this model?
GS: Consumption-based businesses are new in the software space, and CFOs should lead the charge and educate internal teams, customers, and prospects on the value of this approach. The back office is no longer the best place for a CFO.
Regardless of the product, CFOs should understand and, ideally, use their own software or product so they can speak to its use cases and, when relevant, educate on how to forecast for this type of consumption.
For instance, all of Snowflake's financial planning, modelling, and forecasting are done on our product by using real-time data on customer usage to predict future usage.
With consumption-based pricing, every performance improvement made to the product equates to customers doing more with the exact same number of credits they already paid for.
That means every release is another form of discount, and every performance improvement is passed on to customers. This pricing and value model works across consumption-based businesses, and CFOs are uniquely positioned to champion these financial benefits.
CFOs must interact with teams across the company on a daily basis—from sales and support to engineering and product management. They should know what product and performance improvements are coming so they can adjust revenue forecasts and understand where needs exist to inform things like hiring and corporate development.
FutureCFO: What are the common obstacles when it comes to the shift to consumption-based pricing both internally and externally?
GS: The biggest challenge is around systems to track consumption. Until the last few years, the only companies that operated as truly utility-based companies were the big telecom operators or the energy companies that had meters on their products.
Usage-based businesses tend to have invested hundreds of millions of dollars on billing engines in order to track customer-specific usage.
There are practically no ERP systems that do it out of the box, which means any company that uses this billing engine today has likely spent a small fortune.
Furthermore, additional education is needed by the finance team. Historically, customers buy fixed-resource products with a fixed amount at a fixed price.
And, if more resources are needed, it’s a purposeful event that can be budgeted for in advance. Usage-based consumption requires a mindset shift by finance teams.
While the consumption model is advantageous for the customer because there’s no financial waste (you only pay for what you use), this reality requires budgets to be variable rather than fixed, and expenditures become operating expenses (opex) rather than capital expenses (capex).
Moreover, with a consumption model, every SaaS customer is unique. There’s no easy way for companies to know exactly how much of the service their customers are going to use over time, as outcomes will vary depending on use cases and workloads.
These challenges can act as blockers, but it’s short-sighted to let something like a sunk cost slow down future opportunities.
Increasingly, the utility model will be adopted by startups and challengers in every industry, which means now is the time to address these challenges and figure out how to operationalise a consumption-based model so they can benefit from this inevitable trend.
CFOs should lead the charge and educate internal teams, customers, and prospects on the value of the consumption business model.
FutureCFO: When do you think this consumption-based business model will be prevalent in Asia Pacific?
GS: Many software in Asia Pacific is already delivered in a consumption-based model. However, the wide-scale adoption of the model across the region may take some time. What we constantly hear from customers is that they only want to pay for their usage, not shelfware.
Yet, software vendors usually increase deal sizes each year even when we are not utilising their seats or licenses as much.
For software with a lot of transactions and compute, a usage-based model could be the most suitable to follow. However, if it is a software that isn't used that often, then this model wouldn't work as well.
There are many other business software tools that can be offered as a service with a consumption-based payment scheme, including service cloud platforms.
While we believe that the model will become prevalent in the region, ultimately, adopting a consumption-based business model is dependent on the nature of the business’s industry and needs.
