Cloud Revenue Models

The way money flows through a system can make or break a new venture.

The opportunity

Cloud solutions open up a range of opportunities for pricing that you do not get in the real world.

Pricing is the starting point but the new opportunities come by modelling the flow of money throughout your system.

Setting up the right flow of money between some or all of the stakeholders within your system can transform your 1 on 1 software to become a platform connecting parties or even an ecosystem that stakeholders rely on for their income.

This can have the effect of transforming your customer into your sales team by aligning their motivations with yours.

The threat

Money flow is one of the primary friction points that blocks customers adopting your Solution.

Getting pricing wrong can prevent people from trialling, growing or staying with your platform.

This is most often seen when platforms offer a 15 or 30 day trial.

Then cut off service with prospects if the prospects decision cycle doesn’t happen to line up with this arbitrary buying cycle.

The usual pricing suspects

There are a few default choices people make that severely compromise the success of a new platform.

  • Advertising

    Advertising is the most common goto revenue stream for high volume sites. “All we do is get lots of people to look and then sell advertising”.

    This was a great model in 1998 and into the 2000s, these days attention is either owned by the large platforms (Facebook, Instagram, Linked In etc) or it is so diluted that you have to buy traffic from other sources and hope to make a small margin on your advertising.

    This is typically a loosing battle and there are usually better alternatives.

    The more important reason you don’t want advertising is that it creates a tension of opposites within your business model. You need to do the right thing by your users but that can come into conflict with doing the right thing by your customers (the advertiser). We have seen this playout with the low trust in Facebook and other platforms recently.

  • Per User Licencing.

    This is the second assumption when advertising is obviously not suitable. New entrants look at Atlassian or other prominent players and copy what they do without thinking through the implications for their platform.

    Per user licencing is great when you are providing value for identifying individual peoples contribution within an organisation.

    However, many applications are role based and only need to be used by 1 or 2 roles within an organisation, so you may have a 20 person company with 1 registered user on your platform.

  • License fee and support

    The default 20 years ago, this is rapidly becoming obsolete as an option as boxed software is replaces with platforms.

    Platforms do not have a big version number, they are (or should be) continually improved so the pricing needs to cover the costs of continual improvement.

    This model can create a bad relationship because you have received the bulk of the money for the platform upfront and you want to sell a new major version, not incremental upgrades. Your customers don’t want a major upgrade, they just want something tweaked.

So how do you create a pricing structure?

Minimum requirements

  • To start with it can’t be too complex, too hard and people move on or get scared off.

  • It should be based on a metric your platform manages natively. Don’t invent a new metric just for pricing, people will game the system or it won’t be relevant.

  • It should cover your operating costs (not the upfront investment) for having the customer. In the cloud these are typically pretty low but some services have failed as the operating costs climbed.

  • It should not scare off the majority of prospects. You can’t be everything to everyone but the first thing decisions makers do is review pricing and decide before wasting time on a trail.

Better

It should encourage people to not just try it, but to embed it as part of their business operations. One month trials generally do not give people long enough to make the service part of their business as usual.

It should scale to meet 3-5 size brackets for your customer base. The needs of an SME are very different to a corporate, you need to choose who you will serve and how you will scale to service their needs.

It should scale with your customer, not block their growth. Many models stunt the adoption of the system as greater use creates a much greater and unsustainable cost.

It should aim to spread the “pain” amongst a large number of customers. Gouging to recover costs on the first few customers will leave you with none.

Best

Ideally it should encourage or facilitate referrals inherently. Often your best sales engine can come from your existing customers, but not force it because it will backfire or fail if it isn’t inherent to the operation of the system.

It should work with the motivations and goals of your customer, not against them. Nobody likes paying money, but people don’t mind if it is reasonable and “in the flow” of them achieving their goals.

If possible it should transform a customer into an Evangelist, aligning their income stream to your platforms payment. In some instances earning from the platform creates a super referral system that helps you scale beyond any paid customer acquisition model.

Some platforms are simple or are trapped by legacy like, Microsoft Office.

A person uses Word and hands documents onto someone else. They charge each person who wants to create/edit documents.

Microsoft then charge an extra cost for storing the documents in the cloud.

Many of the established platforms work for one company at a time.

Connecting people within that organisation and so charging is typically for users within the organisation.

More modern platforms connect individuals and companies to play different roles in solving a problem.

Revenue models start to look very different as you cross these tranditional boundaries.

You can start to participate in the value exchange between parties delivering a lot higher value than a simple per user per month fee.

Some platforms can create ecosystems letting many parties participate.

These can include complete value chain systems, solving issues for entire industries at a time.

Be specific

You may not be aiming for 1 specific user, more likely you are aiming for a small group of users, each with their own needs.

How to be specific will depend on who your targeting, look at things like

  • Demographic (gender, location, age range) may help narrow it down.

  • Industry, role in the company, problem they have.

  • Size of the company, specific target customers, specific departments

Who are the parties participating in the system?

The most common answer I get is “anyone could use it”.

This is a fallacy that prevents many platforms from gaining traction.

Something as big as Facebook has <20% of the world using it.

As parents and grandparents start using it children and teenagers move off.

Examples

Nutritionists connecting with their high needs patients.

Tradies connecting with all their suppliers to coordinate on jobs.

Construction companies connecting with their subcontractors to collaboratively manage projects.

Mid sized companies with offices in Melbourne that need X.

Established SMEs looking to consolidate their “software tools” to a complete platform.

You cannot be everything to everyone, so instead, be something amazing to a specific audience, and then grow.

Choose a timeframe

Typically platforms have an reoccuring cost unless your facilitating a specific action like the sale of a house, then you probably have your pricing element.

Per transaction, per day/week/month or year.

Choose a scaling metric

This is usually a noun (a thing) that your platform manages and that is a central “Value” aspect of your solution, not an addition just for pricing purposes.

For example:

Nutrition platform: Recipe OR daily meal plan OR weekly plan.

Project Portfolio Management system: Project cost, Active Projects, Number of

A quoting system: Quotes or Invoices.

Map the flow

Now you know who, when, what you need to start modelling the flow of money. The most simple is one person from Who pays the platform for access.

The more creative is that one person pays the platform and the platform pays a supplier (think Uber/AirBnB).

An ecosystem connecting primary producers, onshore distributors, design and assembly teams and a key primary supplier to the customer could trace the entire cashflow and market intelligence between all parties.

Putting it all together

Now that you have your target people, your timeframe and the scaling metric you have to understand what a reasonable price is for your market.

So you need to run iterations to see what pricing model is going to fly and test it with your audience to validate you were right.

Examples:

Selling risk management software to corporates running billion dollar projects you can easily charge 0.001% of the project cost per year and still make good money.

Selling to single person consulting companies monthly who are trying to make ends meet, you may be better off making them money rather than trying to charge them money.