This sponsored post is produced by Mozu.
As businesses increasingly recognize the benefits of software solutions to meet their growing demands, two specific pricing models have created a divide in the community, especially in terms of commerce platforms: revenue-share pricing and usage-based pricing. For context, providers with revenue-share pricing (also known as rev-share) charge users a percentage of their sales, whereas usage-based vendors charge for what clients actually use, such as the number of accounts, website traffic, etc.
So when it comes to software pricing, which model should your business choose: rev-share or usage-based? Here are three key reasons why usage-based pricing trumps rev-share.
1. Usage-based pricing better reflects the actual value the software vendor provides their clients
When selecting a software vendor, you should be able to pinpoint exactly what value the provider brings to your business and only pay for that.
Let’s say you’re a retailer looking at commerce platforms. A rev-share vendor might charge upward of 2 percent revenue on each sale, whereas a usage-based vendor might charge based on web traffic. If the site of Retailer A averages 2 million unique site visits per month with an average order value of $200 and 5,000 orders per month ($1 million in sales), Retailer A would pay $20,000/month to the rev-share commerce vendor.
Retailer B, on the other hand, also averages 2 million monthly visits and 5,000 orders per month, but their average order value is only $20 ($100,000 in sales). Based on this rev-share model, Retailer B would only pay $2,000 per month to their commerce vendor.
At this point, you have to ask: How is that a reasonable difference? If a commerce platform provides Retailer B with the exact same tools to manage the exact same amount of traffic as Retailer A, how can the rev-share vendor justify such a huge discrepancy in cost? With a usage-based pricing model, however, these two organizations would pay the same price, because the overall contributed value from the vendor to the user is the same.
2. The nature of most business models does not lend itself to rev-share pricing
Another important distinction to consider when comparing rev-share and usage-based pricing is the nature of your business, including its industry, type of product, and profit margin.
Going back to our commerce platform example, picture two retailers, one that sells hardware and another that sells high-end handbags. The hardware retailer is in more of a commodity market, selling low-cost items such as nuts, bolts, and hammers at an average profit margin of 3 percent. The luxury retailer is in a far less crowded market and has a much higher profit margin across its product line of 25 percent.
If the hardware retailer were to use a rev-share provider that charges 2 percent per sale, the retailer would actually lose money on several of its low-margin items (like nuts and bolts), and would lose two-thirds of its overall profit margin directly to the commerce provider. This scenario makes rev-share pricing cost prohibitive to the hardware retailer. With a usage-based model, however, the hardware retailer is able to retain a much higher percentage of its revenue, while receiving the exact same level of service as the luxury retailer.
3. Plans for aggressive growth and optimization are better achieved with usage-based pricing
As we’re all in the business of expansion and efficiency, the main question you should ask is how a software provider aligns with your overall business objectives. What are your goals for revenue growth? For improving customer interactions and internal processes? Your software investment should be for a tool that enables your goals, not detracts from them.
Continuing with our commerce platform example, retailers are looking to grow their revenue in two ways: increasing sales volume and average order value. If a retailer invests thousands of dollars and hours to better convert traffic into incremental sales, what has the commerce provider done to contribute to this success?
The same theory holds true for companies looking to achieve strong revenue growth. Companies that do not have aggressive revenue goals are better suited to select rev-share software solutions, as their overhead will not increase at such high levels as organizations achieving rapid revenue expansion. The perspective of revenue growth is arguably the single most important consideration when choosing between rev-share and usage-based software pricing.
When it comes to software pricing, the battle is over — it simply doesn’t make sense to pay for underutilized software. This means that if you’re looking to find an ally in today’s aggressive software pricing war, the choice is clear: look for usage-based pricing.
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