Enabling Usage-Based Pricing - Interview with Adam Howatson of LogiSense
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Usage-based pricing is having its moment in the sun. As the economy emerges from the pandemic people are rethinking their revenue models and looking for ways to connect their pricing to value.
Adam Howatson, CEO of LogiSense is not jumping on this bandwagon, he and his company LogiSense have helped to build the Usage Economy. Usage-based pricing is a key step towards outcomes or results-based pricing. One assumes (hopes) that in most cases use of a product is connected to value, and we have more and more ways available to measure usage.
Ibbaka reached out to Adam to get his insights into usage-based pricing and how to succeed with this important tool.
The interview was conducted by Ibbaka partner Steven Forth.
Ibbaka – Why did you join LogiSense and what got you started down this path?
Adam – Previously, I had spent the last couple of decades in the enterprise information management space with an organization called OpenText. That is a stripe of the market that covers everything from enterprise content management to business process management, and a variety of other technical categories within that fascinating space.
I am active in the technology community in Waterloo, Ontario, which is kind of the Silicon Valley of the north. I met Flavio Gomes, who is the chairman and founder of LogiSense, and I found it to be a fascinating space. Subscription and usage-based billing is really all about monetization. We are approaching an interesting inflection point as a society and in our human evolution around the way we design and take products to market. The proliferation of IoT-based applications, the idea of monetizing information itself and the algorithms and intelligence behind the use of information are all changing the playing field. Increasingly, data is becoming the product. We have gone through our industrial revolution, we have automated the mechanical muscle, we have arrived now at a point where it is this revolution in information and the connectedness of networking and community that is driving the economy.
This fascinated me and LogiSense is doing the sort of things that impact the way businesses are going to adapt to these changing economics. That includes everything from disintermediation of certain industries, like insurance, to the introduction of zero marginal cost elements. In technology, when you have produced the first digital copy of something, there really is zero marginal cost to creating additional copies and monetizing those. Monetizing things at the molecular level to compose these networks of products and services needs new revenue and pricing models.
Through discussions with Flavio I could see that LogiSense was itself arriving at an inflection point where it was good for me to come over and make a contribution.
Ibbaka – As an entrepreneurial person, you had many different opportunities you could have pursued. Why LogiSense?
Adam – The work that LogiSense is doing is fascinating. Not just because it is technically sophisticated - providing the ability to meter and bill for events. Thinking through how to price a product which includes a physical good, a digital service, perhaps a service plan or warranty element, continued access to information or cloud-processing and application delivery is a great challenge. The combinations and variability are infinite. The rate at which these connected devices and communication services are proliferating is near exponential.
The work that LogiSense is doing is going to impact future economies. When we talk about pricing, the future is usage-based pricing, coupled to a subscription, metering API elements, working with partner vendors within a networked product and delivering all that in a simple way to a consumer. This is a massively complex problem to solve. The very nature of the work that the LogiSense is doing and the impact it will have on how companies monetize within their ecosystem fascinated me and that is what convinced me to come over.
Ibbaka – Can you tell us a little bit more about LogiSense and the problem it solves? How is it different from some of the other solutions that are out there?
Adam – LogiSense provides subscription and usage-based billing capabilities for clients around the world. We have a rich customer-base, particularly around IoT connected services, communications, cloud-services, and helping those customers to monetize their products. A big differentiator for us is our ability to provide usage-based billing and to mediate or transform data, to make it consumable and monetizable. Whatever pricing configuration is required for you to be competitive within your market space, LogiSense can provide that.
As an example, we achieved peak cable in 2012 and that industry and pricing model has been hemorrhaging users for the last ten years and continues to do so. In rough terms, you may be paying $3000-4000 a year for access to a collection of 800 digital channels that you may not be interested in, for five that you are. Competitors introduced models that offer a baseline subscription for a catalogue, which may change states so I can suspend it, I can turn it off after I have gone through the catalogue and wait for a refresh before I activate my subscription again.
I have all that I need offered in the baseline subscription with a usage-based element where I can purchase different rental types and viewings. This gives huge optionality to the consumer. Which is what consumers want, as we have seen with the growth of Netflix, Amazon Prime, Disney+ and other streaming services that offer those types of capabilities. They provide a more succinct and transparent value for money pricing model that allows customers to upsell themselves, while providing the authority and freedom to do so without feeling like they are being charged for something that they are not using.
For a variety of reasons, I think we will see an increasing requirement that companies provide value and transparency. Companies that do not will lose out. With the proliferation of information, we know how quickly that can go badly for a company. You can lose your reputation overnight if you are found to be unethical, not transparent or forcing customers into a particular configuration. I think all these factors have a major impact.
Ibbaka – My perception is that, over the last twelve months, usage-based pricing has reached a bit of a tipping point. Are you also sensing this and what do you think is behind it?
Adam – I would agree that we are achieving an inflection point where a usage-based element in pricing is increasingly attractive for buyers and sellers. There are a variety of reasons for this. One is simply the optionality and flexibility that it provides a company to adapt to changing circumstances in the market. If a part of your value chain becomes disintermediated, commoditized, or a competitor shifts their model, you have to respond. If you cannot make the shift to a new revenue model, but your competitors can, that will become a large problem.
Just as important is the need for transparency around value for money. Companies need to be able to show users what they have consumed and what they have been charged for in real-time. It helps with adoption, revenue growth and with the sense of customer satisfaction. The ability to monetize new revenue streams, because when you can meter and understand each unit within your value chain, is a huge strategic advantage. You can create new products on the fly. You can incorporate new services and monetize new elements you were not previously able to monetize.
If you are unable or unwilling to do so, you are likely to be at a competitive disadvantage. There are reasons why companies hesitate and may struggle to proceed. But increasingly this is not an option. Companies need to pay attention to which metrics are the monetizable value metrics. What are the units of usage and the usage metrics that correlate with value delivered? Do you have a complete understanding of what is required from a data transformation perspective to be able to then execute on usage-based billing? Those are all significant undertakings and not every organization is able to execute.
Ibbaka – You have described some of the barriers to adopting usage-based pricing. What are some of the other barriers and obstacles you have seen?
Adam – One is this perception that usage-based pricing is an “all in” proposition. It is not. There are often hybrid pricing models available that combine the best of subscription and usage based pricing. The subscription can be a baseline or minimum contract value that gets supplemented with usage elements to make additional products, services, upsells and capability available to the customer base in a way that is most appealing and expedient for them.
Companies need to be prepared on the financial side as well. Revenue recognition on usage may happen in real-time and that may be different from revenue recognition for the subscription. Changes to revenue recognition are often part of a transition to usage-based pricing, just as they were part of the transition to subscription pricing models.
Lastly, I would call out the relationship between finance, your technical services and the product. This previously did not exist. When you are starting to monetize several different elements or have the capacity to rate, mediate or aggregate, then to monetize or bill for a complex variety of things finance, operations and product need to move together. You need a clear understanding of the metrics and the data you are consuming, what your costs are, what your value chain is, what your margin profiles are and ensure that they (finance and technical services) are in alignment.
Ibbaka – Does LogiSense support these hybrid approaches?
Adam – Absolutely. Billing can mean many different things,, and the LogiSense platform can offer subscription management and subscription billing type services. At the same time, we offer an extraordinarily flexible usage-based model. Furthermore, we allow you to integrate with any system and take in metrics or consumption data used for billing.
In addition, we also provide contract enforcement. In a product or agreement, you are selling to a customer may have usage thresholds or sharing capabilities and other contract elements that are assigned to a particular product or customer. There may be 10,000 or more customers on the same billing plan or just one. Logisense supports both approaches and any combination. This kind of flexibility is needed for emerging business models.