Migration to the cloud is creating the need for business model transformation in the tech industry—transformation that must include new pricing models. Although successful pricing model migration is hard to achieve, it can create substantial value for investors, increasing price-to-revenue ratios from the 1–2x typical of mature tech firms to greater than 4x for those that successfully navigate the transition.
Cloud computing has become a hurricane testing the strength of many tech companies’ business models. Companies in some infrastructure and software categories are rapidly moving to off-premise, cloud-based offers. Others are not yet moving “off-prem” even though the adoption of cloud workloads is prompting many buyers to demand cloud-like pricing models for their on-premise technologies.
Over the next five years, BCG estimates, over 90% of revenue growth in the hardware and software sectors is going to come from either on-prem or off-prem offerings sold with cloudlike pricing models. In these conditions, rethinking industry pricing models is no longer optional. Successful pricing model migration is hard to accomplish. The journey typically takes at least three years (often five or more), and getting it wrong can mean capturing only a fraction of the potential benefits and being stuck with sluggish growth. Not attempting it at all, however—or waiting too long to do so—is going to be a recipe for disaster.
Pricing model migrations often fail due to lack of clear, deliberate pricing and packaging decisions and misaligned incentives. Yet BCG has worked with many companies that have successfully navigated the transition to cloud and new consumption models. Those that do so reignite growth and dramatically improve their price-to-revenue multiples.
Our experience shows that there are six things a company must do to get the maximum value from a pricing model migration:
Companies undertaking pricing model migration face a number of important decisions that go well beyond pricing. They must have clarity on broader issues of strategy and business model. How should they package cloud offerings differently from on-premise solutions? How can they compete with low-cost and free offerings? Or balance simplicity of metrics with value capture? BCG’s experience and expertise can help tech companies answer such questions. Our guidance—which makes use of proprietary pricing questions—can help you make the right tradeoffs, at the right pace, to migrate to pricing models that enable new ways of creating value.
Because making the right pricing decisions is only one part of a successful pricing model migration, companies must also understand the implications of their pricing model decisions across functions and manage the dependencies between these decisions and other functions in the organization. BCG partners with clients to strengthen functions such as product development, go-to-market, and operations that allow companies to actually capture new pricing opportunities in the marketplace.
By connecting pricing strategy to the broader business, BCG’s comprehensive approach to cloud migration helps companies execute the necessary changes across the business, enabling pricing model migration that leads to growth and increased shareholder return.