Business model transformation  – will customers pay for CAD and PLM per hour?

SAP is changing their business model. Engineering.com article – First of its Kind: New SAP Pricing Model is Based on Digital Access by Verdi Ogwell brings some nuggets and ideas about SAP business model changes. The first in its kind, digital model suggest new way to license direct human access and indirect digital access. Here is how it defined.

Direct human access occurs when people log in to use SAP Digital Core using an interface delivered with or as part of SAP software.

Indirect digital access occurs when devices, bots and automated systems get instant access to SAP Digital Core. This also applies when people, devices or systems indirectly use Digital Core via non-SAP applications, such as custom solutions or third party applications. 

Article provide some additional information and examples about CAD and PLM vendors transforming their business models. According to article Autodesk, Aras and Arena were pioneering all-in cloud offering, which is not accurate when it comes to business models. While all three companies are selling subscriptions, the only company actually selling it per-usage (units) is Autodesk. Aras and Arena are selling subscriptions per-user. Other PLM companies are also adopting subscription models, but the devil is in details and for most of them, annual subscription is required.

The debates about usage business model aren’t new in a modern business world. I shared my thoughts future about business model transformation back in 2010 – Faltered licenses and Future business models, Future business models – pay per second PLM? Among all these models, subscription is the most straightforward. Will “pay per usage” business model have some legs?

Usage business models aren’t new. Some manufacturing companies practiced it already 30-40 years ago. Deloitte article Align price with use can give you a good portion of analysis about usage pricing models and trends. It can work for some businesses and some companies and it will not for some others. Read the article and draw you opinion. The model does have risks involved. Here is an interesting passage:

This pattern (usage payment) can be challenging for incumbents to respond to because it erodes significant up-front revenue streams and challenges core assumptions about what customers value and how that value can be delivered. Incumbents will likely struggle to justify adopting a usage-based model because doing so would cannibalize the significant revenue derived from the up-front purchases of their product. The sales, support, and distribution resources are also optimized for large up-front purchases. In addition, adopting a dynamic, usage-based model could jeopardize relationships with existing customers who typically purchase the product up-front.

It looks like SAP is reacting on an increased competition from vendors like Salesforce.

So, the question if pay per use will be adopted by CAD and PLM vendors? I’m not sure about that. The adoption of SaaS tools in CAD and PLM is still at the beginning. Majority of CAD tools are on premise. PLM tools are more advanced in their adoption of cloud, but most of tools are hosted version of existing on premise applications.  Traditionally CAD licenses were bought per seat. Counting hours of engineering work can be dangerous and can backfire. How would you define “work”. Software can be open in the workstation, but proving usage and data consumption can not an obvious thing. Most of PLM business is targeting large companies. It would be interesting to see how these companies will switch to floating usage patterns of licensing. Some PLM companies in the past had a practice of counting users on annual basis and charge customers at the end of the year.

What is my conclusion? Companies will be innovating in business models to become more competitive and gain traction from customers. Some of vendors will push it and some others will follow. Clear identification of consumable units is absolutely important to make it successful. Transparency is a key in new business models. From my experience, engineers are sensitive to measurement of their work time. And company traditionally prefer not to count users and buy site licenses for PLM. It will be interesting to see business model transforming in the next few years. Just my thoughts….

Best, Oleg

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Disclaimer: I’m co-founder and CEO of OpenBOM developing cloud based bill of materials and inventory management tool for manufacturing companies, hardware startups and supply chain. My opinion can be unintentionally biased.