Jim Stevenson, CEO and Founder of Bletchley Group.
getty
Many software companies would grow faster if they stopped asking customers to use their software.
If that sounds like heresy, consider a company like Snorkel AI. It began life selling software that automated data labeling, the painstaking work of preparing data to train AI models. Then it changed the offer. Instead of handing customers a tool, it started delivering the finished datasets, produced with its own software, synthetic data and paid subject matter experts. Annualized revenue reached $375 million, eighteen times higher than a year earlier, and investors valued the company at $3.5 billion, according to TechCrunch.
Conventional software wisdom says that was the wrong move. Conventional wisdom might say that taking on a payroll of experts moves a company too far toward services. But the broader lesson is that software is often a means to an end.
Companies willing to rethink the line between software and services can remove friction for customers, create more value and uncover new paths to growth.
The Shift From Software To Outcomes
None of this is new. Michelin launched a service in 2000 that charged fleets by the kilometer rather than by the tire. Philips agreed to supply Schiphol Airport with light rather than light fittings, keeping ownership of the equipment while the airport “pays for the light it uses.” Because Philips still owned the fittings, it had every reason to make them last, and it said they would last 75% longer than conventional ones.
What AI has changed is the urgency. Sierra, which builds customer service agents, says it “gets paid only when we complete a task for you,” such as a resolved conversation or a saved cancellation. Fin, the AI agent from the company formerly known as Intercom, charges $0.99 per outcome and nothing for failed attempts.
The logic is uncomfortable for anyone charging by the seat. But if AI gets good enough to do the work of ten people, your customer needs fewer licenses. Charge for the result and your revenue grows as the product improves. Charge for access and it shrinks.
The Problem With Selling Access
In my experience, most businesses don’t lack software. They lack the time and specialist people to run it well. A platform arrives with great fanfare, gets used hard for a quarter then drifts into the background while still billing monthly. When budgets tighten, a finance director circles it first, and “we gave you a great tool” makes a weak defense at renewal time.
There is a subtler mismatch too. Many needs are lumpy. A business might have to label a mountain of historic data once, then only a trickle each day after that, yet the license is usually sized and priced for the mountain. Selling the finished result lets the price follow the work, and leaves the job with the people who know the product best.
The Risk Of Owning The Outcome
Outcome selling has sharp edges. Three years after launch, Michelin’s fleet business was, in the words of an IMD case study, showing expansion “far below expectations” and profitability that was “terrible.” Pricing a result before you understand your own costs is a quick way to lose money on every contract.
Then there is volume risk. Rolls-Royce sells engine maintenance by the flying hour. When the pandemic grounded fleets, flying hours from its large engines under long-term service agreements fell 47% in the first half of 2020, and the company booked £866 million of negative contract adjustments. When you sell the outcome, you also inherit your customer’s bad year.
That cuts both ways. Tie your income to your customer’s results and you share their good years too, so the real decision is how much risk you are willing to carry for how much reward. Get that balance right and something valuable happens: you and your customer finally want the same thing.
Four Questions Before Changing Your Pricing
Before rewriting your pricing, I recommend you test the idea against four questions:
1. Can you define the outcome in a way the customer would sign off on without argument, such as a resolved ticket, a mile driven or a dataset accepted?
2. Do you control most of what drives the cost of delivering it?
3. Could you survive a year in which your customer’s volume halves?
4. Are you prepared to hire and manage the people the work needs, and be open with investors about that cost?
Even if the answer to all four is yes, don’t bet the company on it. Pick the customer segment with the lowest adoption of your current product, offer one priced outcome to a handful of them and measure your cost of delivery for two quarters. The numbers will tell you whether you have found a better business or a cheaper way to lose money.
The companies that get this right stop being a line item someone questions at budget time. They become the reason the result happened.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
