Regarding last week's article in The Beat
in which KDS CEO Dean Forbes criticized the transaction-based pricing model
for travel and expense technology ...
Churchill said of democracy that it is "the worst form of government except all the others that have been tried." I think the equivalent can be said of transaction pricing: it has plenty of problems but it’s the best model we have. With regard to the problems, Dean Forbes is right: vendors can profit from their customers’ inefficiencies and waste with transaction pricing. We at DATABASICS have shared KDS’ reservations. Still, after trying a variety of alternatives, we settled on the transaction based pricing model. Why? [more]
Consider how Software as a Service works where the vendor provides the customer infrastructure and support services. A vendor can’t handle a million transactions a day on a platform designed for a thousand. He has to build out to the level of anticipated activity. In other words, he has to pay for increments of capacity. His costs are proportional to customer use. Assuming the vendor is trying to make a go of his business, how should he apportion his costs to his customers? Divide it evenly? That would make the smaller subsidize the larger. Not for long of course: the smaller would walk, leaving the vendor with no other choice than to raise prices on the larger. Usage-based pricing is the result.
Ok, but must usage be measured in terms of transactions? Why not users? User-based pricing suffers from the fact that some people in an organization travel a lot more than others. The right price would either be tiered by frequency-of-travel class or would reflect the average number of trips per user based on past travel. In either event, you come back to a model that rests upon transactions. But couldn’t the price be fixed as a kind of baseline? I think this is probably where Dean is going. In that way, the vendor wouldn’t benefit from increased activity. To say the least! I may have it wrong, but it seems like Dean is suggesting that increased activity is a consequence of the vendor’s failure to do his job. In short, the vendor would deserve to lose money on the additional capacity he provides. First, as vendors we do not control the travel spigot. Second, an increase in travel is frequently the right thing for a company; e.g., it might help it to strengthen relationships with prospects and customers. Charging for increased use isn't a conflict-of-interest for the vendor--it’s a vital interest.
What if activity falls below the baseline? A fixed price is a fixed price--right? The customer will politely request that his charges be reduced as soon as he isn’t getting the better of the deal. The fixed price model ends up pleasing no one if there are significant fluctuations in usage.
Transaction-based pricing is really the only model we’ve found upon which vendor and customer can generally agree. What's truly insane is opening the door to alternatives that invite incessant bickering.