Last week I wrote that it’s a bad idea to use credits as your pricing metric. They are confusing and unpredictable so your buyers don’t like them. I also mentioned firms sell credits because they are trying to cover their costs. In essence they are using cost-plus pricing. Ugh.
There is only one company I know of where selling credits makes sense. That is AWS from Amazon. The reason is I trust Amazon.
First, let’s think about Costco pricing. They use a modified cost-plus pricing strategy. They cap their markups for all goods at 15% and average an 11% markup. You can be confident when shopping at Costco that you are paying a good price.
The same is true for the shopping experience on Amazon. Jeff Bezos is more worried about growth than profit, so he keeps his margins on Amazon quite low. If you’re at all like me, you have shopped around enough to know that Amazon always has a price that is lowest or at least close to the lowest. I can be confident I’m paying a good price. Most often now, I only go to Amazon to shop and just assume the price is good without comparison shopping.
Back to AWS credits. Jeff Bezos and Amazon have built a reputation for living with low margins. I assume that their complex pricing scheme for AWS is covering their costs plus a low margin. After all, Amazon prefers growth over profit. If this is true, then AWS credits are essentially just saying, cover our costs plus a small margin. That seems pretty fair to a buyer.
Now I’m not saying cost-plus pricing is optimal for AWS, but at least them selling credits doesn’t have the same negative connotations of other companies selling credits. Other companies are likely trying to get higher profits. They haven’t built a reputation of sacrificing margin for growth. Hence, they are suspect in the mind of the buyer.
As you can tell, I’m not a fan of selling credits. Next week I’ll offer a possible solution to companies who run an application on top of AWS (or other web service) that could make your finance team happy while still capturing value.