Why Do Pricing Companies Charge Using Revenue Under Management (RUM)?
With the total cost of implementing pricing software starting at around $100 000 many companies are surprised to learn that vendors use a Revenue Under Management (RUM) approach to their subscription prices, meaning that the price of their software will keep going up based on the company’s revenue.
At Pricefx, we’ve spent a decade helping hundreds of customers improve their pricing strategies with our price optimization software and we have heard how they feel about the fact that we, like most vendors, charge RUM.
In this article, we’ll explore what RUM is, why it works for pricing software vendors, why it makes sense for their customers, and we’ll look at which companies need to have discussions about RUM with their vendors right at the start of the relationship.
What is Revenue Under Management (RUM)?
There are a few commonly used pricing strategies that SaaS providers use (freemium, flat-rate, tiered, feature-based, usage-based…), chosen based on the type of software a vendor is selling, how their customers are likely to use their solution, and where the value of their offering lies.
Seat-based licensing is a common software pricing approach where customers are charged per user per month and it is a good model for companies whose software is workflow- or efficiency-based; where the solution provides tools that help users do their jobs better and faster. The value of this type of software is efficiency. The more of the customer’s employees use the software, the more efficient the company becomes. So, it makes sense for such vendors to use a per-user or per-seat subscription strategy.
Revenue Under Management or RUM (also known as Annual Revenue Management or ARM) is a type of value-based pricing, where prices are based on the value the software brings to the customer. The more value a customer sees in the software, the more the vendor can charge for it. (It differs from a gain- or value-share approach, where customers only pay for software once they see value from it.) RUM is popular with pricing software vendors, because the value of the software is revenue. The more revenue gained thanks to the benefits of the software, the more they pay for it. Most vendors charge subscriptions based on RUM on a sliding scale.
So, at Pricefx for example, your subscription could cost anything from $100 000 to $3.5 million per year depending on your company’s yearly annual Revenue Under Management (RUM) or Annual Revenue Managed (ARM).
Learn More Here about RUM and the overall cost of pricing software in more detail
3 Reasons Pricing Software Vendors Charge With RUM
While you could be forgiven for thinking a RUM-based approach is just a vendor’s way of charging the maximum a customer is willing to pay for their product (because that’s what pricing software helps our customers do), there is actually a lot more to it than that.
1. Seat-Based Pricing Doesn’t Work for Pricing Software
Let’s say a company buys a seat-based pricing software subscription for 30 employees. Great. But what if those employees aren’t just pricing for that one company, but are in fact pushing prices out into the market to serve 5000 sellers. They’re using the benefits of the solution to impact 5000 end users on the other side who never pay the software vendor for the value it is providing. They’re not just magnifying the impact of the software but also making it really difficult to measure.
2. Revenue Is the Key Metric for Pricing Software
Price is your most powerful lever of businesses because when you improve prices even just a little bit, it goes straight to your bottom line. That’s our value proposition.
This is why the revenue metric is key to companies like ours. The more revenue a company has, the more value they’re going to get out of a pricing solution like Pricefx.
What’s more, RUM is a publicly available metric.
In a value-based strategy like RUM, value gain needs to be directly tied to a very specific publicly available metric.
This is one of the reasons gain-share pricing presents so many challenges; it’s hard to measure and hard to attribute.
Revenue is a publicly available metric that enables the software vendor and its customer to talk transparently about the expected value they’ll get and how to measure it.
3. RUM Pricing Reflects Vendor Costs
RUM pricing turns out to be a fairly good proxy for complexity. Typically, the bigger a company is, the more complex the pricing problems they can solve, and the more channels they’re able to sell through. From the vendor’s perspective, this all means higher costs associated with hosting such a company. So, the bigger customers pay more for their software than smaller companies do.
We find our own customers feel this makes sense as they recognize that bigger companies are going to get a lot more value out of our software than those at the start of their pricing journey.
Planning Ahead Is Essential
Companies that are most likely to take issue with vendors charging RUM are those in volatile commodities markets and those in hypergrowth mode. Here’s why and what they can do about it;
1. Volatile Commodities Markets
The most common reason we’ve heard from customers for not liking the RUM approach is that they don’t directly control their revenue.
Commodity-based companies, like chemical companies, whose revenues are highly based on volatile commodity index costs, usually price using cost-based strategies. Their revenues might be up by 50% one year, and then down 50% the next, but this doesn’t really reflect their profitability. Their percentage of gross margin has stayed roughly the same throughout.
Of course, the pricing solution they use is super valuable to them because it’s helping them control their costs and increase their revenue in the right places. But the commodity effect could be completely swamping many of the benefits it brings because, as the subscription is RUM-based, what they owe their software vendor swings wildly from one year to the next.
At Pricefx, not only do we notify our customers that they’re approaching (or over) their limit so they can adjust their next subscription payment to reflect the new RUM, but we’re more than happy to accommodate companies in this situation by finding a more appropriate metric (like a gross margin or transaction metric) to measure derived value. So, make sure you have the discussion with your vendor if you’re in a position where you don’t directly control your revenue.
2. Companies in Hypergrowth
We find that companies with stable revenue and medium type growth rates (e.g. 5-10% a year) have no problem with the RUM approach, because the price of their software is based on an expected eventual revenue under management. So a $1.3 billion company might be priced at $1.6 billion in RUM, which gives them some room to grow without having to change their price.
However, companies in hypergrowth mode, with revenues of around 50-60% every year, will see their costs for software rise in concert with their revenues. These companies should take this into consideration when walking into a conversation with a vendor and should have a good idea of their percentage growth expectations over the next five years so the vendor can advise as to how to control for that growth.
The same logic around planning for price increases goes for companies rolling pricing software out in phases across their geographies and business units; the more revenue achieved with the help of pricing software, the more you’ll pay the vendor.
Taking RUM In Your Stride
RUM-based pricing makes sense for pricing software vendors and customers alike. Revenue is the best metric to measure the value the software is bringing your company because not only is it the metric the software has been designed to improve but the more revenue you have, the more it can do for you.
Pricing software can have a huge impact… on your company, your pricing team, your wallet, and the bottom line. Fully understanding the associated costs and value opportunities and how they’ve been worked out is essential to building a trusting and transparent relationship with your vendor.
It’s important that the discussion around implementation costs and subscriptions based on RUM are held early on and that you’re able to predict what you might be paying once your revenue starts curving upwards and you start rolling the solution out across your growing number of business units and locations.
At Pricefx, we’ve built a Margin Lift Calculator to help you estimate the value you could achieve with pricing software based on your specific industry challenges and objectives. Why not check it out to see where your company could be heading next with the help of pricing software?
On the other hand, if you’re interested in learning more about the ROI of pricing software, click below to read more now;
About the Author
Doug Fuehne has over two decades of experience consulting with manufacturers, distributors, and retailers on pricing and supply chain strategy, including over a decade working in pricing software. Doug leads Pricefx’s Impact team, helping customers understand how they can drive value in their business with pricing software across their entire lifecycle. Before Pricefx, Doug led AWS’ Global Supply Chain practice, led Amazon Business’ Customer Success and implementation teams, led presales and professional services at a competitor to Pricefx, and built ecommerce businesses at Deloitte and Enron. Doug enjoys playing guitar, coaching youth sports, hiking the Pacific Northwest and traveling.