Pure Storage makes a big deal of its subscription models of purchasing for storage hardware. It believes it can offer an advantage over the competition because, as a relatively new company, its hardware products are more easily upgradeable.
We caught up with Pure’s product manager for its Evergreen consumption purchasing models, Santiago Navonne, at the company’s Accelerate event in Las Vegas last week.
He told us about the type of customer that can take advantage of storage-as-a-service, why he thinks Pure Storage can offer what others can’t, why subscription purchasing makes sense for customers, and why – despite some short-term revenue dips – it does for the vendor too.
Context here is that in its year end results in February 2024, Pure saw an increase in subscription revenues of 24% (to $329m) while hardware product sales had declined 15% (to $461m).
Why would a customer go for a consumption model of storage procurement? Is there a particular type of customer it suits?
Santiago Navonne: When we think about our storage-as-a-service offering, it’s not a payment method alternative to buying an appliance. It’s a commitment to the customer that if they tell us the performance they want us to guarantee for the duration of the contract, we will handle estimates as well as upgrades to continuously deliver on that guarantee.
It is addressed to the type of customer that is familiar with a cloud operating model. I mean that they are familiar with the concept of consuming infrastructure as a service, with SLAs [service-level agreements] and guarantees and relying on a vendor to really figure it out instead of trying to figure it out themselves.
There’s one bank, for example, that grows a lot through mergers and acquisitions. So, it’s extremely unpredictable for them how much business and data they’re going to have in two years time. Planning for that was, in their view, a waste of resources, and they switched to a consumption model to address that.
If you look at competition, typically there is only an uptime guarantee. Some of them have a heavily caveated performance guarantee. We haven’t seen anybody else do anything like an energy efficiency guarantee or an unlimited buffer capacity guarantee.
What stops other vendors from offering the same guarantees?
Navonne: The reason periodic controller upgrades are easy for us is because the architecture was built from the ground up to allow for that. The amount of cost you incur as a vendor by doing a non-disruptive controller upgrade is significantly lower than if you have to rip that infrastructure and replace it with something different as the customer grows.
If I’m guaranteeing a non-disruptive growth path for a customer and there’s a step at which, if they grow beyond this number, I’m going to incur significant cost as a vendor, I have to either not offer that or bake it into the price. And that’s the choice that I think a lot of our competition is facing.
How do you convince customers that transferring deployment and maintenance of storage to an as-a-service vendor is worthwhile?
Navonne: We think that this is the most valuable way to consume storage, right? We definitely are a subscription-first company and we make sure that every customer is at the very least given the option to consume as a service, because we think that’s more cost-effective in general and more efficient.
But not everybody is extremely comfortable with the idea – we don’t force people to go as a service. We are perfectly happy with our traditional purchase model. It really varies customer-to-customer how mature they are in terms of the costs they account for.
Now, you can do the math up front and say, “OK, I need a 1PB array for my needs three years from now, so can you give me a subscription for that today?” But you’re not taking advantage of the fact that you shouldn’t size for three years from now in a subscription model, but rather consume as you grow.
In addition to shipping hardware to your datacentre, we will pay for your power bill. If you don’t take into account these additional factors that differentiate the service, you’re leaving value on the table.
How do you ensure you’re not just maintaining a buffer of capacity waiting in the wings when you would get money up front for it in a traditional purchasing arrangement?
Navonne: I want a customer to commit to as little capacity as possible upfront. The concept of an over commitment of capacity consumption is not compatible with the consumption model.
To the revenue question specifically, a typical subscription will result in less short-term revenue. You see this in our earnings – that the subscription model actually results in less short-term revenue.
Let’s say the data reduction rates we are getting are lower than we expected. The customer doesn’t pay extra if the data reduction rate is lower. We pay, effectively, by shipping them additional capacity.
Let’s say we replace their 4TB drives with 18TB drives. Well, those 4TB drives come back to us and because of the long-lasting characteristics of Direct Flash Modules, we get to erase those securely and reuse them for probably five to 10 years. We haven’t really incurred a significant cost by making that mistake.
Now, if you’re a customer, and you had to buy something and then throw it out and replace it with something else, that would have been an expensive mistake, but the cost of this mistake is significantly lower for us.
Do you give a guarantee to customers about pricing?
Navonne: What’s quite common in the industry is if you look at a support contract for an array, typically what you see is, “Well, your array’s old. We want you to move off it. We’re going to increase your support pricing unless you replace it with a new one.” For Pure Storage, our subscriptions have always been flat and fair, and we basically commit to the customer that their renewal price is fair and will be no higher than their original purchase price.
Also, we do not have fees associated with discontinuing a subscription, unlike what you may see in a cloud provider where you have this punitive egress fee. If you choose not to renew, we’ll do the decommissioning included as part of the subscription.
In a subscription world, we as a vendor have to work extremely hard to keep a customer. And the reason for that is that that customer, at the end of their subscription term, doesn’t have any sunk cost. They have ended their subscription and they could absolutely switch to a competitor if they choose.
We feel like we have to work just as hard as we always have to keep that customer convinced that they’re getting value out of this subscription and keep winning them over. I think that is one of the biggest benefits that customers get in the subscription world.
Pure may have the intention of being subscription-first, but if suddenly all your customers want to buy on subscription what would it mean for the company? Have you done the sums for that?
Navonne: Customers get more value out of an Evergreen One consumption model, so we encourage people to go the subscription route. We’re not too concerned about the scales tipping in that direction. We’re actually quite proud of that.
Our CFO constantly monitors it and is very comfortable with the process. It was maybe a year ago where we recorded extremely high sales for Evergreen One and he mentioned at the earnings call that, from a revenue perspective, this resulted in a headwind.
And that prompted a big change in mindset by a number of investors who started thinking about the value of a subscription business and thinking of Pure Storage as a subscription company rather than as a hardware company.