Today, Redwood announced a new pricing model for its RPA software in which users pay only for units of work completed, and on a cost basis equivalent to efficient human work on the same task. As a result, if a Redwood robot sends an email, or retrieves specific data, or performs reconciliation work, the organization is charged on completion for specific amounts relevant to the parallel human cost of execution in a ‘perfect work efficiency’ environment.

This is a fundamental change from the prevalent model in the industry of paying for licenses for RPA software and estimating how many licenses will be necessary to perform specific tasks. While other pricing models exist – ranging from paying for the process rather than the robot, to buying robots outright as owned software properties – this is the first time that pricing is available both on completion and on a granular, task-centric basis. In essence, Redwood is enabling organizations implementing RPA to pay on a piecework basis, and only after the work is performed.

The new pricing model will mark the second major transition in the company’s client contracting medium in the last five years. Historically, Redwood sold its software on a perpetual licensing basis, which changed over time to a more traditional annual licensed offering (although some clients are still on perpetual licenses). Redwood will need to manage a transition period in which clients can switch to the utility pricing model on the anniversary of their licenses, which may introduce some unevenness to the company’s financial performance during 2018-2019.

There are more implications for Redwood, and for the RPA industry, as a result of deploying this new pricing model:

The new model changes the revenue & profit mix for Redwood…

The company expects to see some flattening of topline revenue as a result of this change, but improved margins, with an overall increase in transaction volume. Redwood believes that by reducing barriers to entry in RPA through enabling payment by the task, and after the fact, more prospective clients will adopt the Redwood solution. This is a logical evolution of the Redwood business model in that it promotes Redwood’s library of prebuilt robots to a larger prospective audience and smooths the on-ramp to Redwood adoption for more organizations.

…and demands that Redwood’s pricing model is appealing

The company has researched levels of productivity and cost in both Western and offshore economies and modeled a function that prices Redwood tasks at roughly 20 Euro cents per moderate-duty task (retrieving a report, reconciling data, sending an email, etc.) based on a perfectly-efficient Western worker performing 156 such tasks per hour for a fully-loaded employment cost of €50k. (A low-cost economy worker performs half as many such tasks per hour for half the cost in Redwood’s model.)

In order for Redwood to unlock the full potential value of this new pricing model, these assumptions and metrics need to be appealing to buyers.

Redwood creates more pressure on the traditional licensing model

This is still a relatively young industry in terms of establishing pricing and contracting norms, so disruptive acts (and Redwood’s new pricing model will certainly be disruptive at some level) creates pressure on ‘safer’, more traditional modes of client engagement. Redwood holds a degree of advantage in that the company has an extensive library of ~35,000 prebuilt robots that it can price and sell on this model, as opposed to RPA providers that provide software that is customized and deployed within the client organization. It will be more difficult for traditional RPA providers to cost-effectively match the Redwood model in the market.

Reporting & invoicing challenges are addressed through Redwood Robotics itself

Transitioning from a license-based contracting structure to a high-resolution, granular use-based contracting structure would normally be a steep challenge for a software organization accustomed to annual licensing, given the degree of reporting and invoicing complexity involved. Fortunately for Redwood, these processes are being handled in their entirety by additional automations, deployed to the client organization at no charge, which monitor and document Redwood automation usage and generate regularly-scheduled invoices for the client.

Summary

Redwood has put forth a compelling new framework for equating robotic and human labor costs, and for enabling organizations to pay only for work done rather than paying for the abstraction layer inherent to a robot license.

In effect, Redwood offers piecework rates in a market predominated by ‘salaried-FTE’ model robots. While this is unlikely to become the norm for RPA pricing, it provides Redwood with a new, and potentially sustainable, source of competitive differentiation.