Subscription-based businesses evolve over time and with this evolution comes a need to have a greater level of control and flexibility over the types of plans they offer their subscribers and the prices attached to these plans. Businesses rarely ever succeed by taking a one-size-fits-all approach and it’s no different for a subscription business. Customers need to know that they are getting value, and the merchant needs to be able to price things effectively to show off this value. If a business handles things properly they are less churn and more satisfied customers.
Subscription businesses have a number of pricing models open to them. They could offer a fixed-price model, a seat-based or SaaS model, a usage-based model, or a one-time model. Each model is different and comes with its own strategic benefits.
With the fixed recurring model consumers are charged a set price for the product or service at the beginning of each billing cycle. Merchants can offer different plans, but they fix the price of the plan or each item in the plan. When people think of subscription models they think of fixed price subscriptions; including video streaming services, monthly magazine subscriptions, and the more recent box-of-the-month service.
Businesses like using this model for their subscription-based service because it gives them a predictable, continuous revenue stream. They know how much revenue they can expect to get during each billing cycle and this amount doesn’t fluctuate much. Subscribers enjoy it because there is a lower cost of entry. They will pay less on a monthly basis instead of paying the full purchase price right away to gain access. It’s similar to choosing leasing a car over purchasing a brand new one outright.
Seat-based subscription models are typically used in cloud-based, B2B software. Subscribers to the software pay for each “seat” license they need for the software. It’s similar in theory to the fixed model, as customers typically pay a fixed price per seat, but the price can be prorated if new users are added after the billing period starts. Sometimes a business will reduce the cost-per-seat in the event that a customer purchases a lot of seats. This model provides businesses with predictable costs that can scale as the size of the business scales.
You can see how these business models are different from a usage-based model, where a customer will be charged depending on how much they use the product or service that they subscribe to. This is seen most commonly in transaction-based businesses such as a cell phone provider. Cell phone customers will often pay according to how much they use their phones such as the amount of data, texts, and minutes they use. There are also video hosting services that will use this business model and charge subscribers based on how much storage or bandwidth they use up and how many ad clicks they generate. Billing for usage in a usage-based model will happen in arrears, after the end of the billing period when the usage can be calculated.
The main benefit of the usage-based model is that customers will pay depending on how much they use so they can see the value, meaning that there is less churn. This advantage isn’t there with models where a subscriber will need to guess how much they use and pay for it in advance. When a subscriber overestimates how much they use they end up being overcharged which drastically decreases satisfaction. With a subscription business this model can be used to track and identify any opportunities to upsell. This model will also respond well to changes in the market or competition. Usage-based models are mostly found with B2B businesses, although there is a wide variety of pricing models with B2B subscription businesses. They may offer tiered plans for example, with the tiers based on how much the customer expects to use. With these models the lower-priced tiers will have a recurring fixed price with a usage-based model for the higher end tiers. Businesses may choose to offer custom plans with negotiable prices where customers pay more or less depending on their usage levels. With higher usage levels comes a lower cost per unit, giving merchants the power to offer a volume discount of sorts.
Finally there is the one-time charge model. In this case a subscription-based service will offer a one-time charge model to give prospective customers the chance to try out the product or service before they purchase a subscription. One example would be customers purchasing just one box-of-the-month to see what is included and decide if they like it. If they are pleased with what they get they will choose to subscribe and receive more boxes (or the product/service on offer) on a regular basis. Offering customers the chance to try before they buy is the main benefit to this model. It also allows businesses to test the demand for a new product or service before creating a subscription model for it. Businesses can also make a one-time charge, such as the costs of setting up or offering equipment, can be included in any of the other models detailed above.
Choosing the Right Model
Different subscription businesses are better suited to different models. A business may need to give different models a try before finding the right one, and they may need to alter which one they use as the business evolves and develops. A business offering subscription-based services may begin with the fixed-price model, but then discover that including something based on usage or switching entirely to offering usage-based pricing is better for their customers and their business.
Or a business could choose to offer a usage-based model before deciding that it is too complicated. They will then switch to offering different fixed-price plans with their own different usage limits because this makes things easier for them and their customers.
No matter what model a merchant chooses to go with they need to be able to support it with their subscription billing solution.