Subscription models have taken off in recent years in just about every industry. From corporate SaaS offerings to monthly clothing deliveries, companies across countless sectors have embraced the benefits of subscriptions as a reliable source of recurring revenue. But are they really the be-all and end-all model for increasing revenue potential and customer loyalty?
We wrote recently about Danny Crichton’s TechCrunch article unpacking what he calls the “subscription hell” that has taken over the digital media landscape. And Crichton isn’t alone. The 2017 Private SaaS Company Survey from KCBM Technology Group and forEntrepreneurs shows that, while buyers may initially be intrigued by subscription offerings, they’re not likely to stick around long, with the median annual churn rate at 11% and rates reaching over 20% in many cases.
So What’s the Problem with Simple Subscriptions?
Crichton’s main gripe is that these models tend to offer inflexible packages that don’t take consumers’ true needs (or budgets) into consideration.
“We not only get paywalls where none existed before, but the prices of those subscriptions are always vastly more expensive than consumers ever wanted. It’s not just Bloomberg and media — it’s software too. I used to write everything in Ulysses, a syncing Markdown editor for OS X and iOS. I paid $70 to buy the apps, but then the company switched to a $40 a year annual subscription, and as the dozens of angry reviews and comments illustrate, that price is vastly out of proportion from the cost of providing the software.
Subscriptions are always positioned as all-or-nothing, with limited metering or tiering, to try to force the conversion. To my mind though, the question is not how to get 1% of readers to pay an exorbitant price, but how to get say 20% of your readers to pay you a cheaper price. It’s not about exclusion, but about participation.”
So while a simple subscription model may be appealing in terms of recurring revenue, its value doesn’t necessarily match its price tag in buyers’ eyes.
And speaking of recurring revenue, simple subscriptions tend to leave a lot on the table in terms of earnings potential. While the predictability is certainly beneficial, companies that limit their focus to these basic packages miss opportunities for growth through add-on or expansion offerings.
The Solution? Go Beyond Simple Subscriptions with Consumption-Based Billing
Let’s be very clear: we are not advocating for taking subscriptions off the table, but we do think they can be improved with consumption-based billing, a hybrid of simple subscriptions and pay-as-you-go offerings. On their own, neither model can fully meet the needs of companies or their customers, but combined, they open the door to valuable opportunities for both sides.
The consumption-based model enables businesses to track and analyze product or service usage data and update offerings in real time to maximize value and stay on top of the market. It also helps drive revenue by pairing a predictable, simple subscription with add-on revenue from additional products, services and features.
For customers, a consumption-based billing model eliminates the frustrations that come with simple subscriptions. It provides total transparency around what they’re paying for versus what they’re getting, allows them to pick and choose services and products based on their actual needs and lowers the barrier of entry for untested products, allowing them to try something new without making risky long-term commitments.
What Does Consumption-Based Billing Look Like?
More and more high-tech businesses are moving to a consumption-based billing system today, and it’s come to be known as the billing model of the future.
But what does it look like, exactly?
While the concept is fairly straightforward, consumption-based billing can take on a variety of forms. You’ve seen it on your cell phone bill for years — you pay a base subscription fee each month and add on features like extra data, cloud storage or insurance — but consumption-based models can be set up in countless ways, from tiered and tapered pricing to time-based, stored-value and multidimensional models.
This flexibility is a key advantage for the customer-business relationship as it allows vendors to offer a wide range of packages based on individual customers’ expectations, budgets and needs. But the flipside is that the underlying billing systems that support consumption-based models are more complicated than what many businesses have in place for simple subscriptions or one-time offerings.
Because consumption-based billing is more individualized than traditional models, it requires an intelligent billing platform that can process usage data at scale according to the business’ unique packaging, pricing and rating models and report that data effectively to produce accurate invoices for each individual customer.
Is Consumption-Based Billing for You?
For businesses looking to increase revenue and enhance customer relationships through transparency and flexibility, consumption-based billing can be a critical competitive advantage. For more information about how we can help your organization make the shift to a more powerful billing model, contact us at firstname.lastname@example.org today.
Michael Beamer is a 24-year technology and business leader with unique experience helping companies maximize the business impact of technology. In his current role as president of goTransverse, he is dedicated to providing clients a flexible billing touch-point that creates long-lasting customer relationships and increasing customer lifetime value.