4 Common Subscription-Based Pricing Models and their Benefits

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Subscription-based pricing is nothing new. Subscriptions have existed since the 1600s when newspapers and other periodicals began to be published. However, with the rise of technology and Software as a Service (SaaS), subscriptions have become ever more popular, since they offer advantages both for customers (predictable expense and freedom of choice) and sellers (stable recurring revenue and scalability).

Not long ago, in our 2021 benchmark report for revenue leaders, 75% of the companies surveyed said that subscriptions represented most of their revenue stream. Why are subscriptions so effective? One principal reason is that acquiring new clients costs between 5 to 10 times more than simply selling to your existing customers. Moreover, those who already buy from you will spend up to 67% more than new arrivals.

What is Subscription-Based Pricing?

A subscription is a pricing framework that allows customers to receive services or purchase products for a specific amount of time on a recurring basis at a set price point — often in monthly or annual installments.

A broad range of businesses, from SaaS to mobile applications to lifestyle brands, have adopted a subscription pricing model. You might recognize some big names, such as Microsoft Dynamics 365, Slack, and Google Workspace.

4 Principal Subscription Pricing Models

While there are many variations, most subscriptions that are popular among B2B and B2C companies fall into one of 4 principal categories, each with its niche. To draw in the highest revenues, it is essential that you choose the model that best fits your product or service and your business structure.

(1) Fixed or Flat-Rate Pricing

Customers receive a complete product or service for one price in this model. It’s a simple, all-access pass that renews either monthly or annually. A fixed-price model is a good fit for those who offer a product with limited focus – an application that solves a common problem, for example. This sort of product is much easier to sell at a fixed price, especially when dealing with individual buyers. What is more, marketing the product is simple and straightforward.

On the other hand, this pricing model has a narrower range of ideal customers. Smaller businesses may not be able to afford the flat rate, while enterprise-level clients might go elsewhere looking for more extended functionality. And on the seller side, those with more complex applications will find the fixed-price model inefficient and difficult to scale, making it difficult to continue the development of more features to meet the needs of a broadening customer base.

(2) Tiered Pricing

Another pricing model that provides more flexibility than the fixed-rate model is the tiered model. This provides customers with a series of options with increasing feature sets, allowing them to choose the option that best suits their functional requirements and budget. It’s popular among SaaS providers, e-commerce companies, streaming services, apps, and mobile game developers.

Tiered options scale well because they give buyers multiple options while providing upselling opportunities for sellers. Market reach is greater, serving low-end and high-end customers equally well. Customer lifetime value is extended because customers will often opt to upgrade to a higher tier as their requirements change rather than move to a different product.

Businesses that adopt the tiered approach must ensure there is a clear distinction between package options, providing sufficient value at each level to justify the increased price.

(3) Per-user Pricing

A simple and scalable approach, per-user pricing gives both buyer and seller a predictable pricing structure. As the company grows, so does its need for users – and therefore your revenue stream increases along with it. Thus, revenue forecasting is simple. This is another model often used by SaaS companies.

However, there are downsides. Shared login credentials are a common shortcut to reduce paid user count. And the number of users doesn’t always correlate to the value your product provides. Smaller companies with low user counts might not pay enough for the value they receive, and large enterprises might find their high user counts to be cost-prohibitive. The value should be based on increased sales, user adoption rate, and customer satisfaction levels.

(4) Usage-based model

This approach to subscription pricing charges the customer based on their usage or consumption of a product or service. It’s also known as “pay-as-you-go”. Many SaaS companies shy away from this model because there are fewer opportunities for increasing revenue beyond acquiring more customers. However, it is particularly suited for large utilities, such as telecommunication providers.

Usage-based pricing is considered to be the “fairest” by consumers. What they use they are charged for, and vice versa. However, sellers find themselves at a disadvantage, because pricing isn’t tailored to business size. Upselling is difficult, if not impossible, which equates to more lost revenue opportunities. Forecasting future sales is especially challenging since product consumption can vary widely because of many factors.

Choose the Right Subscription Model for Your Product or Service

These 4 different approaches to customer subscriptions each have their place, depending on your product configuration and business goals. Choosing the model that brings you the greatest success should be done with great care.

In our next article, we’ll be covering 4 important questions that you’ll need to answer before deciding on a subscription pricing approach, and those questions will help you see clearly which one is the right fit.

You’ll also want to consider subscription management software that can eliminate a lot of the manual work necessary to manage subscribers and maximize upsell opportunities. DealHub’s solution can simplify your operations and drive higher revenues. Contact us today to learn more and find out how to put it to work in your company.

 

By DealHub | dealhub.io

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