"By switching to a usage-based pricing model, you can more accurately and fairly charge customers for the value they receive from your product or service."
It's no secret that subscription pricing has been a popular way for businesses to sell their products or services. But as more and more customers are ditching their subscriptions and choosing to pay per usage, the model is beginning to lose its appeal. Here's why your business should be making the switch from subscription pricing to usage-based:
The Evolution of Pricing Models
As businesses have evolved, so too has their approach to pricing:
From time-based to value-based. In the early days of monetization, most businesses charged by the hour. Think lawyers or plumbers. When some companies began offering a more robust service, they started charging a fixed rate for that service regardless of how long it took them to complete it. Think bookkeeping services or consultancy firms.
From cost-plus to value-based. As services became more competitive and commoditized, companies realized they had to charge differently if they wanted to stay competitive and profitable (after all, who wants to pay the same price for a mediocre service as an exceptional one?). Some companies switched their pricing model from a cost-plus approach (adding on a set percentage markup), which is how many traditional retailers still price their goods today, to value-based pricing, wherein you assess your customer's needs and set your price based on how much value you can provide them. Value can be defined in many ways—from measurable benefits like increased sales or return on investment to softer measures like improved relationships with customers or reputation in the marketplace—but it usually comes down to what your customer cares about most at that particular moment in time.
From value-based to usage-based. Value used as a driver for price point works well when you're selling something stable and predictable—say, makeup brushes or furniture—but when you're selling technology such as software or apps where the underlying product itself is constantly evolving and improving over time with new features being added regularly, then it becomes less straightforward for both you and your customers because what's valuable today may not be valuable tomorrow once that technology has advanced beyond its intended use case or becomes obsolete altogether due to technological innovation elsewhere in the market. And thus, we saw the rise of usage-based pricing models whereby customers pay only for what they use when they use it instead of paying an all-access pass fee upfront.
Why Do Businesses Use Subscription Pricing Models?
The biggest reason businesses use subscription pricing models is also the simplest: they know what they're going to make. It's a predictable model with few fluctuations, making it easy for businesses to budget and plan. Knowing how much they'll make each month is reassuring for businesses with fixed costs. And for those with variable costs? A monthly amount is more straightforward to plan around than an amount that fluctuates depending on usage.
Subscription pricing can also be less expensive for customers than a metered payment structure. Customers don't need to worry about being charged extra every time they use a service or changing their rates as their usage changes. Instead, it's all laid out for them; a bill arrives in the mail (or inbox) each month and explains exactly what was purchased and how much it cost.
It's also an easy model to implement, especially if you already have a customer base paying you monthly fees. You keep charging them the same way you always have, but tell them that now you've "bundled" their services into one big package instead of splitting it up into several smaller ones—and voilà! You're making more money without any extra effort on either your part or your customers'.
Usage-Based Pricing Models: The Future
The future of commerce is usage-based pricing, and the sooner you adopt this model, the more profitable your company will be. The world has seen an increase in on-demand services like AWS, Mailgun, Uber, and Postmates. These apps are built on usage-based models where consumers only pay for their use. This pricing model is becoming increasingly popular with consumers and businesses alike.
Adopting this model now allows you to grow with the changing times instead of being left behind by companies that have already adopted it. Many companies have already switched to usage-based pricing models (UBP), including New Relic, Cypress, etc., and are doing exceedingly well with the new consumption-based pricing strategy.
Don’t think about how many licenses or subscriptions your business can sell—think about how many people use your product multiple times per day. The best way to achieve that? Usage-based pricing!
Why Your Business Should Be Making The Switch From Subscription Pricing To Usage-Based
Usage-based pricing is a price model that charges customers based on how much they use your product or service versus billing them for a flat rate. You can also offer usage-based pricing in addition to subscription plans or tiers – perfect for customers who need flexibility in how they pay.
This dynamic pricing strategy offers many benefits to both you and your customers:
- It gives your customers more options
- It gives your customers a way to pay for what they use, not how much they use
- It's fairer to your customers
- It provides a better customer experience
Your customers will be more loyal. Customers are happier when they pay only for what they use because it makes them feel like they have more control over the cost of their services. This helps reduce customer churn and increases customer lifetime value (CLV).
You get more accurate data on how much each customer uses your service or product, which helps with optimizing resource allocation across the company. This is great for all departments but especially important for accounting, sales, and marketing teams.
You can avoid being commoditized in the marketplace because competitors can't copy your usage-based pricing model without knowing how much your customers use your products and services.
You will attract more customers who want to pay as little as possible yet still get a high level of service because they no longer have to worry about spending too much for unused services or not paying enough for those whose needs require more than an average level of consumption. It also attracts high-level users who want a higher level of service from other providers but don't want to pay too much money upfront before seeing any return on their investment: these types often look at subscription plans as “taking a gamble” rather than an investment in themselves.-You'll increase market share by offering lower prices on smaller usage tiers while keeping higher prices at larger tiers; this means that if customers do decide to switch providers later down the line (which happens frequently), then there's less risk involved because they're only switching away from one component instead of all components together.
All in all, there are many reasons to consider making the switch from subscription pricing to usage-based. By offering your customers more flexibility, you're showing that you trust them and the work they do. That's what we call a win-win!