Usage or Subscription Pricing?
Being heavily embedded in the payments industry, we have noticed an uptick in usage pricing. Certain SAAS (software as a service) businesses have switched to this pricing model, specifically during their infancy. This new model of charging for usage versus software is an attempt to provide customers with more value for the cost. When the subscription model hit, the market it nearly swept and invaded all industries. Consumers preferred a reward system where you can pay a small amount on a monthly basis for being a faithful customer. The cons to the popularity of this model is that each individual consumer has an estimated amount of at least 20 ongoing subscription services per year. This means that consumers have almost unknowingly inherited ongoing bills that are beginning to add up. The ripple effect to this is now you have customers analyzing which subscriptions they need and which ones they don't.
Usage models are becoming more popular, simply because the consumer finds more value in this way of paying. Users can pay for what they use as opposed to paying the same subscription fee every month, regardless of how much they use the service. When surfing the endless options on the internet, service providers that charge for usage vs. subscriptions will almost always win. Customer retention is much higher because customers have more flexibility than in a subscription-based model. With a subscription model, if a customer experiences unforeseen changes that causes them uncertainty on how often they would use the service, they typically just cancel. Even if the customer has the necessity to use the service from time-to-time, they will still stay away from the service out of fear of being charged for inactivity.
The most common con for usage-based models is the inconsistent billing amount. This con goes both ways between the merchant and the customer. In cases where the customers use the service one more month than the other month, the higher charges might catch them off guard. This fluctuation of pricing might cause the customer to view the charges as more expensive since in billing cycles might be more expensive than previous months. For the merchant, revenue will be highly inconsistent for that very reason. Some months the merchants might experience a slow-down due to the market and they may not make the necessary revenue to cover operating costs. However, in other months they might profit more than anticipated, which can be great but only when the profit is higher.
We’ve seen some merchants use usage-based billing for retention purposes. They might have a subscription-based business and when a customer decides to cancel due to their declining needs, they will offer the customer pricing based on usage. For that reason, the customer may decide to stay with this new billing model. Usage-based billing really depends on the merchant and their customers. Depending on the type of services offered, usage-based billing may or may not work.
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