Indeed, in our 2021 benchmark report for revenue leaders, 75% of surveyed companies reported earning most of their revenue from subscriptions. One of the main reasons for this is that securing new customers can cost 5 to 10 times more than selling to existing customers. And existing customers spend, on average, 67% more than new customers.
However, every company handles subscriptions a bit differently. In this article, we take a look at four subscription-based pricing models, including considerations to help you determine whether you’re using the best pricing model for your own product or service.
What is subscription-based pricing?
Subscription-based pricing is a payment framework that enables customers or businesses to purchase and subscribe to a vendor’s products or services over a specific period of time, and for an agreed amount price. Usually, these customers commit to subscription services on a monthly or annual basis.
Many types of businesses, from SaaS startups to app developers to lifestyle brands, now operate on a subscription-based model. This includes nearly all of today’s most popular enterprise software, such as Salesforce, Slack, and Google Workspace.
4 types of subscription pricing models
There are four main types of pricing models that are popular among B2B and B2C companies, each with its own set of advantages and disadvantages. To maximize recurring revenue, it’s crucial to optimize your subscription pricing model to fit the structure and framework of your business, and the goods or services you sell.
Although there are also other types of subscription-based pricing models, we will specifically cover the most common ones being used today.
1. Fixed or flat-rate pricing
This model offers subscribers a single price for all the products or services they’re purchasing. Customers typically get access to all features and are charged monthly or annually. A fixed or flat-rate pricing model can be a good fit for companies that offer a product with limited capabilities or features. Companies may find themselves selling to a limited number of customers. Smaller businesses may not be able to afford the flat-rate price and enterprise organizations may find the capabilities and features available do not meet their needs.
Usually, these products offer a clear solution to common pain, making them easier to sell, especially to a single buyer persona. And since there is a fixed rate, pricing is simple and easy to communicate to customers.
But a fixed pricing model doesn’t work for every company. It may be appropriate for companies that offer a simple and predictable product, but B2B SaaS companies that have feature-rich software will find this type of pricing inefficient. It’s difficult to set a fixed price on SaaS tools due to their complexity of offerings, and the diverse needs of each customer.
2. Tiered pricing
A tiered pricing model provides customers with different package options and features and gives them the flexibility to choose which is best for them. This pricing model is common among SaaS companies that offer software with different levels of service and features. It’s also a popular pricing model choice for e-commerce companies, such as streaming services, apps, and mobile games. This is because it provides both benefits to buyers and sellers. The buyer is able to choose from different pricing packages that are available and sales teams can offer buyers additional package options that increase up-sell opportunities.
Tiered pricing models are commonly used because they are scalable, as upsell opportunities become easily achievable. This pricing model has the ability to reach a larger target market because it provides different solutions and prices for customers to pick from, based on their unique needs and preferences. Lastly, it helps maximize customer lifetime value by enabling customers to upgrade their subscription plan as needed.
When creating a tiered pricing model, businesses should ensure each package has a clear distinction between features or levels of access. This enables customers to fully understand the differences in pricing and value of the product or service.
3. Per-user pricing
Many businesses choose to go with a per-user model because it’s simple and easy to scale as their customer base grows. Since it’s based on a number of users, as a company grows, so does its user count – which means they need to upgrade their plan.
For the seller, a per-user approach simplifies revenue forecasting. And owing to its ease of scaling, this model is often used by SaaS companies
This pricing model does come with some disadvantages, though. Employees frequently share their login information and the end result is lost revenue. And per-user pricing doesn’t necessarily reflect the value of your services or products. Just because the price of 30 users costs a certain amount, does not mean the inherent value of the product should be based on user count. The value should be based on additional sales, user adoption rate, and customer satisfaction levels.
4. Usage-based model
Usage-based pricing models charge customers based on their usage of a particular product or service – it’s sometimes referred to as a “pay-as-you-go” model. It’s less popular among SaaS companies because it depends solely on usage, which sets a tight ceiling on potential revenue. Usage-based pricing models are primarily used by IT and telecommunication companies.
Usage-based pricing models are considered the most “fair” to customers because they are charged in direct proportion to their usage. But it comes with a number of disadvantages for the seller. Usage-based pricing models are difficult to scale because companies cannot charge customers different prices in relation to the size of their business. Smaller businesses may be paying more and enterprise-sized organizations may be paying less – based on their usage amount – and that leads to lost revenue opportunities. Additionally, revenue prediction and forecasting are more difficult because it can be hard to predict a customer’s future usage.
What to consider when choosing a subscription pricing model
To ensure you’ve chosen the right pricing model for your business model, you may want to ask yourself a few questions.
1. Who are your current customers
Understanding your customers and their needs will help you determine the right subscription pricing model. Do some customers choose different features and capabilities, or have higher usage rates than others? Are your customers mostly small-business owners? Such customers may have a harder time paying a total amount up front and thus prefer to spread out their payments over time.
When your customers are making purchasing decisions, do they prefer simplicity, or do they like the ability to choose different features or customizations? These types of questions will help you figure out what best suits your customers and may attract them to your subscription.
2. Does it suit the product you provide?
How complex is your product? Does it have multiple features and capabilities? If so, a tiered pricing model may be the best fit and enable you to charge for different levels of access. When thinking about your product roadmap and revenue model, think about what will help you scale revenue more effectively in the long term.
If your revenue model isn’t aligned with your product growth, then you’ll likely be letting untapped revenue slip through your fingers. You want to choose a pricing model that can grow alongside your product and expand your relationship with each customer – whether through additional features, number of users, or usage. A subscription-based pricing model will increase your recurring revenue, and ultimately, customer lifetime value.
3. What pricing model does your competition use?
Take a look at established and successful competitors. It’s important to note what works and what doesn’t. By studying the competition, you may also be able to determine where they are leaving gaps in the market – and revenue on the table.
For example: if the competition is geared toward serving large businesses, consider offering a tiered pricing option that will better serve smaller companies that may not have the budget or need as many features. By doing so, you can capture that recurring revenue your competition is blindly leaving on the table.
4. Is it in alignment with your operating costs?
With subscription-based pricing, you need to keep in mind operating, fixed, and variable costs. Make sure your subscription revenue covers these costs so you can define sales margins and price your products and services accordingly.
By gaining a better understanding of how you need to price subscriptions in order to be profitable, you can choose a pricing model that optimizes subscription revenue while providing a plan that works well for your customers.
What’s next? Optimize subscription-based pricing models with subscription management software…
It would be a costly mistake to overlook subscription revenue in today’s subscription-based economy. Choosing the right subscription-based pricing model will enable you to increase recurring revenue, forecast revenue growth accurately, and ensure healthy profit margins.
But managing subscriptions is easier said than done. Although 75% of companies earn most of their revenue from subscriptions, only 24% of them use subscription management software. To optimize your subscription model for success, it’s important to invest in subscription management software that can be used to maximize recurring revenue.
DealHub’s subscription management software allows you to automate the renewal process, identify and recommend up-sell and cross-sell opportunities, and easily generate subscription contracts. DealHub eliminates the need for laborious manual tasks that are often riddled with errors and negatively impact profit margins.
Subscription revenue is a key source of profit, and when properly managed, will enable you to grow recurring revenue and achieve sustainable long-term growth.