When businesses want to maximize the revenue generated from each customer and forecast future revenue, they need to prioritize monthly recurring revenue (MRR) and annual recurring revenue (ARR) over one-time transactions. To incentivize customers and build loyalty, a company can offer subscription-based pricing—payment plans that require customers to make regular payments for the goods or services they use.
What is Subscription-Based Pricing?
Subscription-based pricing is a business model in which customers pay a recurring fee, typically monthly or annually, to access a product or service. Instead of making a one-time purchase, customers gain continuous value over time as they use the product or service for as long as their subscription remains active.
This pricing model is widely used across both business-to-business (B2B) and business-to-consumer (B2C) markets.
- B2B: Many companies use subscription-based pricing to deliver software-as-a-service (SaaS), hardware, or professional services to other businesses. For example, a SaaS provider might charge companies a monthly fee for access to its software platform and ongoing support.
- B2C: Consumers also benefit from subscription models, which make products and services more affordable and accessible. For instance, monthly subscription boxes or streaming platforms allow consumers to enjoy curated or premium content without paying a large upfront cost.
For businesses, subscription-based pricing provides predictable, recurring revenue and deeper customer relationships. It enables more accurate revenue forecasting, enhances customer retention, and creates opportunities for upselling and cross-selling.
For customers, the model offers flexibility, affordability, and convenience with access to continuous updates, new features, and ongoing value.
Synonyms
- Subscription Pricing
- Subscription-Based Pricing Model
- Subscription Pricing Strategy
- Subscription Pricing Plans
Advantages of Using Subscription Pricing
Subscription pricing is one of the most common pricing models because it is often the most advantageous for both sellers and buyers.
Predictable Revenue Generation
Businesses can anticipate revenue generation from subscription-based pricing since customers pay a recurring fee. This predictability allows businesses to make better plans for the future and adjust their strategies accordingly.
From an investment standpoint, predictable future revenue increases a company’s value and makes it more attractive to potential investors.
Better Revenue Forecasting
Subscription-based pricing enables businesses to estimate the revenue they can reasonably expect from each customer, making revenue forecasting much easier and more accurate.
More Revenue Per User
Subscription-based pricing can help businesses increase their average revenue per user (ARPU) and overall profit margins. By replacing one-time purchases with recurring payment plans, companies can generate continuous income from each customer over time rather than relying on single transactions.
Additionally, subscription models make it easy to offer tiered pricing, upgrades, and discounts for long-term commitments—all of which encourage customers to stay longer and spend more, helping maximize revenue throughout the customer lifecycle.
Improved Customer Retention
Customer retention is considerably less expensive than customer acquisition, and improving retention by 5% can drive profits up more than 5%.
Businesses can use the subscription model to nurture relationships with existing customers, building loyalty and improving customer retention. And customers love the transparency of subscription pricing (i.e., no hidden costs or surprises) and the convenience of regular payments, further improving customer relationships.
Improved Customer Experience
Subscription pricing improves the customer experience in numerous ways:
- Fixed monthly or annual costs make accounting and budgeting easier.
- The transparency and convenience of subscription models improve customer satisfaction.
- The ability to cancel anytime creates a sense of flexibility and control for customers.
By offering ongoing value, businesses can attract new customers and retain existing ones, leading to higher sales and revenue growth.
Increased Brand Awareness
Subscription-based pricing gives companies the opportunity to market their products and services to existing customers regularly. And when customers are regularly exposed to a brand, they become more familiar with the products, increasing brand awareness.
Creating marketing material for a product or service with easy-to-understand pricing is also considerably easier, helping companies convey their message more concisely and increase conversions.
Shorter Sales Cycle
Lower upfront costs, the convenience of recurring payments, and pricing transparency shorten the sales cycle.
Businesses can close deals quicker and start collecting revenue by reducing the time needed for internal negotiations and touchpoints with sales reps. And customers can see the value versus cost more easily, resulting in quicker decisions.
Opportunity To Upsell Customers
Businesses can use subscription-based pricing models to upsell their customers on more expensive products or services when the customer’s needs change over time. This allows businesses to generate even more revenue from each customer without having to acquire new ones.
Better Experience for Sellers
Retaining top sales talent is just as crucial as retaining customers. The selling experience is a key factor in employee satisfaction, motivation, and retention.
Subscription-based pricing makes it easier for sales reps to make clear and compelling offers to potential customers, leading to more successful deals. And if sales reps can close new deals faster and retain existing ones better, they are more likely to stay with the company and contribute to its success.
Challenges of Subscription-Based Pricing and How to Overcome Them
While subscription-based pricing offers numerous benefits, it also presents unique challenges that businesses must address to ensure long-term success.
Common Challenges:
- Customer churn: Customers may cancel their subscriptions due to a variety of reasons, such as dissatisfaction with the product or service, increased costs, or changing needs.
- Pricing complexity: Determining the optimal pricing for the base plan and add-on modules can be challenging, especially when considering factors like customer value, market competition, and cost structure.
- Limited upselling opportunities: Once a customer has subscribed to a plan, there may be fewer opportunities for upselling or cross-selling additional products or services.
Overcoming the Challenges:
- Focus on customer satisfaction: Delivering exceptional value and addressing customer needs is essential for reducing churn and fostering loyalty.
- Offer flexible subscription options: Allow customers to easily upgrade or downgrade their subscriptions based on their changing requirements.
- Implement effective customer retention strategies: Utilize tools like customer relationship management (CRM) software to track customer behavior and proactively address issues.
- Diversify revenue streams: Consider complementary products or services that can be sold to subscribers to supplement subscription revenue.
- Optimize pricing: Continuously monitor market trends and customer preferences to ensure that pricing is competitive and aligned with perceived value.
- Provide excellent customer support: Offer timely and helpful support to address customer inquiries and concerns.
- Use CPQ and Subscription Management software: Configure Price Quote (CPQ) software that integrates with subscription management automates the process of configuring products, calculating prices, and generating subscription quotes based on customer-specific requirements. By providing a seamless subscription management experience, businesses can improve customer retention and reduce churn.
By addressing these challenges, businesses can maximize the benefits of subscription-based pricing and build a sustainable revenue model.
Types of Subscription-Based Pricing Models
There are five types of subscription pricing:
Flat-Rate Pricing
The flat-rate pricing model is the most straightforward subscription pricing strategy. It’s a fixed subscription fee for access to a product or service for a month, year, or other period of time.
Flat-rate pricing works best for products and services that customers use regularly and don’t necessarily need more than what they pay for.
Examples of flat-rate pricing models that work include:
- Software Subscriptions: A software subscription gives users access to the software and its features regularly.
- Gym Memberships: A membership fee that allows users to use the gym facilities for a set period of time.
- Streaming Services: Monthly or yearly subscriptions that give users access to streaming services, such as Spotify Premium.
Flat-rate pricing works best with simple products that have straightforward use cases. If the product or service is more complex, then usage-based, tiered, and per-use/per-unit pricing models might be better options.
Usage-Based Pricing
The usage-based pricing model charges customers based on how much or little they use a product or service.
The usage-based model is best for products and services that require more customization, such as software-as-a-service (SaaS), cloud storage, and online services.
Examples of usage-based pricing models include:
- Cloud Storage Subscriptions: Cloud storage subscriptions charge customers based on their storage usage. They can also pay more for added storage.
- Internet Plans: Internet and phone data subscription plans are sometimes charged based on the amount of data used.
- Utilities: Businesses pay for their utilities depending on how much energy they use each month.
Usage-based pricing works best for businesses with a wide range of customers with different needs.
It also helps companies optimize revenue by charging customers based on their actual usage rather than a flat fee. Without a consumption-based pricing model, certain types of businesses would end up giving too much of their service away for free.
Tiered Pricing
Businesses that use a tiered pricing model segment customers into different categories (i.e., pricing tiers) based on their needs.
The tiered pricing model is well-suited for products and services that have different levels of features, such as software subscriptions or streaming services.
Examples of tiered pricing models include:
- Streaming Services: Streaming companies such as Netflix offer customers access to content at different price points (e.g., ad-supported, standard, and premium).
- Complex Software Plans: Software companies offer different levels of features at varying price points. For example, Calendly offers a basic plan and an enterprise plan with more advanced features. It also offers different individual features and integrations at different price points.
- Customizable Tools: CRM software and other forms of robust tools typically offer customers different tiers of features.
Tiered pricing ensures that businesses can deliver the optimal amount of value to each customer—not too much or too little. It also helps companies optimize their revenue by charging customers more for higher-level features.
When businesses use the tiered pricing option, sales reps need to take a consultative approach to the sales process and pair prospects with the best possible solution for their business size, specific needs, and overall budget.
Per-User/Per-Unit Pricing
The per-user/per-unit pricing model charges a customer based on the number of users or units they use. It is similar to usage-based pricing in that customers are charged based on their usage. But it differs in that the pricing is fixed and based on the number of users or units, rather than their individual product usage.
This pricing model works best for products and services that involve user accounts or individual units, such as enterprise software and managed IT services.
Examples of per-user/per-unit pricing models include:
- Software Licensing: Software licensing is typically charged based on the number of users accessing the product or service. Examples include Microsoft Office 365 and Adobe Creative Cloud.
- Managed IT Services: Managed services companies typically charge customers based on the number of users or devices needing support.
The per-user/per-unit pricing model gives businesses a greater level of control over their pricing and helps ensure that they are not giving away too much for free. It also makes it easier to scale their service, as businesses can add users or devices as needed.
Per-Added-Module Pricing
Per-added-module pricing is a subscription model where the base cost covers a core set of features or services. Additional modules, or features, can be added at an incremental cost. This pricing structure allows businesses to offer flexibility and customization to their customers while generating additional revenue from premium features.
Examples of per-added-module pricing models include:
- Software-as-a-Service (SaaS) platforms: Many SaaS companies employ this model. A basic subscription might include essential features, while advanced functionality like integrations, analytics, or support can be added as separate modules.
- Project management tools: A core plan could cover basic project tracking and task management. Premium modules might include time tracking, resource allocation, or advanced reporting.
- E-commerce platforms: A base plan could include product listings, shopping cart functionality, and basic payment processing. Additional modules might offer inventory management, marketing tools, or advanced analytics.
- Cloud storage services: A basic plan might offer limited storage space. Additional storage can be purchased in increments, often at a discounted rate compared to the base plan.
Per-added-module pricing has many benefits. It allows customers to choose the exact features they need, avoiding paying for unnecessary functionality. It helps businesses generate additional revenue by offering premium modules to customers who require them and introducing new features without affecting base plan pricing.
How to Determine Which Subscription-Based Pricing Model to Use
Choosing which subscription-based pricing model to use depends on the type of product or service being offered, the target customer base, and the overall business strategy.
Fixed pricing is best for businesses that offer products or services with a limited number of features, where the customer value is relatively consistent.
Usage-based pricing works best for businesses that have a wide range of customers with different needs and variable usage levels.
Tiered or per-user/per-unit pricing models work best for products or services with multiple levels of features that can be segmented into different tiers. And if it needs to be scaled up or down based on company size, per-user pricing will work best.
Ultimately, businesses should choose the pricing model that aligns with their customer’s needs and provides the best value. A good rule of thumb is to start with a fixed model and then adjust as needed.
Software to Manage Subscription-Based Pricing
Several different software solutions can help businesses manage their subscription-based pricing models.
Customer Relationship Management (CRM)
Customer relationship management tools like Salesforce, Pipedrive, and Zoho CRM can help businesses manage their customer relationships and keep track of subscription pricing.
Using CRM, salespeople can move their prospects through the pipeline and track movement. At the same time, marketing teams can create personalized campaigns and offers based on which prospects would benefit from which subscription.
Sales Enablement
Sales enablement tools like Highspot, Showpad, and Seismic help sales reps create personalized experiences for prospects and customers.
Sales enablement software helps reps qualify leads, manage customer data, create custom presentations, and track customer engagement.
Configure, Price, Quote (CPQ)
Configure, Price, Quote (CPQ) software enables businesses to efficiently configure complex products, apply accurate pricing, and generate professional quotes and contracts in minutes. It automates key steps in the sales process—from product selection and pricing approvals to quote creation, contract management, and invoicing.
For companies using subscription-based pricing, CPQ software seamlessly integrates with subscription billing systems to ensure consistent pricing, accurate recurring charges, and smooth renewals. This integration helps businesses streamline quote-to-revenue operations, reduce manual errors, and deliver a faster, more transparent buying experience for customers.
Subscription Billing Software
Subscription billing software helps businesses manage their subscriptions and automate the billing process. Subscription billing software can be used to generate invoices, track payments, send reminders, and automate renewals.
It also lets businesses create custom pricing plans with specific terms, control customer access to certain features or services, and track usage data.
People Also Ask
What is the subscription-based business model?
The subscription-based business model is a pricing strategy in which customers pay to access products or services on a recurring basis, such as monthly or annually. This model can be used for various businesses, including software-as-a-service (SaaS), streaming media, and eCommerce stores.
When is subscription-based pricing not a good idea?
Subscription-based pricing is not a good idea when the customer’s usage of the product or service is unpredictable. Additionally, subscription-based pricing may not be appropriate if customers only need occasional access to a product or service.
Is a subscription-based model sustainable?
Yes, the subscription-based model can be sustainable. It often offers businesses more predictable cash flow and allows them to create recurring relationships with customers. Additionally, subscription-based pricing is often easier for customers to understand than other pricing models.
How is AI being used in subscription pricing?
AI is helping businesses optimize subscription pricing by analyzing customer behavior, usage patterns, and market trends. It can recommend personalized pricing tiers, forecast churn, identify upsell or cross-sell opportunities, and suggest dynamic pricing adjustments to maximize revenue. AI enables companies to make data-driven decisions, improve customer retention, and align subscription pricing with the value customers receive.