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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 where customers pay a recurring fee on a monthly or annual basis to access goods and services. These payments provide customers with ongoing value since they can use the product over an extended period rather than purchasing it once.
Subscription models have both business-to-business (B2B) and business-to-consumer (B2C) applications.
- B2B: Businesses can use subscription-based pricing to offer software-as-a-service (SaaS), hardware, and services to other businesses. For example, an online marketplace might charge other companies a monthly fee for access to its platform.
- B2C: Consumers can also benefit from subscription-based models as they provide access to goods that consumers may otherwise not be able to afford if it were a one-time purchase. For example, monthly subscription boxes can provide consumers with regular deliveries of curated items that would be cost-prohibitive to buy all at once.
Subscription-based pricing gives companies greater control over their revenue and customer relationships by allowing them to forecast future income. It also helps businesses differentiate from competitors and build customer loyalty by providing value and convenience.
On the other hand, customers benefit from low-cost access to goods and services and the convenience of monthly payment plans.
- Subscription Pricing: The type of pricing that charges customers a recurring fee on a monthly or annual basis.
- Subscription-Based Pricing Model: The pricing model that charges users a fixed price per month, rather than a one-time fee.
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.
1. Predictable Revenue Generation
Businesses can anticipate revenue generation from subscription-based pricing since customers pay on a regular basis. This predictability allows businesses to make better plans for the future and adjust their strategies accordingly.
From an investment standpoint, predictable future revenue also increases the value of a company and makes it more attractive to potential investors.
2. Better Revenue Forecasting
When businesses need to forecast potential revenue, they need tangible data based on recurring payments and averages.
Subscription-based pricing allows businesses to calculate how much revenue they can reasonably expect from each customer, making revenue forecasting much easier and more accurate.
3. More Revenue Per User
Subscription pricing can also help businesses increase their average deal size and margins. By offering subscription plans rather than one-time payments, businesses can potentially increase the amount customers pay per transaction.
Subscription models also allow businesses to offer discounts or incentives for long-term commitments which can help maximize revenue in the long run.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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 honest 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.
Types of Subscription-Based Pricing Models
There are four types of subscription pricing:
- Flat-Rate Pricing
- Usage-Based Pricing
- Tiered Pricing
- Per-Use/Per-Unit 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.
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.
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.
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 the customer is technically 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.
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 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.
71% of sales leaders say their salespeople fail to connect their solutions with their customers’ needs, resulting in lost sales opportunities. The information provided by sales enablement helps reps personalize the customer experience and increase sales by pairing customers with the best subscription tier or solution based on their needs.
Configure, Price, Quote (CPQ)
Configure, price, quote (CPQ) software helps businesses quickly configure and price complex products with multiple variations. It can also automatically generate quotes, contracts, invoices, and other documents, as well as manage the entire sales process from start to finish.
Companies that use the subscription model to sell their products can use CPQ software to streamline sales and ensure that customers receive the best value for their money.
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.