So maybe you’re thinking of starting a subscription billing models business… or maybe you’re already running one, but you aren’t sure your pricing model is quite right. We’ve got your back. Our bite-sized introduction to four popular subscription billing models will help you sort the freemiums from the fixed-tiers, so you can put together a pricing strategy with confidence.
Pricing Model #1: Freemium
A popular option – just think of MailChimp and Dropbox, for starters – ‘freemium’ subscription billing models give users the option to use a free version of their product. Usually, this is a limited version designed to tempt the user – and if they want any bells and whistles, they’ll need to pay to upgrade.
Pros:
A great way to attract lots of new subscribers. No hard sell necessary: it’s free!
‘Try before you buy’ appeal – which allows users to see what’s special about your product.
Potential to attract loyal customers on a long-term basis: if they’ve spent time getting to know your product, they’re already invested enough that, if and when their business grows enough that they wish to upgrade to a more sophisticated, paid-for package, they’re less likely to look elsewhere.
Cons:
Pitching can be tricky. You need to design an offer that shows your product to your best light without giving everything away – but it can’t be so basic that people don’t want to stick around and try it.
The free version might be enough. For some users, upgrading will never be an option, so you have to be realistic about your conversion goals.
It depends on the product. This recurring subscription billing model doesn’t work for all products. If supporting your offering is too resource intensive to make a free version financially viable, it’s not going to be an option for you. There also needs to be an obvious path from a basic subscription to a more sophisticated, paid-for version (like a mailing-list subscription; because, as a business grows, a company with an active mailing list will need to support more subscribers and will require increased functionality – which is why the MailChimp model works so well).
Pricing Model #2: Pay As You Go
A simple option that is fairly self-explanatory: with a pay-as-you-go model, businesses charge subscribers based on their daily, weekly, monthly, or annual usage.
Pros:
Reduced financial risk plus minimal commitment could attract more customers. Customers may find this option more attractive as, because they only pay for what they use, they can save money in the long-term (and value-for-money is built right in). In addition, because they’re only paying for what they use on an incremental basis, they are not committed to sticking with the product long-term – which could be appealing to certain businesses.
Cons:
Unpredictable. If a customer is on a pay-as-you-go subscription, it’s hard to construct revenue predictions with any degree of certainty. Depending on their preferences, their usage could go up and down seasonally, or they might not even need to use your product all the time – so there could be months when the product is effectively there for them to use (so the cash you’re putting in to support the resource doesn’t change), but your revenue is zero.
Pricing Model #3: Fixed Fee (Tiered and Single)
Fixed fee models allow you to offer a plan, or multiple plans, at a fixed price.
Pros:
Predictable revenue stream. Unlike a pay-as-you-go model, fixed fee models give you a reassuring degree of certainty: if you have a few key metrics to hand (such as the number of customers, which plans they’re on, and the churn rate), you can make fairly accurate revenue and growth projections.
Clear, defined options. For many customers, knowing exactly what they can get for their money is very attractive. If you offer a single, fixed price plan, you’re saving them the hassle of having to research, dither, and perhaps research some more before finally making a decision. If you offer a few plans, you’re giving them more options, but still breaking it down in an accessible way. The bottom line is that no-one wants to pay for features they won’t use, which is why fixed price models work so well.
Cons:
Perceived lack of flexibility. For some customers, a fully bespoke option is all they’re interested in – and the perceived lack of flexibility with fixed-price/fixed-priced-tiered plans can dissuade them from signing up. But the old adage is true: you can’t please everyone. The important thing is to find a pricing model that ticks the most boxes for your particular brand, offering, and desired customer base.
Pricing Model #4: Pay Per User
A really useful subscription billing model, and one that is often overlooked, the pay-per-user system allows you to boost premiums by charging for each additional person that has access to the relevant account.
Pros:
Predictability. As, at its heart, this is a fixed-price strategy – a business will, at the very least, be charging a baseline price for one or more key users – revenue is easier to monitor and project.
Potential to make easy financial gains. If your offering lends itself to this kind of model, a financial boost is built right in. For example, if your business is a B2B platform, your profits may naturally grow as the business user’s company grows: because as they onboard more staff, who will need access to your platform, their recurring subscription fee will naturally increase. That, however, can also lead to the primary ‘con’ on our list – see below…
Cons:
Potential to quickly become overpriced – and therefore unviable. If the price per user that you’ve set means that the leap in subscription cost is extremely noticeable once more users are granted access, your customers may start to look elsewhere. It’s important to pitch this carefully, therefore, and consider offering some sort of tiered system for large businesses (or special discounts/promotions for loyal customers who stick with you as their business grows).
Keen to find a pricing strategy that works perfectly for your company? Stick with the Billsby blog, which is full of handy hints for subscription billing services: from tips on how to reduce churn to staying on top of marketing trends, there’s plenty to discover.