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August 31, 2021

Usage-Based Pricing vs. Subscription: Which Model is Right for Your Business

When running a company, the way you charge people can make or break your business. If people feel like they are being ripped off then they will simply go elsewhere. Just a 5% increase in customer retention produces more than a 25% increase in profit. At the same time, you want to charge in a way that the company profits and can sustain itself in bringing in money each month.

The subscription-based model has been popular for many years, but the usage-based model has started to see more significant traction in SaaS companies lately. However, both have their pros and cons and what works for one company may not work for another.

It is estimated that the average Saas company will only spend about 6 hours determining their pricing strategy. Taking the time to properly research different pricing models and which one might be right for your business will pay off in the end, literally. So when it comes to the debate between usage-based versus subscription-based pricing, it helps to know why you would possibly choose one over the other.

What is Usage-Based

Usage-based, also called consumption-based, is a pricing model that charges people according to how much they use. 

Traditionally one might think of paying a power bill based on the amount of electricity used, but not so much for a product or service from a tech company. Some businesses, like AT&T with data usage, started charging per so many units a while ago. And it’s a model that is being seen more with SaaS companies and could potentially take over as the leading pricing model of choice from the subscription-based model at some point.

Twilio and Stripe are excellent examples of software companies that implemented a usage-based pricing model rather than a subscription-based model and saw great results. As they were able to grow their business they were also able to grow their profits by trusting in their brand and that people would continue to want their services, all while charging based on amount rather than one rate.

Currently, 38% of SaaS companies charge based on usage. And that number is bound to increase, as investors are seeing the benefits of a usage-based model, rather than viewing it as a risk.

What is Subscription Based

A subscription-based pricing model has a set rate or tier ranking rates, that are charged once on a monthly or annual basis. Rates are also set to go up as production costs increase over time. 

Places like Netflix and Disney+ have been raking in money from a subscription-based pricing model. Others, like YouTube and Spotify, offer free access to content that is full of ads and for a monthly fee, you can upgrade to a different type of membership that is either ad-free or has other kinds of perks. So this creates rates that are based on a tier ranking system.

As of right now, the subscription-based pricing model is what most businesses are turning to. 70% of business leaders, across retail, automotive, leisure, utility, etc. say subscription business models will be key to their prospects in the future.

Many businesses have had great success with subscriptions, whether offering a flat rate or a tier ranking system, and customers are now used to seeing subscription services and don’t have much of a problem with signing up for a recurring fee.  

Which One Should You Go With

As stated previously, both models have their benefits and it’s worth considering each before making a choice that will impact your business.

Some pros of a usage-based model include:

-It can be more cost-effective for businesses to charge based on usage. When people are on a subscription-based model then they are able to use as much of that product or service as they want and it can end up costing a business more because they weren’t able to charge enough to cover that high usage and also make a profit.

-Customers can end up saving money and this helps build customer loyalty. If they are just paying based on how much they consume and getting their money’s worth then customer’s will continue to come back and recommend the company to others. When customers are happy then businesses profit from that.

-Companies and customers have a more mutually beneficial relationship. Businesses need to have a great product or service to attract new or returning customers. This drives innovation and customers are willing to pay to have the latest and greatest thing. 

Some pros of a subscription-based model include:

-Businesses have consistent revenue coming in each month. They know how many people they have on a subscription and can calculate how much money they will receive every month. They can also predict their budget in the near future with some sense of accuracy just by already knowing what their intake is.

-Subscriptions lock in customers for a monthly or annual basis and this helps with customer retention. By having those repeat customers, a business will be consistently bringing in money. 

Subscriptions automatically charge or renew a membership, even if a customer has forgotten that they have that membership, and businesses have that guaranteed revenue.

-On the customer side of things, it can be easier for them to plan out their monthly budget. When they have a set rate they already know what they’ll be paying and can go ahead and allocate that money for the subscription. This can help customers be able to maintain having the subscription.

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