Subscription-Based Pricing: Advantages for Businesses and Customers
There are many ways for companies to bring products and services to customers. One increasingly popular choice in the digital age is the subscription-based pricing model.
Designed to encourage recurring, reliable revenue streams, subscription pricing requires a regular monthly or annual payment from a customer to maintain access to a solution.
Subscriptions are everywhere in our modern lives, appearing in the form of gym memberships, access to streaming services like Netflix, AWS as a service, and more.
The question is: Will a subscription-based pricing strategy be beneficial for your business, or do you risk scaring off clients this way?
We’ll explore the benefits of subscription-based pricing for companies and their customers and when you should consider this structure.
Defining Subscription-Based Pricing
Before we dive into some of the advantages of subscription strategies, it’s worth noting that there are different kinds of subscription to choose from. Let’s take a look at some of them.
First, there is the freemium model. This is the strategy companies use when you can access some features of a product for free, but others remain locked behind a paywall.
For instance, you could access basic Microsoft Teams features for free, but companies in need of extra features will have to pay a monthly fee.
This model is a great way to demonstrate value to customers with free features, then convince them to spend cash for the premium version.
Many software companies offering subscription-based pricing follow the discount subscription model. They might offer one price per month for customers who pay monthly and another for those who pay annually.
The annual cost is often a lot lower, allowing clients to save more money in the long run.
This strategy encourages a bigger purchase, while ensuring customers are less likely to unsubscribe from the service early.
Sometimes, subscription-based pricing involves sending a different bill to customers based on their usage each month. This is known as pay-as-you-go.
You subscribe for a specific service, then pay extra for features like more internet bandwidth, or additional minutes in a business calling package.
The Advantages of Subscription-Based Pricing
Subscription-based pricing has a whole array of benefits, both for the consumer and the provider. Let’s look at some essential benefits in more detail.
One of the biggest benefits of subscription-based pricing for customers is its simplicity.
You know how much you’re going to pay each month for the package you need, and you can easily set your subscription to recur and renew, so you don’t have to think about it.
Customers can essentially set and forget their subscriptions.
This is especially useful for companies who don’t want to leave their staff without access to important tools if they accidentally forget to renew.
Flexibility is another major advantage of this pricing model. It allows companies to offer different packages for certain customers, increasing their chances of earning new clients.
For instance, you might have one package for classic enterprise customers and another for start-ups to accommodate their differing needs.
At the same time, your customers have the freedom to change their package whenever they choose, upgrade, downgrade, or even cancel their subscription if they decide they’re not fully satisfied.
You can predict your revenue flow by predicting how many customers you’re likely to have for each pricing package.
Customers also get to easily see exactly how the cost of their subscription adds up.
This increases your company’s transparency, which can improve the feelings of trust your clients have for you.
Upselling and Cross-Selling Opportunities
As your customers get used to the benefits of your main product, you can offer them extra advantages in the form of bonus features or higher-quality packages.
This makes it easier to gradually turn loyal customers into some of your highest-paying clients.
At the same time, it means that clients don’t have to shop with multiple different providers to get the tools they need.
When your customer pays for a subscription, even if it’s just for a month at a time, they’re committing to using your software or service.
This is an opportunity for you to convince your clients that you’re worth their investment.
It also means that your customers can determine which companies they can trust with a minimal upfront cost.
Most importantly, subscription-based pricing benefits companies because it allows them to ensure recurring revenue.
A business with a subscription-based pricing structure keeps their clients coming back for more, month after month.
This way, you don’t have to worry as much about constantly finding new clients. You can leverage all the benefits and loyalty of repeat customers.
All you need to do is ensure you’re managing your subscriptions properly and delivering experiences that your clients love.
When Is Subscription-Based Pricing Not a Good Idea?
There’s no one-size-fits-all strategy for the best pricing structure. In some circumstances, a subscription won’t make sense for your customer.
For instance, if a customer is buying a product they’re only going to need for a couple of months, they won’t want to sign up for a yearly membership.
Subscription models also create the worry of vendor lock-in.
For customers who aren’t sure about your business yet, this can be nerve-wracking, as they may want the option to unsubscribe at any moment.
Many of the issues companies have with subscription-based pricing can be resolved by understanding your customer and adapting your strategy to suit your needs.
For instance, if you’re a B2B company selling software to small businesses, you’ll know these companies can’t afford to make expensive investments up-front.
Offering discount packages for long-term subscriptions or using a freemium model to tempt your customers into using your service and eventually upgrading can improve sales.
The more you can show your clients that you’ve considered their needs and created your go-to-market strategy accordingly, the more likely they are to trust you.
Finding the Right Pricing Model
Some companies will thrive with a subscription-based pricing model, while others won’t.
You may even decide to give your customers the best of both worlds by allowing some to purchase solutions outright and others to subscribe to a membership.
The best way to ensure your pricing structure is suitable for your customers is to get to know your audience and listen to their feedback.
Heather Redding is a part-time assistant manager and writer based in Aurora, Illinois. She is also an avid reader and a tech enthusiast. Reach out to her on Twitter.