A Guide to Subscription Pricing Models: Which One is Best for Your Business?
16/06/2020 | Blog
Subscriptions are the established pricing model for CSPs and the tech industry in general.
However, there are different subscription models to work with depending on how you shape your pricing strategy. What should you know about the various subscription models?
Companies used to exclusively charge for software on a one-time basis not so long ago. Customers had to pay for a tool only once and they were free to use it forever. Some companies might have thrown in monthly support payments, but that was it.
This worked well as the only software model, for some time, until it started to show its weaknesses. Companies would lose money as they were essentially doing work for free, to keep software updated. Developer salaries and server costs were very high to maintain, as customers had low lifetime values, due to a lack of recurring revenue.
It can be unfair for consumers as well. Some enterprise software costs were too expensive for the average business. Microsoft Office’s packages at the start of the millennium, for example, were priced at roughly $1,000 per user, when you factor in inflation.
Innovative companies like Salesforce, Concur, and Basecamp realized this problem and helped drive the SaaS model to the mainstream. Instead of charging a one-time payment, companies now often offer monthly subscriptions with much lower prices which solves two problems.
First, companies have a reliable way to generate recurring revenue for their software products and services. SaaS companies grow faster than any other business in terms of revenue. What’s more, consumers can utilize tools, just as they did before, without requiring huge initial investments.
These benefits—along with a list of other advantages—make subscriptions the ideal payment structure for most software companies, including Cloud Solution Providers.
Should Every CSP Work With Subscriptions?
The answer is almost always yes.
Microsoft’s product suite is priced based on usage or over time (e.g. daily, weekly, monthly). CSPs need a constant flow of income to account for this, as well as for essential costs like wages and server fees. Subscriptions help to achieve this. It’s also an industry-standard now, so you risk confusing users if you charge them differently.
CSPs can utilize other pricing structures for additional services like training or product setups. However, subscriptions should always be used for core solutions to keep financials healthy.
The Different Types of Subscription Models
In usage-based subscriptions, you charge customers based on how much or how long they’re utilizing your products. This model is often used by cloud providers. Digital Ocean is one example. They charge users hourly for most of their services.
Usage-based pricing makes sense if your company offers products that scale, like API requests or data processing. This allows your company to generate more revenue from heavy users as well as increase adoption since new customers can pay any amount they want to get started.
Achieving a consistent income stream is one potential disadvantage when you bill for usage this way. You might achieve record numbers in one month and fail to break even the next, as user activity fluctuates.
2. Flat Rate
Flat rate pricing offers your product at a fixed price point every month with full access to every feature. The price remains the same regardless of whether the user is a solopreneur, a startup, or a booming enterprise client.
The flat rate structure works best for companies with single products. Since there is only one price, it’s easier for customers to understand your solution and make decisions. You’ll find it easier to sell, especially for small companies with no dedicated sales teams to manage leads.
The downside of this model is that it does not scale well for profitability. CSPs may lose money as they bring in enterprise clients that can (and should) pay more than the fixed price.
3. Per User
More and more companies are charging per user, as it makes scaling easy for both parties. Customers know exactly how much they’re paying for every active employee in their organization. It’s also great for service providers. The more users you get, the more you earn—simple as that.
That said, per-user pricing is the most vulnerable to manipulation. Customers pay for a single user and share the account among employees to save costs. It can also ruin your finances when a customer leaves with all of their users, causing a huge loss of income.
4. Tiered Pricing
Tiered pricing works like flat rate pricing with a twist. This model provides varying price points for different packages. For instance, a customer who only uses basic features may pay $30 a month while an enterprise client may opt for the $499 package that includes basic and advanced features.
Tiered pricing works great for companies with diverse target demographics. You can customize your packages to meet the needs of every customer type. You can also upsell to existing clients as they grow, which makes tiered pricing excellent for scaling revenue.
It can, however, be confusing for users to differentiate the packages on offer. You might also lose money from users who utilize your resources to their limits. Most SaaS companies offer custom plans to accommodate heavy users to solve this problem.
How CSPs Can Elevate Their Billing With interworks.cloud
CSPs need to know which billing model works best for their business. Regardless of the model, CSPs should work with automation tools to streamline their billing. Not only will they spend less time on manual work, but they will also eliminate errors and inefficiencies that affect the billing process and harm their bottom lines.
interworks.cloud is an award-winning platform that provides best-in-class billing automation for Microsoft Cloud Service Providers and Cloud Distributors all over the world. The interworks.cloud platform pricing model is as well subscription-based. Request a free demo today to find out how we can elevate your business to the next level.