Pay-as-you-go model and consumption-based pricing

Pay as you go is the notion of of paying for products, apps, services, media as it is consumed.

The reason why this is so significant for subscription brands is that subscription businesses are basically at at the end of the day, financial engines that are looking to, attract customers that are subscribers and those subscribers are willing to pay for the good or service that they're consuming over a period of time. So the extent to which a company is able to continue to retain those customers for a longer period of time, they become more and more valuable. So this idea of pay as you go in a healthy construct is a nice clean alignment between the value that is received by subscribers and the price that is being requested to pay for it as along a continuum, along a timeline continuum and that is a super healthy cut construct for an alignment of a long standing relationship with customers.

Yeah. Let's go back again in time to, perhaps the days when you bought music on an album or a CD and you paid up front and you would go home and hope that you like the music. And oftentimes, we didn't and we didn't have any way to, have recourse when we were young. Now we pay for our music by way of subscription. We have access to the world's catalog of music, and you have a wonderful, array of options and choice. And you pay for that access to, the world's catalog of music. So, the idea that with their consumption and the way that they perceive value is with their consumption and the way that they perceive value is a super healthy construct.

It's been helpful for subscription businesses because, as the world has moved towards cloud based models, the way that businesses are built are, now able to deliver their products, apps, services, to be priced on the margin, if you will. So the marginal cost is able to be metered out over a long period of time. And it these businesses are are do not require a huge upfront investment on the part of the consumers in order to make their business models work. So, over the course of time as businesses have innovated and figured out how to be flexible and experiment with different business models, it's not a mistake that all of these various businesses in different categories are all arriving at the same epiphany that an alignment between that value that is metered out over a long period of time, is a better way to deliver a pricing model and a better way to align with the way consumers want to purchase products and they're willing to stay for a far longer period of time when it is metered out on the margin like that.

Media for one. So let's the example being, you know, going through, let's go back five, ten years when we were receiving our media through a cable company, and then the whole sort of movement towards cord cutting emerged. And that was because cable bills increasingly would rise over the course of your your tenure with the cable company, and the, percentage of the content that was being provided, that you would actually watch remain the same. So this idea that I am paying for a bloated package, I'm paying for content that I'm not watching or I don't even value started to mount.

And so the idea of, hey, I'm gonna actually cut the cord. I'm gonna go consume my media on a more a la carte basis and pay for exactly what I am interested in consuming, allowed consumers to have choice and exercise that choice. And so, they were able to construct just the right set of subscriptions that created the assemblage that sort of curated, portfolio of content that any consumer wanted to, experience and and value. And so what we're really talking about is that alignment of value.

So other other categories, software is a good one. It started out with the upfront payment model. You sign a contract and you would hope that you got value over time and there might be certain blocks of per seat per month additions to that contracted amount. But over time the self serve direct to customer model emerged that made it much more efficient for software companies to sell to consumers in a self serve fashion.

You put a credit card on file, you might have a platform access fee or a setup fee. But then as your company starts to consume more, seats of software, that that you could basically align the growth of your company perfectly with, the amount you are paying. So Adobe Creative Cloud for Photoshop and the and the Creative Suite is kind of the best example that comes to mind.

Far easier when you're a startup or a company that's growing and you have a growing design team to pay the you know thirty nine dollars a month I believe it is rather than paying for the fourteen hundred dollars upfront purchase and then hope that you get value out of that over time.

And there are far more, you know, we're seeing a lot of other industries emerge into into this, kind of, pay as you go, fashion. And it's, you know, we're seeing it largely in, consumer facing applications for that that nice close alignment between the consumption models.

We are seeing it more and more with, electric vehicles, you know, being able to pay for exactly the amount of electricity that you're charging your car with.

One of the opportunities is you know at companies that are looking to acquire customers in growth mode, there's a cost to that and categories are competitive, meaning keyword bidding is expensive and the cost to acquire customers becomes increasingly expensive, particularly in competitive categories. So as business owners are looking to figure out how they can grow their businesses most not only, most quickly but also most efficiently to do profitably is really one of the largest objectives and a pretty critical constraint.

So if you think about the mindset shift that is required when you move from an upfront sale one time purchase, if you're paying for a customer and a one time purchase barely recoups the cost of of acquiring that customer then that's not going to be a very profitable business over time. So the advent of pay as you go has allowed for companies to figure out, hey, it's not just about a one time purchase decision. It's about how do we acquire customers that are gonna remain loyal, engaged customers for long periods of time into the future, and that allows for companies to to clear the hurdle rate of the cost of acquiring that customer in a a far more effective way.

And so, there there are some just fundamental sort of economic, principles at play when you move from an upfront purchase mindset and a go to market pricing strategy to a pay as you go pricing strategy that, just fundamentally allows you to run a far more profitable business because the continuum that lifetime value of those customers can be extended so much further into the future.

It makes the challenge of high customer acquisition costs in particularly in competitive categories become less daunting.

Yeah. This is, this is actually one of the areas of innovation that's so exciting about the pay as you go model, which is every company doesn't matter whether you are a product app, media company, a dating service, insurance company.

Every company has a first run experience where a customer consumer signs up and then they're like, okay. I'm ready. I click submit. What next? How does this experience unfold?

And there are in every business, there are unique moments where consumers go, I get it. That is what I just paid for. This is great. Those trigger moments that are so important for every company to understand about their own user experience, how they think about delivering it and really put themselves in the shoes and look through the lens of the consumer to understand and feel what it what are those moments that unlock endorphins and you think, oh, this is great.

Years ago, I was at eBay and we came to realize through a lot of market studies and research customer research that that trigger moment at eBay was when a customer signed up and bid on their first auction listing and won and received that email that says congratulations, you won, and that language is still used today, that is an incredible feeling. And it does release endorphins, and it did have a very significant impact on the expected value of those customers. The probabilistic value going forward for customers that won in an initial, bidding of an auction versus those that never bid or didn't or bid and lost.

Those customers often churned out and never returned again. The customers that won something are the example applies to every business out there and the the it is imperative for every, business owner and or product developer and marketer to truly rally around not only discovering and understanding what those trigger moments are for your business, but also figuring out how to recreate them and to punctuate them and then perhaps to create them again. There doesn't have to be just a single moment, but if you can create a series of those moments and those moments, it can help unlock perhaps cross sell, upsell decisions that are being made in SaaS models.

That is some of the magic that has to go into building a successful pay as you go business.

There are a number of things that have to come into play in order for businesses to be successful offering pay as you go pricing models.

There's the the sort of functional, aspects of being able to offer fixed and variable pricing and to meter the usage.

But as marketers and and product developers come together, you know, there are many complex ways that, these offers can be presented. And it's it's often not just a simple fixed and a variable component. There tends to be for metered models, there tends to be tiered pricing different progressive tiers, it can be stair step tiers, there can be all different kinds of variants on the theme.

Consumers expect that there will be discounts at scale as you become a larger customer you expect the pricing particularly on the margin for pay as you go services to decline and you expect a discount.

So the billing system that we deliver at Recurly has has contemplated how do we make this easy and flexible and fluid for businesses to create a series of orchestrated events that allow for the best user experience to unfold where frankly billing just gets out of the way and doesn't encumber the user experience.

That is a big philosophical, objective for Recurly in in the way that we think about building out our platform. But then we also couple it with data and analytics because, businesses also need to know what those, trigger points are that unlock the potential for future expansion of customers. And so we have to do our part to make sure that our customers have visibility into the underlying, data and and, movement that's taking place in their business.

That allows for companies to better understand where is the best price point, where are users getting stuck, where are they churning out, where are we seeing resistance to, additional upsell and expansion and why. And so that it creates that continual feedback loop that should, be a provide a critical tool to enable these kind of decisions and debates to occur in every company that has a unique set of, dynamics in their business in order to get it right.