Pay as you go: everything you need to know about adding consumption-based models to your mix
From Porsche launching a subscription service that lets customers drive whichever Porsche vehicle they desire to many more companies innovating in the “XaaS” (everything as a service) model, recurring revenue companies are innovating with their pricing strategies to retain customers and scale with evolving business trends. A great way to make subscription billing seem more fair is by embracing “pay-as-you-go” pricing, in addition to a standard “one-size-fits-all” pricing model.
Usage-based pricing enables subscription businesses to charge customers based on how they consume products or services. For example, a rideshare user might pay Uber or Lyft only for the distance they traveled, or a homeowner may only pay the local energy company for the power they actually used in the previous month.
One of the key tenets that attracts customers to this pricing model is convenience, since they are only charged for what is used rather than having to pay a monthly fee upfront. They retain full ownership and control over expenses and features consumed without having the need to provide any commitment upfront to the subscription.
To enhance this convenience, subscription companies can let customers pay into a prepaid account (perhaps offering a discount for doing so) and pull the money for future purchases from the balance in this account. This enables subscribers to more easily track their spending (e.g., “I’m going to allot $200 for rideshare this month”), while also providing merchants with a more predictable revenue flow, greater customer loyalty, and fewer payment processing costs.
Another common example of the pay as you go pricing model is metered billing, frequently used by utility companies that charge by units of energy or water consumed.
Popular use cases for consumption-based pricing models can be found in numerous industries, including:
IoT (Internet of Things): Hologram, a cellular platform, sells SIM cards in bulk and only charges for the SIM cards actually used
Telecom: companies like AT&T and Verizon offer postpaid plans that allow customers to pay by usage, as well as prepaid options for consumers who want a defined amount of minutes, text messages, and data
Internet advertising: companies like Facebook and Google charge for display advertising, which can be prepaid in credits by customers
Cloud infrastructure companies: Businesses like Snowflake (a Recurly partner!) were quick to launch services based on consumption-based pricing models, often charging based on bandwidth, API calls, storage costs, or other parameters
SaaS companies: many SaaS platforms that charge for services delivered through the cloud often deal with very high volume products such as packages, emails, and clicks, and commonly set up pricing models based on usage down to a precise level (e.g., per gigabyte of storage used or messages sent)
According to the 2019 KBCM SaaS survey, usage-based pricing models were the second most popular pricing methodology, just after seat-based pricing.
Before we get into some of the advantages that come with “pay as you go” pricing, let's not forget that there are indeed some limitations to keep in mind when considering these pricing strategies. Because there’s no upfront commitment (for example, Uber or Lyft don’t mandate a monthly fee just to gain access to their services), companies must invest in making sure customers keep coming back by promoting, and standing behind, a strong value proposition. Another key challenge involves implementing the right systems and processes internally to precisely track customer usage and subsequently invoice customers automatically.
“Pay as you go” pricing models come with many benefits for businesses, including:
The ability to experiment with new monetization methods as well as introduce hybrid models to make the most of growth opportunities
Popularity among audiences who prefer not to have any form of commitment and prefer low entry points and flexibility of choice
In-depth understanding of consumer buying and usage patterns that can help drive roadmap and pricing decisions, as well as the ROI on features developed
The ability to configure personalized, segmented promotional strategies based on the experience you want to create for your customers
Weaving consumption models into your existing plans
Companies need to constantly innovate in order to stay differentiated in the market. With consumers demanding greater decision making flexibility and more choices, it's imperative that companies start to think about hybrid business and pricing models.
Indeed, businesses today are exploring combining their existing subscription plans with usage-based consumption pricing strategies to drive more growth. A B2B marketing automation platform, for example, might charge a recurring flat platform fee every year along with a small fee for every email campaign run or every 1,000 leads entered into the system.
Zapier, which integrates with Recurly, is a great example of a company that’s developed hybrid pricing. The platform charges a recurring fee on a monthly basis and adds an additional charge based on tasks/month.
An increasingly popular trend in different industries is for companies to create hybrid monetization models based on microtransactions. In the gaming world, microtransactions enable gamers to unlock new rewards, avatars, levels, weapons, and other assets on a per-transaction basis while paying for the actual game on a consistent recurring basis. Even in digital media and publishing, some companies have toyed with a similar microtransaction-based model to, say, unlock a premium article. The ability for subscribers to prepay into an account balance helps enhance this microtransaction payment strategy.
Is a “pay as you go” model right for you?
Implementing a new pricing model is a big undertaking. We recommend testing and iterating on pricing strategies with smaller cohorts before scaling a new strategy to your entire customer base. Consumption-based pricing models seem to be growing in popularity, but typically within a hybrid use case; most companies don’t go all-in on consumption-based pricing, at least immediately. Usage-based billing models probably make the most sense for your business if:
Your customers consider convenience and fairness important. This is your chance to create a unique and differentiated customer checkout experience that’ll give customers more choice and flexibility.
You have the ability to precisely track the customer usage down to whatever metrics you choose—every gigabyte used, every email sent, every achievement unlocked, etc. This might require you to invest in a platform that helps you automate these processes.
Your organizational culture is built in such a way that the insights you get about how subscribers are using your products and services will help your company build innovative new features and products.
You want to leverage the strength and numbers of your existing, recurring subscriber base while also experimenting with consumption-based pricing to reach a new set of consumers
As part of our recently expanded payments capabilities, Recurly supports enhanced capabilities on usage-based pricing strategies for all of your complicated billing needs. You can diversify your offerings with microtransaction pricing for billing your customers with Recurly’s pricing precision, down to fractions of a penny. You can also uncover new ways to monetize your offerings by layering consumption-based offerings on top of your subscription product with Recurly’s prepaid account balance.
Check out our latest data sheet to see everything new with recurring payments at Recurly.