Pay-as-you-go & consumption-based pricing

Insights from Dan Burkhart, CEO and Co-Founder of Recurly

As subscription model businesses have evolved, they've figured out how to be flexible and experiment with different pricing and plans. It's no mistake that so many subscription companies are arriving at the same conclusion: metering out value over a period of time is an effective way to align with the way consumers want to purchase products—and deliver pricing to match.

In this CXO Insights video, Dan Burkhart, Recurly CEO and Co-Founder explains the advantages of a pay-as-you-go pricing model and its benefits for both your subscription business and your subscribers. 

Check out the full transcript below the video.

What is pay-as-you-go and how is it relevant for subscription brands?

Pay-as-you-go is paying for products, apps, services, media, and more as they are consumed. The reason it's so significant for subscription brands is that at the end of the day, subscription businesses are financial engines that are looking to attract subscribers, and those subscribers are willing to pay for the good or service that they're consuming over a period of time.

Subscribers become more and more valuable the longer they are retained. 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 along a continuum, along a timeline continuum. And that is a healthy construct for a long-standing relationship with customers.

Why have consumption-based models grown in popularity with consumers?

Let's go back again in time to the days when you bought music on an album or a CD and you paid upfront and you would go home and hope that you liked the music. Oftentimes we didn't, and we didn't have any recourse. Now we pay for our music by way of a subscription. We have access to the world's catalog of music and have a wonderful array of options and choices, and we pay for that access.

It's been helpful for subscription businesses because as the world has moved towards cloud-based models, businesses are now built to be able to deliver their products, apps, services at marginal pricing.

So the marginal cost of your offerings can be metered out over a long period of time. And these businesses 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 coincidence that all of these businesses are all arriving at the same epiphany—aligning their pricing with the value that is metered out over a long period of time is a better way to let consumers purchase products the way they want. Consumers are willing to stay for a far longer period of time when it is metered out on the margin like that.

Are there specific industries where consumption-based pricing has become popular?

Media, for one. Let's go back five or 10 years when we were receiving our media through a cable company and then the whole movement towards cord-cutting emerged. And that was because cable bills increasingly would rise over the course of your tenure with the cable company, while the percentage of the content that was being provided that you would actually watch would remain the same. So this idea that you were paying for a bloated package—"I'm paying for content that I'm not watching, or that I don't even value"—started to mount. And so the idea of, "Hey, I'm going to actually cut the cord. I'm going to 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 and exercise choice. And so forward-thinking media companies 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. Again, what we're really talking about is the alignment of value.

Other industries include software. SaaS started out with the upfront payment model. You signed a contract and hoped that you would get value. But over time, the self-serve direct-to-customer model emerged, and 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, you could align the growth of your company perfectly with the amount you were paying.

Adobe Creative Cloud for Photoshop and the Creative Suite is a great example that comes to mind. It's far easier when you're a startup or a company with a growing design team to pay $39 a month, rather than paying $1,400 for an upfront purchase and hoping that you get value out of it over time.

And there's far more...we're seeing a lot of other industries emerge into this kind of a pay-as-you-go fashion. We're seeing it largely in consumer-facing applications for that nice alignment between the consumption models. We are seeing it more and more with electric vehicles; being able to pay for exactly the amount of electricity you're charging your car with.

What’s the biggest opportunity that a subscription model business can capitalize on by embracing a pay-as-you-go approach?

One of the opportunities is at companies that are looking to acquire customers. There's a cost to that, and categories are competitive. The reality is, keyword bidding is expensive and the cost to acquire customers becomes increasingly expensive, particularly in a competitive industry. Business owners are trying to figure out how they can grow their businesses not only in the quickest fashion but also the most efficient one.

Think about the mindset shift that is required. In an upfront sale or one-time purchase model, if you're paying to acquire a customer and a one-time purchase barely recoups that acquisition cost, you're not going to be very profitable over time. So the advent of pay-as-you-go has allowed companies to figure, "Hey, it's not just about a one-time purchase decision. It's about acquiring customers that are going to remain loyal, engaged customers for long periods of time into the future."

When you move from an upfront purchase mindset to a pay-as-you-go pricing strategy, it allows you to run a far more profitable business because the lifetime value of those customers can be extended so much further into the future. It makes the challenge of high customer acquisition costs, particularly in competitive categories, become less daunting.

How can companies think about leveraging pay-as-you-go and optimize lifetime value? 

This is actually one of the areas of innovation that's so exciting about the pay-as-you-go model. In every company—it doesn't matter whether you are a product company, a media company, a dating service, or an insurance company—you have a first-run experience where a customer or consumer signs up. And then they're like, "Okay, I'm ready. I clicked submit. What next?" How does this experience unfold? And in every business, there are unique moments where consumers go, "Aha! I get it. That is what I just paid for. This is great!" Those trigger "a-ha" moments are so important for every company to understand their user experience. It influences how these companies think about delivering their products and services. You look through the lens of the consumer to understand the moments that unlock endorphins and you think, "Oh, this is great."

Years ago, I worked at eBay. We came to realize through a lot of market studies and 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 notification that says, "Congratulations, you won." And that language is still used today. That is an incredible feeling. It does release endorphins. And it did have a very significant impact on the expected value of those customers. The value of customers that won in an initial bid of an auction was exponentially higher as than those that never bid, or bid and lost. Those customers often churned out and never returned. So the customers that won something are the ones that came back for many, many years on end.

The example applies to every business out there. And it's imperative for every business owner and/or product developer and/or 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 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.

How is Recurly enabling subscription businesses to make the most of pay-as-you-go trends?

There are a number of things that have to come into play in order for businesses to be successful in offering pay-as-you-go pricing models. There are the functional aspects of being able to offer fixed and variable pricing and to monitor consumers' usage, but as marketers and product developers come together there are many complex ways that these offers can be presented, and it's often not just a simple fixed and variable component. There tends to be, for metered models, tiered pricing and different progressive tiers. There can also be stairstep levels. There can be all different kinds of variants on the theme. Consumers expect that there will be discounts at scale as they become a larger customer, and they expect the pricing, particularly on the margin for pay-as-you-go services, to decline.

So the billing system that we deliver at Recurly 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—one in which billing, frankly, just gets out of the way. And doesn't encumber the user experience. That is a big philosophical objective for Recurly, not only in the way that we think about building out our platform but also in the way we couple the billing capabilities with data and analytics, because businesses also need to know what those trigger points are that unlock the potential for future customer expansion.

And we have to do our part to make sure that our customers have visibility into the underlying data 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? It creates that continual feedback loop. We should provide a critical tool to enable these kinds of decisions and debates to occur in every company, which each has a unique set of dynamics in its business, in order to get it right.

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