“If you’re a B2B provider and relying on a subscription only model, you’re probably leaving money on the table.”
Did that pique your attention? You’re not alone. I recently posited this to my audience during my presentation on recurring revenue at a Finance seminar. The statement was meant to be provocative, and it turned out to be. After the presentation, I was followed into the exhibit hall by one of the attendees who asked me, rather pointedly, to explain my position.
I told him about a company I had worked with recently that had been relying on a subscription only model for one of their B2B product lines. For a variety of reasons, they decided to switch this product line from prepaid subscriptions to post-paid consumption (usage billing) pricing. In the first quarter under the new pricing scheme, usage remained flat, but the product line saw an increase in revenue due to the new pricing model. Over time we found that usage models provided additional flexibility in tailoring offers to customers and revenue continued to grow.
These findings likely fly in the face of everything you’ve heard about subscriptions and recurring revenue so far. Yes, subscription billing is a powerful model that has created whole new industries and new markets for existing industries. But it’s not the only game in town.
You can easily find examples of consumption-based models in many industries. At one point or another we’ve all had mobile phone and data plans that included overage fees (usage-based charges once the allotted usage for the month is exceeded). As time passed, these plans have become more sophisticated, adding rollover minutes and data to cover future overages. But the concept remains the same – charges are consumption based.
One of my favorite examples of the consumption model is the medical equipment industry, where suppliers like Philips and GE Healthcare have extended their markets by making expensive advanced diagnostic systems like MRI machines available through pay-per-use arrangements. Without this option, many smaller hospitals would not be able to afford the equipment they need to provide the best possible patient care. For more examples of industries where consumption models are playing a major role, check here.
When would consumption-based models be a good idea?
- When your product catalog contains many goods or services that can be combined together in multiple ways to bring value to customers
- When consumption is volatile from month-to-month
- When there may be reluctance by customers to paying for services that are not actually consumed
- When the price to purchase your product is a barrier to entry for some prospective customers
The key benefit of a usage-based model is the variety of service combinations you can offer to increase revenue streams. This is especially true in B2B scenarios, where usage-models allow you more flexibility to create unique offers and to price for competitive advantage. Usage-based models like tiered usage enable you to incentivize usage and can be particularly effective at gaining share-of-wallet when a customer is using your service and a competitor’s at the same time.
Am I suggesting that you abandon subscription models? No, but I am suggesting that you abandon the thinking that seems to be prevalent in some quarters that there are no other options. And I’m suggesting that as you look for a software solution to monetize your recurring revenue business, you choose one that:
- Enables both subscription and usage-based models
- Allows you to easily switch between models
- Supports complex A/B testing with different pricing models and plans
In the example I cited above, the business was leaving money on the table. We were able to increase revenue simply by changing from a subscription to a consumption (usage billing) model. We also gained an advantage and began stealing market share from a larger competitor. Is there a similar opportunity awaiting your business?