Subscription-Based Pricing Model: Win-Win for Business and Customers

The subscription-based business model has gained popularity in recent years. Whether its consumer services like Netflix, Spotify or Amazon prime, enterprise SAAS offerings like AWS and Adobe Cloud or physical products like DollarShaveClub or Blue Apron, subscriptions are ubiquitous. And for a good reason. Even more services and businesses are exploring a subscription-based or SAAS model for their service or product. While the subscription business model is not for every product, there are several benefits of a subscription-based pricing model. Product Managers should consider it as a pricing strategy to build long term monetization of their product.

Recurring & Predictable Revenue

The subscription-based pricing model allows companies to earn revenue on a regular basis from each existing user. This revenue is also much more predictable as long as the user stays subscribed and see value in the product. That means, companies only need to acquire user once and can monetize the user to get recurring revenue week after week, month after month, and year after year.

Lower Total Acquisition Cost

Customer acquisition cost is once of the key KPIs for any business. Companies spend hundreds of dollars on customer acquisition costs. This is even high for enterprise companies. The subscription-based model reduces the user acquisition cost since users are much more likely to try the service if the upfront cost is lower, which is generally true for subscription services. The acquisition cost spent upfront also generates higher revenue over the life of the subscription.

Direct relationship with customers

The subscription-based business model gives companies more opportunities to shift customer acquisition to self-serve channels such as web and mobile. This allows companies to establish a direct relationship with their customers, bypassing retailers, distributors, and other channel partners, which in turn means better profit margin and profit.

Deeper relationships with Customers

The subscription model also allows companies to establish a deeper ongoing relationship with their customers. Customers have more interactions with the product due to ongoing engagement. These interactions allow companies to better capture user data and better opportunity to leverage this data to further engage these users with the product.

Network Benefits and Competitive Advantage

Once customers are invested in the service and its ecosystem, it’s harder for them to switch. This is particularly true for products that have network effects or user-generated content, thus allowing companies to build long-term competitive advantages. Some of the great examples of these effects in play are collaboration services like dropbox and box in the enterprise SAAS space, both of which exploit the fact that network of users is critical for their service to succeed. In consumer space, there are companies that such as Ring security that provides community features as a benefit to its users and delivery services such as Instacart and Amazon Prime Now that rely on the network of shoppers to deliver value and build competitive advantage.

Higher Valuations from Investors

All the above advantages that the subscription model provides result in better-perceived value of the business. As a result, companies with subscription-based models have a better valuation in both public and private markets

Benefits to Customers

Subscription products are not only beneficial for the company but it’s also good for the customer. Here are the key customer benefits of a subscription-based product.

Ability to get What you want, When you want, Wherever you want

This allows customers to get access to the product based on their needs without the need to wait or purchase the product prior to use. These products can be delivered at a set frequency to match user needs or in case of digital services, can be accessed anytime, anywhere instantly.

No upfront cost of Owning

Customers do not need to spend huge amounts upfront keeping the overall cost of ownership low. This is a great benefit for products that have high upfront costs and long break-even periods.

Ability to Test the Service Without Investing

Since the cost of trying is low, users can easily test the product or service and continue using it if they like it. Most subscription services also offer free/ trial period and users can cancel within that period if they do not like. This allows users to try multiple products and choose the one that meets their needs best.

No Long-term Contract Lock-ins

Users can not only sign up for subscription service without heavy upfront costs, but they can also cancel the service anytime without paying any early termination or cancellation fees. This flexibility to switch also keeps companies working hard to keep users engaged and retain their business.

Latest Updates As Technology Advances

Many technology products are constantly innovating and evolving. With upfront purchase, users are stuck with the product for a long time until they are ready to put in the investment to upgrade. With a subscription-based model, users are able to take advantage of the latest technology that companies have to offer to their users to constantly engage them.

Subscription-based pricing is certainly not for all products. But there are several products from SAAS services, to physical products and even professional services that have found success with a subscription-based pricing model. If a product delivers meaningful, quantifiable ongoing benefits to users, then Product Managers should consider subscription-based pricing.

What do you think about the subscription-based business model? Have to found success or learned any lessons with your subscription-based pricing strategy? I would love to hear your comments.