The recent continued changes is the consumer buying and spending habits have forced businesses to change their revenue models to accommodate the new trends in the market. The customers are demanding for simple, hassle-free and manageable shopping experiences. Companies are turning into the subscription and the pay as you go revenue models to cater for this need.
The Subscription Revenue Model VS Pay As You Go
In the subscription revenue model, a customer pays a subscription fee mainly on monthly basis, to have continued access to a product or service. On the other hand, the pay as you go revenue model involves metered use of a product where the customer is charged for what he/she uses on a transaction basis or when he/she uses the service. Examples include “Pay-per-view TV,” custom research firms, online journal publications among others.
The subscription revenue model
The subscription model owes its immense success to the value it provides to both the customer and the business owner. The most value for the customer comes from convenience; first, with the simplicity of that comes with use of subscriptions. The customer no longer needs to worry about the purchase process, or have to remember to make an order each month, because subscriptions gives them the assurance that they will have what they need beforehand.
Moreover, the customer no longer needs to go through the hassle of making a trip to the website or store to place an order. Secondly, subscriptions help customers to stay within their budget by offering a flat rate with minimal price fluctuations. There is also added value to the customer due to huge discounts, or economies of scale by getting it all for the price of one through bundling.
The major benefit of the subscription model to the businesses is the ability to make accurate revenue projections through the expected recurrent sales. Subscriptions encourage recurrent payments, which imply that businesses using this model have more guaranteed revenue thus giving them up to eight times more value than a similar business with minimal recurring revenue. The consistency in revenue and customer habits enables the company to gather customer data and open up new customer outreach possibilities, effectively manage inventory due to the ability to predict demand, offer effective pricing methods among other benefits.
Challenges of subscription model
Risk of overspending: There is a high risk of overspending especially because customers have to wait till the end of the month for the bill to come to realize that their spending habits have accrued huge bills.
Paying for resources you do not need: It is highly likely that many customers on subscription plans pay for resources they don’t need. For instance, a business that pays for 10 GB of bandwidth but only consumes 2 GB bandwidth. However, on a pay as you go model, the business will only pay for the 2 GB bandwidth consumed.
Pay As You Go Model
The Pay As You Go Model works in two ways: users can add “credits” to their account by paying some amount of money in advance, which is charged, based on continued consumption. Once the credits are used up, the user can no longer access the service until he/she purchases more credits. The second options entails having metered billing where you are invoiced at the end of a billing cycle based on your consumption such as water, electricity, and gas utility bills.
The customers on pay as you go model appreciate that they are not committed to a lengthy contract that limits their freedom of choice until this period expires. Moreover, the customers have more control on their spending, with the cost being set by how much a customer wants to spend.
To the business, this model Aligns costs with consumption thus facilitating the ability to manage per use cost and track the inventory in real time. Moreover, if the product or service is good, it provides huge benefits to the provider because the customers will be willing to commit to long term use of the product or service without feeling coerced. Finally, there is no need for both the customer and the provider to renegotiate terms as the customer scales.
Challenges to the Pay As You Go model
Unpredictability: This model is characterized by unpredictability in terms use and revenue because customers only purchase what they think they need as opposed to the subscription model where they have to pay a specific price whether they use the service or not.
May discourage frequent use customers: This model may not cater well for the customers who make frequent purchases because, bills tend to go higher than the customer who has paid a premium subscription for a similar service for unlimited use.