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Mar 16, 2021“Some say that 2020 was the year of subscription pricing. If that is the case, you can expect 2021 to be the year of consumption-based revenue.” - James Messer, Founder and CEO, Gotransverse, in Forbes
Earlier this month, Gotransverse founder and CEO James Messer wrote an article for Forbes about the evolution of traditional subscription services. He acknowledged that the COVID-19 pandemic has driven significant demand for subscription services as consumers have sought to procure everything from necessities to entertainment in a safe, convenient way. In fact, according to Deloitte, US consumers pay for an average of 12 entertainment subscriptions. However, he says, the “honeymoon period” between consumers and their subscriptions may be coming to an end. Deloitte’s research indicates that churn among entertainment subscribers is growing, and other research finds that 47% of Americans are put off by the growing variety of subscription services available to them.
Why the cool-down? “Consumers want choice, but they want to choose how they buy,” Messer says. “The trend is moving to pay-as-you-go, and more consumers are willing to pay a little extra for precisely what they want.” As economic uncertainty has many consumers combing through their credit card bills to cull out unnecessary services, subscriptions that offer just a few useful services (or appealing TV shows) are likely to wind up on the chopping block. But, says Messer, this doesn’t signal the end of recurring revenue:
“While some subscription sales may show signs of softening, companies are doubling down on recurring revenue strategies. Fifty-two percent of CFOs say that 40% of their revenue is recurring. Usage-based pricing is now proving to drive success for emerging and established companies.”
Usage-, consumption-based, and pay-as-you-go pricing is beginning to edge out simple subscription as customers prefer to pay for only what they need and want — without any extras. And as an added benefit for businesses, these models enable deeper insights into how and what customers are purchasing, enabling companies to enhance their value, streamline their resource allocations, and prevent customer churn. While there are some challenges to usage-based pricing — a decrease in revenue predictability and additional complexity added to the budget, for example — the benefits of these models far outweigh the obstacles that may make for a bumpy start. (This is especially true when businesses invest in the right platforms and systems to support complex billing.) As such, Messer is confident that 2021 will be the year of consumption-based services, and he predicts we’ll begin to see four key trends emerge:
- More customized pricing for everything-as-a-service business models
We’ve already seen everything-as-a-service (XaaS) models proliferating cross industries as just about every kind of company, from car manufacturers to fitness to education to gaming, have begun offering their services and products in subscription form. As those industries begin to see the advantage of customized pricing models to give customers exactly what they want, Messer predicts, “the next logical step will be an increase in consumption-based offerings.”
- More direct-to-consumer business models
As the pandemic has kept many retailers shuttered, or at least operating on a limited basis, D2C business models have been growing in popularity (think Warby Parker, Allbirds, and Glossier, for a few examples). Messer suspects companies that sell directly to customers — rather than getting intermediaries involved — will continue to flourish.
- Refined models for existing usage-based services
Companies that already offer usage-based services will continue to refine their pricing models, giving customers access to the specific features and products they want. “For example,” Messer says, “OTT providers will start allowing customers to buy or rent specific series or episodes without requiring them to subscribe to a channel in which they may have no other interest.”
- Hybrid models that blend usage-based and subscription services
And finally, he predicts, companies will start to blend subscriptions and a la carte services, providing a balance between predictability and choice. He suspects we’ll also start to see consumption-based pricing come with incentives to encourage recurring revenue, such as discounts and loyalty programs for repeat customers.
Customers have more purchasing power now than ever before, with more brand choices for just about any product or service they may be in the market for. So, in order to build resilience, companies must be willing and able to meet their demands for choice in exactly what they purchase and how. As a result, Messer says, we’ll start to see savvy companies adding consumption-based pricing to their existing revenue models to both enhance the customer experience and open new doors to revenue growth.
Read Messer’s full article here.
To learn how Gotransverse enables our clients to implement these complex, innovative pricing models, we invite you to take a virtual platform tour today. Then, when you’re ready, request a demo to speak with one of our experts about whether Gotransverse is the right billing partner for your organization.