The Evolution of Pricing Models

The explosion of technology in recent years—including the growth of Internet usage, the proliferation of connected devices and the increased ability to harness and process large volumes of data—are transforming the way consumers think about making purchases and, in turn, the way B2C and B2B businesses operate.

Traditionally, whether a business was selling software to businesses or widgets to consumers, the sales process was fairly transactional: a quick, one-time sale at a fixed price, with no real attempt to form a lasting customer relationship. The product, itself, was a business marketing tool. If customers liked it, they might tell their friends. But once they were set up, themselves, there was no reason to expect or encourage them to come back.

But eventually, businesses began to realize that, by limiting their sales to these one-time transactions, they were missing out on opportunities to drive growth by building long-term relationships with their customers. So they started to make a change.

Subscription Models Drive Recurring Revenue & Customer Loyalty

Evolved from the publishing industry’s model for newspapers and magazines, the subscription model is a simple concept: customers pay a fixed amount every period, and they receive their products and services at the same frequency. This model took off first in software, as B2B companies started selling subscriptions rather than one-time license fees, and then in the B2C universe, with media streaming, subscription boxes and more taking off rapidly.

When we consider the benefits for both customers and providers, there’s no wonder subscription services became so popular so quickly. On the vendor side, subscription services enable both recurring revenue and more accurate forecasting (and budgeting). For customers, subscriptions are a highly convenient way to ensure constant access to their favorite and most useful products.

And then there’s the customer loyalty piece. Research has shown that returning customers spend 67 percent more than new customers, and subscription offerings give vendors a powerful opportunity to turn new customers into returning customers.

Of course, the question becomes, once businesses have built those long-term relationships, how can they really capitalize on that customer loyalty, providing additional value and opening up new revenue streams?

Consumption-Based Offerings Create Limitless Opportunities for Growth

While a simple subscription model is certainly valuable in terms of recurring revenue and customer retention, it also leaves a lot on the table in terms of value for customers and earnings potential for businesses.

As companies started to realize this, they began combining their simple subscriptions with one-time and pay-as-you-go offerings, allowing customers to subscribe at a basic level and then add the features, products or services they needed. It’s the model you’ve seen on your cell phone bill for ages — you subscribe to your basic messaging and data plan, and then you can pay to add features like extra data, cloud storage or insurance as needed.

For customers, this model provides total transparency regarding what they’re paying for and what they’re getting. They’re no longer stuck paying for default features they don’t use, and they can tailor their purchases to their specific needs. For businesses, it means the ability to track and analyze granular usage data so they can update offerings, maximize value and stay on top of the market. It also helps drive revenue by pairing the predictability of the simple subscription with the nearly limitless revenue from add-ons. And for both business and customer, this model lowers the barrier of entry to trying out new products and services, letting customers dip their toes in the water and letting businesses test-drive new offerings without significant financial risk on either side.

Managing Complex Pricing Models

As pricing models have become more varied and complex — and as customer and transaction volumes have risen accordingly — legacy billing systems and platforms have often struggled to keep up with these changes.

Because subscription and consumption-based billing are more individualized than traditional models, they require an intelligent billing platform that can process usage data at scale according to the business’ unique packaging, pricing and rating models and report that data effectively to ensure a smooth quote-to-cash process for each customer.

For businesses looking to increase revenue and enhance customer relationships through consistency, transparency and flexibility, consumption-based billing can be a critical competitive advantage. For more information about how we can help your organization make the shift to a more powerful billing model, we invite you to contact us today to schedule a complimentary, personalized demo.