At We Are Builders we like the subscription pricing model for our SaaS startups. Here are 9 reasons why businesses and customers do too.
Pricing strategies are always a hot debate. On all levels there will be friction, first a discussion on choosing between subscriptions or transactions, then about the plans/products and the price levels itself.
A few weeks ago I battled a founder about subscriptions vs. transactions and I came up with these 9 reasons subscriptions are bad-ass.
Here are the definitions to make sure we’re on the same page:
- Subscription model — a periodic (monthly, yearly, or seasonal) payment to gain access to products or services.
- Transactional model — you pay as you use the products and services.
Like the title of this publication tells, we prefer subscriptions. However, the subscription model is not feasible and/or desirable for all and there are several pros of the transactional model as well.
The subscription-based pricing model works for services that deliver true value to users, now and in the future.
A brief history on subscriptions
The subscription model originates from newspapers and magazines and became more and more popular in other industries. Just before 2000, some software companies started adopting subscriptions, sending out floppies and CDs to enterprises. But as the popularity of SaaS and cloud platforms grew it became more commonplace.
We all know what happened next, valuations for subscription-based businesses like Spotify and Netflix skyrocketed while companies that failed to spot the changing customer need (e.g. Blockbuster and record sales companies) saw their revenue dry up.
Below we’ll consider the pros I see with subscriptions, for both parties that are involved in subscriptions: customers and businesses.
Why customers ❤️ subscriptions
Consumers are more and more looking for convenience. Subscriptions bring convenience in several ways.
Have it before you need it. Always.
Subscriptions assure customers never have to remember to periodically reorder. In turn, this gives customers the reassurance that they will have whatever they need before they actually need it.
Decide once, enjoy forever.
A customer only has to make a purchase decision once. Afterward, he/she never has to think of it again. This makes customers perceive less pain of the purchase decision.
Less payment hassle
If customers had to go through manual payment daily, weekly or monthly this would become kind of annoying. Every extra step between the user and getting value from a SaaS product is another step where a user might churn.
Flat rate (or Capex vs. Opex in B2B)
With a flat rate being charged periodically, consumers have the convenience to stay within their budget and don’t have to pay a huge amount of money up front.
Why businesses ❤️ subscriptions
Subscriptions are about building relationships. With a subscription we can acquire customers’ loyalty, making it a reinforcing effect. As long as the relationship brings more value to users than the subscription costs, the users are less likely to break up and start dating a competitor.
A predictable stream of income
By definition, the recurring model provides a more predictable stream of income than with the transactional model. A subscription is the start of a formal relationship between user and company.
Metrics, Metrics, and Metrics.
The subscription metrics (e.g. Monthly/Annual Recurring Revenue, Customer Acquisition Cost, Lifetime Value) provide valuable steering information to CEOs and CTOs. And as a bonus, investors know how to read these metrics too and enable them to make better valuation analysis.
Better customer profiling
Just like in the real world, the more you are with someone, the better you get to know each other. It is vital to learn from users, especially in the early days of a startup.
I’m using specialized user tracking software to find bottlenecks in our software, find the best converting copywriting for landing pages and learn about users preferences. This speeds the journey to product/market fit (or pivot) and helps fine-tuning the product.
The Customer Acquisition Costs (CAC) : Lifetime Value (LTV) ratio
The CAC and LTV are in our top 3 metrics in our weekly metric review. The CAC is the cost we make to acquire a new customer. The LTV represents the total expected revenue a company makes from a new customer.
Subscription based companies can handle a higher CAC as they have the opportunity to recover the CAC not in just one transaction but in the lifetime of a customer. Additionally, keeping the users engaged has priority number one for subscription-based services so continuous product improvement and customer service are essential.
Having different pricing plans that provide different feature sets and value to customers is a huge opportunity for SaaS businesses to increase the revenue per customer.
And customers want to be upsold, as they are looking for convenience. But keep in mind your pricing plans need to be aligned with your customers budget and needs.
So what’s next? Should you be switching? You’d better think this through! Remember the subscription-based pricing model works for services that deliver true value to users, now and in the future.
However, if you do consider switching, here’s a bonus: check out these excellent posts from Lincoln Murphy, Pricing Strategy Framework for SaaS Startups and A Complete Guide to Changing Your SaaS Pricing from Patrick Campbell.
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