In this piece, Zuora’s head of strategy Nick Cherrier dispels rumours of the ‘death of subscriptions’ and explains why the Subscription Economy has never been stronger.
Reports of the death of subscriptions are, to bastardise a classic Mark Twain line, greatly exaggerated. That hasn’t stopped the ‘rumour’ doing the rounds – and the most commonly declared ‘killer’ is usage-based pricing.
I would suggest that far from being dead, subscriptions – the entire Subscription Economy in fact – have never been in a stronger position. And far from being a threat to (or murderer of) subscriptions, usage-based pricing is one the chief reasons that subscriptions are riding so high.
In my view, subscriptions and usage-based pricing aren’t competitors. In fact, I don’t see them as comparable. Subscriptions come in all shapes and sizes – this has always been one of their great advantages. While it’s true that Netflix and Spotify have made fixed-price or “all-you-can-eat” subscriptions perhaps the best-known variant, many other versions exist (and are being developed as I write this). Usage-based pricing is just another of them.
To give an example, let’s move away from the undisputed heavyweight champions of recurring revenue models and look at some very successful companies not quite as well known for their subscriptions.
Breitling is a Swiss watchmaker, established almost 150 years ago. They offer a subscription program called Breitling Select that is a classic fixed price offering. As a subscriber, you can choose from up to 3 watches over a 12-month period for a one-time fee in addition to a monthly rate. You send back one watch before trying another and, after two months you have an opportunity to purchase one of the watches at a special rate.
Like any subscription variant it has its pros and cons. It’s extremely simple and easy to understand, for a start. It also makes budgeting straightforward, for both the watch-wearer and for Breitling. But, there’s no price differentiation, which means Breitling may not be making optimal use of customers’ willingness to pay, and leaving money on the table. And, it’s not strictly ‘fair’ if you take into account usage – a person who wears a watch to one fancy dinner party and then forgets about it pays the same as someone who wears their watches every day over twelve months.
For the consumer who worries about value for use, pay-per-use pricing is, of course, enticing. A good example is Rolls Royce’s TotalCare option for its aerospace customers. With TotalCare, Rolls Royce, the world’s second-largest aircraft engine manufacturer, charges its customers a fixed rate per flying hour. Airlines only pay for what they use and Rolls Royce has an incentive to keep their engines in perfect running order (if they’re out of action, the revenue stream stops).
On the other hand, pay-per-use makes predicting revenue somewhat more difficult for the subscription company. There’s also the problem of the taxi meter effect. That’s a phenomenon where people have a tendency to fixate negatively on the link between units of consumption and price (to the extent that some even prefer to opt for a more expensive lump sum just so they don’t need to think about the accumulation of fees as the meter ticks over).
These might be considered the two poles of subscription pricing. In between is a spectrum covering numerous hybrid models. There’s Freemium – think Dropbox, which lets you try a version of its service at no charge, but offers premium versions for a monthly fee. There’s overage-based pricing, a middle ground between the two poles – think Audible, which gives you a limited amount of free content per month and then lets you make purchases on top of that. There’s tiered with overage – think Origin Energy which lets you self-select the most appropriate subscription level while also including an energy use component. And there are many more, all of which have advantages and disadvantages.
There are so many options because one-size fits all is anathema to the Subscription Economy. Having said that, broad rules do apply. Zuora research suggests that there’s a sweet spot for most companies: those who have between one and 25 per cent of revenue coming from usage-based pricing grow faster than those with no usage-based revenue. However, there is a tipping point beyond that quarter mark where growth eventually stalls.
So, yes, there is a best-practice range for proportion of usage-based pricing, but there is no such thing as a “correct” subscription variant combination for an industry or sector. It would be far too prescriptive (and just plain wrong) to say, for example, that a financial services company must blend tired pricing with classic set-price. Instead, the best measure of success is whether those who use a particular service come out as winners. If they don’t, they’ll walk. The era of “take it or leave it” is well and truly over.
That’s a good state of affairs for the people buying energy, listening to music or watching streamed content. But the fact that there are so many options – the fact that the model is so easy to tweak or adjust – means companies willing to modify and experiment, win as well.
Usage-based is one of the primary reasons that subscriptions remain so flexible for customers and for businesses. It hasn’t killed subscriptions; it’s made them better.
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