Subscription billing effectively stabilizes and standardizes your income while aligning more closely with your customers’ preferences. By offering subscription plans, you can create a predictable revenue stream and foster stronger customer relationships. If you’ve decided to implement subscription billing to capitalize on these benefits, you may be curious about your options.
In this article, we’ll explain subscription pricing, explore the various models, and guide you through choosing the right model for your business. We’ll also provide insights on subscription pricing strategies and how to avoid common fees associated with subscription billing, ensuring that your approach is as cost-effective as it is efficient.
What is subscription pricing and how does it work?
Unlike traditional billing models like cash on-delivery or credit-based invoicing, subscription pricing requires customers to make payments at regular, predetermined intervals. These payments grant access to ongoing services, sites, or technologies or cover the cost of recurring product deliveries.
Depending on the subscription type, charges typically occur monthly or annually and are pre-authorized to streamline the payment process.
4 types of subscription pricing models
Your business’s best subscription pricing strategy will vary significantly depending on your industry, business model, and customer base. Fortunately, several approaches are available.
Fixed-rate
Also known as a flat-rate model, this approach is the most straightforward subscription option. All customers pay the same, uniform price to receive the same amount of product or to gain access to the same level of service. Fixed-rate subscriptions are ideal for organizations that offer a limited or singular product catalog or for those with consistent production costs for each product or service delivery.
Your business is likely already paying a fixed-rate subscription for some, if not all, of the software you use under an annual license.
Benefits of the fixed-rate model:
- Easy to manage, requiring little accounting oversight
- Simplifies communication with buyers
- Standardizes revenue streams
Tiered
Instead of offering the same product or service to every customer at a single price point, a tiered subscription model provides more variety. Consumers can choose how much or how little they wish to receive. Each tier offers increased access to features or services, with a corresponding increase in cost.
Tiered subscriptions are particularly effective for businesses with complex service offerings that cater to different market segments. Limiting the number of tiers is typically the best way to avoid customer confusion.
Benefits of the tiered model:
- Supports a broader pool of potential customers
- Offers opportunities to up-sell
- Encourages retention as users can shift between tiers as needed
Usage-based
Instead of predefined payment terms, pricing in a usage-based model varies based on how much of a product or service a subscriber consumes during the subscription period. Simply put, the more you use, the more you pay.
This approach is ideal if your operating costs fluctuate significantly with the consumption levels of your subscribers.
Benefits of the usage-based model:
- Allows subscribers to try a service without a large commitment
- It gives subscribers direct control over what they pay
- Aligns the subscription price with its actual usage cost
Hybrid
A hybrid model borrows from the previously discussed options, offering a more customizable strategy. These subscription plans instead deliver a base price for all users that will increase if usage exceeds a set threshold. This price increase, in turn, might act as a new fixed-rate tier or may follow a consumption-based approach.
Benefits of the hybrid model:
- Ensures a base level of income regardless of usage
- Offloads spikes in operating costs to power users
- Empowers subscribers to control their costs
What to consider when choosing a pricing model
There are advantages and disadvantages with whichever model you choose. But with careful planning and forethought, you can easily determine which structure works best for your business. Some factors that you should consider are:
Who are your customers?
Start by conducting thorough market research to understand your target customer base. How large are they, on average? Are they new to subscriptions? How do they typically fund purchases for products or services? Will they require varying levels of support?
The plan you choose must be one that your customers are willing to pay for.
What does the market look like?
Examine what your competitors are offering. Are they using a subscription model, and if so, do they use the same pricing model you’re considering? Could offering a different payment strategy give you a competitive edge?
Also, consider broader industry factors. If markets are tight, opt for simpler, more predictable subscription pricing schemes.
Does it meet your financial goals?
Assess the actual production costs of what you offer. Do your operating costs remain stable regardless of usage, or do they spike as usage increases? Can the pricing model you’re considering scale effectively as your business grows?
Subscription pricing strategies to know
Of course, once you’ve identified the subscription pricing model that makes the most sense for your organization, you’ll still need to determine the actual dollar value to charge. To identify that rate, most businesses use one of the following methods:
- Cost-plus pricing: Simply calculate what your ongoing operating costs would be for a given subscription and add a percentage margin to cover profit and reinvestment
- Competitor-based pricing: Establish your fees to align with what similar businesses in your industry are charging
- Value-based pricing: Build your pricing schemes based on market research regarding what customers will be willing to pay for your product or service
How to avoid fees with subscription pricing
While subscription-based pricing can simplify your billing efforts, tracking and collecting the appropriate fees can prove a bit complicated. That’s why most organizations rely on some form of subscription billing software. However, many of these platforms also charge a per-transaction fee.
This per-transaction fee typically costs between 1 and 2 percent of the purchase, which can quickly add up. Before choosing a subscription platform, ensure you understand all associated fees.
It’s also important to consider functionality. Invoiced’s automated A/R solution eliminates per-transaction fees and offers valuable features like detailed subscription metrics, helping you optimize your pricing models.
Invoiced: Make subscription billing easy without the fees
Subscription billing doesn’t need to be complicated, especially when you choose an Accounts Receivable Automation software to manage your billing and invoicing efforts. Alongside comprehensive reporting, exhaustive back-end integration, and seamless customer communication tools, our Subscription Billing feature makes it easy to automate the collection and processing of fees for all your subscription services — no matter how complex or how many tiers you offer.
Best of all, it does so with zero per-transaction charges. Schedule a demo of our A/R solution today to get started.
