“Don’t measure your business with someone else’s ruler.”
When it comes to choosing the right pricing model for your business, that golden rule holds true. You’ve heard plenty about SaaS companies evolving their pricing models from a subscription-based model to a consumption-based one. Regardless of whether your competitors are making the change or you’re simply caught up in the hype, the decision comes down to the impact on your revenue. But switching to a consumption-based model isn’t necessarily the right decision for every business.
The stakes are high because a poorly-judged or problematic pricing strategy can result in a serious loss of revenue. So let’s take a look at reasons why a consumption-based pricing model may not necessarily be right for your business.
#1: Annual (or multi-year) subscription-based pricing has its advantages
Offering an annual or multi-year plan through a subscription pricing model is one of the easiest and smartest pricing-related decisions you can make. For one, this type of plan locks customers into longer agreements, reduces churn rates, and through annual discounts, incentivizes conversion. In addition, signing up for an annual plan is easier for buyers in terms of budgeting.
Consumption-based pricing, on the other hand, allows your customers to stop using your product at any time. The benefits for your customers are clear—they pay for their actual usage, not simply their access to the platform or their potential usage. For your business, however, customers and their lack of use can essentially reduce your billables to zero.
#2: Predicting revenue is difficult
One of the advantages of subscription pricing is predictable recurring monthly revenue. CFOs typically forecast revenue on a monthly basis for the next financial year and then annual predictions. From a business operations perspective, allocating and budgeting resources for new products and service lines, as well as spending in other areas (e.g., marketing), is more straightforward when you have revenue stability.
With consumption-based pricing, revenue forecasting is less accurate and potentially even volatile. While you can make assumptions based on historical usage data, that assumes you have enough data to do so. More importantly, any significant declines in customer usage will impact revenues for any given month or months.
#3: Customers’ "use now, pay later" can create cash flow issues
One of the fundamental differences between subscription-based pricing and consumption-based pricing is when customers pay. With standard annual pricing, customers typically pay for the month upfront. With consumption-based pricing, however, businesses can’t charge customers until the end of the month once total usage is calculated. That can delay when payment is actually collected.
For businesses, this delay can create internal cash flow issues. Here’s why in one word: overhead. Bills from running your business means you’ll be paying out to meet those obligations in advance of receiving revenue. Depending on the financial maturity of your business, a misaligned pricing model can be detrimental.
#4: Customers face budgeting struggles
While we discussed the difficulties for businesses to predict revenue that come with consumption pricing, the same applies to customers. With subscription billing, customers know exactly what they’ll be paying each month. However, since consumption billing is based on usage, customers will likely see a bill that fluctuates. That added layer of uncertainty may turn off customers who prefer ease over complexity.
The Bottom Line
Before embarking on any pricing changes or improvements, research your options, and, most importantly, speak with your customers about their needs and challenges. If you’re interested in learning about the benefits of consumption-based pricing, check out our best practices.
Regardless of the pricing model you choose, Subskribe is here to help scale your company’s growth. To learn more, contact us.