Ten years ago, the subscription model was rare. Pay-as-you-go structures for products and services were one of the most popular ways to conduct business. Netflix was mailing DVDs and an actual, physical newspaper wasn’t seen as quaint.
But today, things have changed.
With so many companies charging a subscription for their services, from streaming media to beauty boxes to dog food, shoppers are now much more familiar with the subscription business model.
New distribution models that didn’t exist ten (or even five) years ago are now common. Consumers are flocking to subscription-based products and services for:
- Waste Reduction
But is a subscription model the right move for your company? Below, we break down the pros and cons of the subscription model vs the more traditional pay-as-you-go model.
With a subscription business, customers pay a recurring fee on a consistent basis (monthly, quarterly, bi-annually, etc.) to receive a product or service regularly.
Pay-as-you-go models work differently because the customer pays a one-time cost for the product or service to get access to it. Then, if they need it again, they will pay again when they choose.
With a magazine subscription, a customer gets their favorite fashion or food magazine delivered to their house once a month. If they were buying the same magazine based on the pay-as-you-go model, the customer would need to go to the grocery store or go online and buy just one issue of the magazine when they wanted to read it (and most likely at a higher cost).
There are even hybrid options, often seen with digital media. Hollywood has been double dipping for years, for example. Avengers: Endgame will be released on DVD and Blu-Ray a few months after the theatrical release, before getting a streaming debut on Disney+ a few months after that. Regardless, The Mouse wins. The Mouse always wins.
Pay-as-you-go has several clear benefits. There’s a very low barrier to entry for customers, and offers them more flexibility around the products they want and when they want them.
- Smaller barrier to entry
- No commitment
- Better cost-per-use
A customer doesn’t need to commit to a prescribed plan and get charged on a monthly basis. They just pay once for a product or service and then start using it. It works well for products that are needed infrequently.
Consumers don’t have to make a commitment up front and can budget accordingly. Think of the differences between viewing a movie on Netflix versus renting one from Redbox.
Because the customer is paying when they want the product, this model helps businesses manage their cost-per-use. It also allows for better tracking of what sells and what doesn’t. Instead of going all in with a product suite, the true revenue generators are able to stand out.
This can allow for more granular metrics. With pay-as-you-go, it’s easier to see which products have a significant ROI, vs. which ones are barely breaking even.
- More difficult to maintain customers
- Difficult to predict revenue
With pay-as-you-go, when the customer makes a purchase, you’re profiting from the sale right then and there. In order to continue making these profits, you’ll need to turn this person into a recurring customer. That requires creating and releasing new products that give the customer a reason to come back.
Without an established, monthly relationship, keeping customers engaged becomes a challenge, and an opening for competitors.
And, while there are more granular metrics on a product-by-product basis, it can be harder to predict revenue over time. Customers buy the product on their schedule — not yours. Because of this, revenue swings from quarter to quarter are not uncommon.
A subscription service is convenient and reliable. There’s a constant relationship that creates a bond between customer and company. At least, that’s how it works ideally.
- Regular engagement
- Easier for consumers to budget
- Easier for businesses to be forward looking
Customers sign up once, the product is delivered to them (whether digitally or physically), and they don’t have to remember to do anything else. When done well, subscriptions are simple and streamlined.
Customers are regularly reminded of the benefits from your products, and can also budget easier. They know how much your product costs and when they’ll be charged. There’s no guessing game. Happy users are engaged users are paying customers.
For companies, the subscription business makes it easier to predict revenue because of recurring purchases. You can also better manage your inventory since you know what’s being sold each month.
It also means that when a customer signs up, they’re automatically a recurring customer. With just one sign-up, your subscription-based business maximizes the lifetime value of every buyer.
This allows for companies to worry less about the present and think more long term. Without the pressure of selling stock now, you can better predict the future and decide how you’ll approach it.
- Customer may be paying for too much
- Easy to cancel
- Consistently providing value to the customer
Customers may be getting more than what they need with their subscription, leading to waste. This is most often seen in food boxes. Constant customer listening and research should lessen this, but it’s difficult to eradicate it.
Also, as easy as it is the sign up, it’s as easy to cancel. Though there is evidence that the hassle of switching services or cancelling a subscription may favor the business, ultimately there is little stopping customers from leaving you.
It’s important to keep your product fresh and new. Blue Apron changes their recipes and brings in celebrity chefs. Adobe has constant updates of their Creative Suite. The product rarely feels stale (literally for food delivery services).
So what’s right for you?
Ultimately, that’s for you to decide and there isn’t a one-size-fits all answer that applies to all businesses. It’s worth noting that you may be able to combine the two models – “pay as you go” is similar in many ways to metered billing (more on that, and other pricing formulas, here).
Here are a few things to think about as you make this decision:
- Which one makes the most sense from a customer POV? If you can’t explain to customers why your pricing model is convenient for them, they’re not likely to be customers for very long. If you have existing customers, talk to them and see what they think. If you’re still in the research stage, talk to would-be customers or the people that you think are your target market—both about your product in general and how you want to charge for it.
- Can you split-test pricing pages to see which one is more successful? At one point, split-testing was difficult for the layperson to set up—but no longer. There are a variety of beginner-friendly tools (including some WordPress-specific ones, if your site is built on WP). They’ll help you create two different versions of a page, and then see which one converts to more customers (and more profit for you). You can read more on A/B testing (and why testing two totally separate pricing pages against each other can teach you a lot) here.
- What model moves you closer to creating a sustainable business? Subscription-focused businesses might seem like the obvious choice here (and, assuming you can avoid subscription fatigue, they can be great for creating recurring revenue). But no matter what model you’re using, sustainability and customer retention should be the focus. You might realize that the nature of your product makes it hard to retain long-term subscription customers. If that’s the case, then pay-as-you-go (or recurring billing, focused on a specific period of time—monthly payments for three months, for example) can be a great alternative.
Remember: the core of a successful business is pivoting and experimentation. Whatever you decide today, make sure to pay attention to the critical metrics for your business and be ready to adjust your strategy accordingly.
No matter what pricing formula or business model you’re going with, we can help you make the most of it.
Our Price Optimization guide has a list of experiments you can do right now, categorized by funnel stage and difficulty. Download it for free and get started today: