When you’re starting any kind of business, you almost always find certain aspects that require more attention than you initially expected.
And when you’re starting a subscription business, pricing may very well be one of those aspects.
Since any subscription business model relies on customers paying a recurring fee of some sort, the way you choose to handle your pricing and billing is important.
How you present your prices to your customers will influence their decision to buy. And how you bill and collect from them on a recurring basis can influence how long they stay.
Even if you’re not just starting out—if you’ve been in business for years—there’s always room to finesse and adjust your pricing strategy.
Maybe there’s a different price point or usage model that’s more attractive to customers or a billing model that will result in your business making more money, such as dynamic pricing. Or perhaps you need to put a creative, competitive pricing offer together to pull in a whale of a customer.
Remember, modern customers want to pay in a way that’s convenient and makes sense for them. Maybe the way your product is priced works for most of your customers—for now. But in six months or a year, expectations and needs can change.
Flexibility is key when it comes to your business’s pricing strategy and ability to go to market with that strategy quickly. But without a recurring billing software solution that facilitates easy updating and customization of a wide range of billing and pricing models, you’re dealing with a real barrier to your potential growth.
What Happens When Your Pricing and Recurring Billing System is Inflexible?
Businesses dealing with inflexibility when it comes to pricing and billing for their product or service will often decide on a pricing strategy and rarely (or never) make any adjustments—no annual upticks, no promotions, and no experimenting with different billing models.
Alternately, their finance teams might be forced to create billing workarounds that can potentially cause problems and confusion down the line—both internally and also when it comes time to bill customers.
Pricing and billing model inflexibility has a bigger impact across your organization than you may think.
- Inaccurate reporting: Your monthly and annual reporting may not be accurate because of all the workarounds you have to create. For example, if your team needs to add a one-time charge to an invoice, they may have to add an additional ‘subscription’ for the price of the one-time charge in question. Then, they’ll have to cancel that fake subscription for subsequent billing periods. Now your reports are showing false expansion MRR as well as a false subscription churn.
- Restricted marketing and sales: Your marketing and sales teams won’t be able to get as creative as they’d like when coming up with new or unique pricing offers. This could make their efforts less effective and lead to potential customers choosing to take their business to a competitor that can accommodate special pricing and contract customizations.
- Inefficient recurring billing and invoicing: Your finance team’s processes are less efficient. As something that happens on a recurring basis, the invoicing and collections process should be a ‘set it and forget it’ kind of task. But, without a flexible product catalog connected to your billing process, the team that does your billing may have to manually update invoices every time you make a change to your pricing.
In the end, it all comes down to one thing: if you’re working with inflexible pricing and billing capability, your business is going to fall behind your more agile competitors.
The Right Recurring Billing Software Becomes a Product Go-to-Market Advantage
Okay, so by now you probably understand why having the ability to customize and update your pricing strategy and billing models is so important for making regular pricing iterations and for finding new ways to bill customers or accommodate customization.
But when you’re racing against your biggest competitors to get your product to market, your recurring billing software can be the competitive advantage that gets you there first. And pricing power is just one component in how it enables a quick and stress-free go-to-market experience.
When using a manual-heavy or legacy billing system, adding new products or services to your product catalog isn’t a quick or easy task. Often, businesses handling billing this way need to pull in their developers to do this.
Of course, this isn’t the most efficient way to go about things. Your developers have work to do on your product, and pulling them away to spend hours updating your catalog isn’t the best use of their time.
With a modern recurring billing platform, adding new products into your business’s catalog can be done in just a few clicks—no coding knowledge required. And product and pricing information from your catalog gets pulled into your billing and invoicing process automatically, so no manual updates are necessary.
All of this means quick go-to-market with new pricing and products, and of course, testing out different pricing strategies and pricing models becomes efficient and effortless too.
Can Your Subscription Business Support Top Pricing Strategies and Billing Models?
Whether for a brand-new product or updating pricing on an existing one, your business’s recurring billing software should have the flexibility to test various pricing strategies and then support whichever billing or pricing models work best.
The most popular pricing strategies for subscription products and services fall under the umbrella of value-based pricing—i.e., pricing based on the perceived value of the product—rather than cost-plus pricing—i.e., the cost of making the product plus a profit margin—which is more commonly seen in retail environments.
Here are some of the top pricing strategies your recurring billing software should be able to support.
Freemium Pricing Strategy
A combination of the words ‘free’ and ‘premium’, a freemium plan is a $0 option for users of your software. The goal is to allow potential customers to try out the software for a short period and then encouraging them to upgrade to a paid plan—a sort of penetration pricing strategy.
Freemium plans are most popular with SaaS businesses, which generally approach this pricing model in one of two ways.
- The first is free-forever, which usually allows the customer to test out a limited version of the software. If they decide they need to access the full feature set, they must take action to upgrade. Otherwise, they can continue to use the free version indefinitely.
- The second is a free trial approach, where the user receives unlimited access to the software for a limited amount of time—this could be a matter of days, weeks, or months. After the free trial period is over, the customer must migrate to a paid plan to continue accessing the software.
Video conferencing platform Zoom—which pulls in a casual $4 billion in ARR, by the way—is one example of a subscription business that’s found success with freemium pricing.
“We really want to get the customers to test our product,” Eric Yuan, Zoom’s CEO and founder told SaaStr. “It’s really hard to tell customers, ‘You’ve got to try Zoom.’ We make our freemium product work so well[...]That’s why almost every day there are so many users coming to our website, free users. If they like our product, very soon they are going to pay for the subscription.”
Fixed Pricing or Standard Subscription
Standard pricing is the most straightforward plan for a subscription-based business model. This is your simple monthly or annual recurring fee.
Businesses offering fixed pricing have only one tier of pricing and users pay a flat recurring cost to unlock access to all features and functionality of the product.
Because of this, it may be a good option for businesses just starting out and aiming to get their product or service on the market ASAP while learning more about their target audience. As these businesses gain market share and understanding of their customer base, they might offer more options or switch up their pricing model completely.
Basic, standard, and premium. Bronze, silver, and gold.
If you’ve ever purchased a SaaS subscription, you’ve likely seen this model in action—it’s one of the most popular for this industry.
Different features and functionality are bundled together to create a package, and each package is made available at a different price point, allowing flexibility for different budgets and usage requirements.
When two or more products are sold together as a ‘package deal’ for one price—often cheaper than if they were purchased separately—it’s known as pricing bundles or a bundle pricing strategy. If you can create a bundle where the perceived value outweighs the price, you’ll likely find that bundle pricing can help you be quite successful.
You’ve probably seen this in action in telecommunications companies when they offer deals for customers purchasing both phone and internet service.
It’s common in SaaS pricing tiers, too, as mentioned in the section above. As the pricing tiers get higher, more premium features are added to create additional value.
As the name implies, usage-based billing adjusts the customer’s recurring fee based on the amount of your product they use during each billing period—whether that’s the number of users, amount of storage space, etc.
Depending on what makes the most sense for any specific business, a usage-based pricing model could take any number of different forms.
- Per-unit or quantity-based pricing: In the world of SaaS, this is commonly seen in practice as per-user pricing. Customers are charged a set recurring fee for each person they have using the platform.
- Volume-based pricing: This pricing strategy makes use of pricing ranges, giving customers a higher per-unit discount. So, if a customer were to purchase between 1-9 licenses for your software, maybe they’re paying $30 per license per month. But, if they were to buy 10-19 licenses, that cost would come down to $25 for each license, and so on.
- Stairstep pricing: This is similar to a volume pricing strategy in that the cost is based on a range of units purchased. The difference is stairstep pricing doesn’t necessarily offer a discount on each tier. Email marketing platform Constant Contact uses a stairstep pricing structure, basing its pricing on the number of contacts a customer has in their system. If a customer were to upload between 0-500 contacts total, they’re paying $20 per month, regardless of whether they added 3 contacts or 499. For any total number between 501-2,500 contacts, they’d pay $45 per month, no matter what the actual number of contacts is, and so on.
- Tiered pricing: Another pricing strategy that takes range into account. This time, each tier has its own price, and there isn’t an overall volume discount. Say a customer purchases 12 licenses to use your product. With a tiered volume structure, the first ten licenses may cost $50 per month, while the remaining two cost $40.
- Metered pricing (AKA pay-as-you-go): With pay-as-you-go pricing, the cost to the customer is directly dependent on usage. Metered billing is extremely common in the B2C space—with everything from utilities to cell phones to ride-sharing operating on this pricing strategy—but it’s also seen in some B2B scenarios as well. For example, SMS platform Twilio charges customers $0.075 for each message sent or received. It can afford some customers a more economy-pricing-type option because they have more control over their spend. At the same time, as customers grow with your business and increase their spend, your revenue benefits.
Usage-based billing is becoming a popular option for B2B subscription businesses, as business customers tend to be more willing to pay based on the amount of value they’re deriving from a product.
Meanwhile, individual consumers may be more sensitive to fluctuations in pricing, so it’s not always a great model for B2C businesses. That said, industries like phone/internet, utilities, etc. successfully sell in the B2C market with a usage-based pricing strategy.
Say a customer has five different annual subscriptions with your business, and they signed up for each subscription at different points throughout the year. When it comes to handling their recurring billing, you have two options.
- Prorate so you can include all the subscriptions onto one annual invoice, or
- bill them at multiple frequencies.
Billing the customer at multiple frequencies—or, taking advantage of multifrequency billing—is a simpler and more straightforward option for your billing team. Rather than calculating the prorated amount, they simply start a new billing cycle for that customer at the time of each signup.
So, no matter when your customer signs up for their subscriptions, they get billed for a full year of service on the anniversary of that date each year until they cancel.
This is almost the opposite of the pricing strategy seen in the typical SaaS business model. Where SaaS companies charge users a recurring fee for their product, software companies following the perpetual licensing model charge a one-time, upfront fee for indefinite use of the product.
Perpetual licensing was common in the early days of software, though it’s been gradually going out of fashion in the software world, ditched in favor of the subscription billing model.
There are a few reasons for this—subscriptions mean more predictable income for the business, a lower cost barrier to entry for the customer, and the ability to easily keep the software up to date.
The biggest benefit of perpetual licensing is security on the end user’s side. Since the customer will host the software on their own servers, rather than the vendor’s, they have total control over any security measures in place.
If it’s impossible to decide between various pricing strategies and billing models for your product or service, why not offer more than one?
Offering hybrid pricing commonly involves offering a fixed-rate fee with the addition of usage-based pricing for overages, though you may also simply offer your customers two or more different ways to pay for the same product. Customers may also pay a recurring fee and have the option to purchase one-time physical goods as well.
Some SaaS businesses may offer customers the option to purchase their product on a recurring or on a perpetual license basis.
Subscription businesses with multiple product offerings tend to be the ones that commonly offer hybrid pricing.
CRM software giant Salesforce offers hybrid pricing to its customers. While its standard product offerings are priced using a tiered model, customers can take advantage of a wide variety of add-ons at a fixed rate or usage-based price.
Businesses that deal in the IoT space handle their recurring billing differently from the way most other subscription businesses would. IoT businesses tend to deal in one-time purchases—the connected device itself—along with a subscription fee for use of the device.
This differs from regular hybrid pricing as IoT businesses often need additional IoT billing support for the reseller ecosystem, and so require recurring billing software that supports features like customer hierarchy management and unified parent-child invoicing.
Recurring Billing Software is The Pricing Advantage and Billing Support You Need
There are a lot of pricing strategies and billing models out there. And, as you continue to work on your strategy, the idea of switching things up should never be off the table—remember, you’ll want to make it as convenient and comfortable as possible for your customers to buy and pay for your product or service.
And if that means someday some of your customers prefer paying for exactly what they use rather than a flat fee, you need a system that will enable you to make that price switch seamlessly.
When you offer customers exactly what they want, they stay happy and are more likely to remain with your business. Which means they win and you win.
The recurring billing software that supports a wide variety of pricing strategies and billing models is the competitive advantage you need to optimize your pricing strategy as you continue to scale.