Subscription Vs Pay-Per-Use Pricing in SAAS

Pricing is a very difficult subject to cover in a short blog post. There are so many factors to consider, and a lot of grey area when we start getting into potentials and estimated revenues for your SAAS company. So it’s no wonder that pricing is a difficult yet a very important topic to understand as you are rolling out your software offering. The two options we are going to look at are pay-per-use, the virtual toll booth approach, and subscriptions. It’s not difficult to understand the concepts behind them, but to decide which one is right for you is a lot harder.

When to use Pay-Per-Use Pricing

There are a few reasons to pick pay-per-use (PPU) over subscriptions. The first consideration is material costs. If your application has a material cost, i.e. an offline fulfillment cost, making sure you factor in that cost is going to be very important. Products like Snapfish, where each print adds costs, understand this and have elected to use a pay-per-use approach to pricing. There is no better way to manage those costs than to use PPU, or to limit your fulfillment, which is not going to be customer friendly. The second reason to use PPU is when the service is not intended to be used constantly. Services like Angie’s List could really benefit from a PPU approach, since the use of the product has a limited lifetime for many users. Adding a PPU option to this service could greatly increase use since the pricing model reflects the user habits. Lastly, another good reason to pick PPU pricing is that it delivers greater feedback on accurate pricing, and allows the user to dictate their costs. This is evident in the current backlash on cable TV. The subscription model is failing because of the increase of user demands and the desire to pay for only what they watch. The blanket subscription does not work when the customer does not want all you offer in the subscription, or has an adversity to paying for services they don’t want. It puts the users in control of the costs, and in control of their choices.

When to use Subscription Pricing

Subscription models are great when there is a consistent, even daily use of a product. When cost to run the service does not grow with use, the subscription models allow for a growing margin on top of a steady cost structure to offer the service. The growth rate and margins would make any business owner grin from ear to ear. So that is the magic formula you are looking for in a subscription service. This does lend itself well to internet SAAS, simply because the costs don’t tend to increase that greatly with each additional user. And, subscription services can also simplify access and monitoring for a customer. They pay one fee and have access, streamlining the billing and accounting feature greatly.

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Challenges in Pricing

So what are the major challenges that most companies face in making these decisions? The first one is that they don’t have the ability to monitor or track use that would be needed to create a PPU service. They shoot low because they can’t build the required tracking to enable that feature. Similarly, some companies can’t determine the ‘toll booths’ that make sense for their service. They don’t really know where the value lies and miss opportunity for increased revenues. Lastly, they follow the herd. We are all guilty of that in some way, but until you run the numbers and look at the potential for your service in each method, you are leaving money on the table.

 

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