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How a market evolution will decide the future of usage and subscription based pricing
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The battle is on! The demand Usage-based pricing has always been asked for, especially by the consumer, but the seller's market may not like the idea since it might harm their profitability. The common man talks about the usage-based model dependent on their value, which the other talks on the basis of operations, and thus it comes to a point where one has to decide which takes the throne.

The consumer always keeps changing, and as consumer changes, it is always essential for the market to go dynamic according to consumer ideology. It has always been a difficult situation for the market to adapt to the consumer demand, and that is why they say the consumer is king, no doubt about that. The rise of capitalism is true, and everyone must adapt if they ever want to survive the wrath of the selfish market. Many services work on different styles and bases. Even though the market works on a barter system, the barter system has evolved uniquely, and it is also frequently changing, but at what cost?

The way of obtaining product was different then and is even the same today on the local platform that is also widely used across the wide market; Debit in, Credit out has been the golden rule of accounting. You play first, and then you get the product. But, the other forms of the market have a different way of dealing with the normal consumer. Subscription-based pricing has gone a long for it to be recognized across the market today. It works based on desire; you buy the product every month if you desire to use it for a longer period and benefit from this. This kind of model allows an equal divide of benefit to both parties. The consumer can benefit from the Usage, and the developer can grow the product for the better.

This form payment/usage model has been in the market ever since the e-market boomed to fame. After that, the play store and app store have been following the same strategy of making the consumer go on a subscription basis if they ever have in-app purchases within the apps they have downloaded. Lao, the same policy applies in stores that supply rations, in gyms, and clubs. Even in a library, gaining a position requires a subscription for you even to read the book. Subscription is a very common concept that not all companies and markets are reverting to the model that involves a usual or frequent purchase by the consumer. This also helps the consumer turn as it tends to quite cheaper if done on a subscriber basis (1). 

But it is a very different situation nowadays; what I mean to say is that the consumer is rational, but how fast is the rationale changing that a market formed at this scale tends to be considered even quickly. Considering that the subscription model has been there over some time, (2) it still doesn’t mean that such a factor should experience death. But, what is it getting replaced with? A new model has come to town, and it is the Usage-based model that has been winning the hearts of the consumer. Everywhere, consumers fight over the reasons for paying more than what they use. For example, if a guy doesn’t use the gym for a week but pays around five thousand rupees regularly, it is unfair for the consumer to pay for what they haven’t consumed. This is why such a model has been quite famous for some time (3). 

The user base model has been appreciated for their leveling style pricing sit involves the “you pay, what you use’ strategy. Of course, the market blew their nerves over this ideology, but it does not stop the consumer from asking for it as even markets need to survive with regular payments and other ways. But, in some places, such a concept fares well like electricity that has been the most common in using this strategy. But, yet that concept looks challenging for many other forms of the market that provide and borrow on the subscription-based model, and it could also harm as the consumer might induce dishonest effects that could prove excessive for the seller.

What is Usage-based pricing?

Use-based pricing is a consumer-based pricing model in which customers are charged only when they use a product or service. The customer is usually billed at the end of the billing cycle. A fee is charged to the user in a flat subscription pricing model regardless of how often they use the service. On the other hand, the user-based charge fluctuates according to what the customer consumes. User-based pricing may also be known as metered services. Usage-based pricing may not be a fairly new concept; most people are familiar with the pricing model when purchasing metered services such as electricity or water from public utilities. Today, many cloud service software (SaaS) and infrastructure (IaaS) providers add user-based payment options to their subscription billing models to maintain profitability. Having this feature allows people to experience how to use services conventionally without spending money in advance (4). 

Usage-based pricing allows for activity-based management (ABM) strategy in which business processes are evaluated and cost-effectively adjusted using an activity-based costing strategy. For example, in software development, this could mean moving from a subscription-based cloud service to serverless computing and a very granular (FaaS) pricing model. One of the best advantages of buying products or services through a user-based delivery model is that the pricing model’s transparency makes it easy for the business side to align costs directly with consumption. A big downside, even so, is that variable use translates into variable OPEX expenditures, which can damage budgets and make forecasting capital expenditures difficult (5). 

User-based pricing can reduce customer churn on the provider side, but businesses must balance the use-based pricing balance with sustainable, recurring revenue. Because too much or too little use-based pricing can compromise the long-term growth, experts recommend that no more than 50 percent of revenue be based on Usage. If you’re on a shoestring budget, it might be out of the question to spend hundreds of dollars a month on a new SaaS product. However, even if a potential customer is on a limited income right now, that doesn’t mean they will have to live with cash forever. Use-based pricing gives your leads the chance to assess your product’s waters and prefer the experience at a lower cost. On a pay-as-you-go model, customers can increase their prices as their own companies and expenditures grow. More and more money your consumers can save makes more so they can invest back in their businesses (6). 

 

What is the Subscription-based model?

Throughout the subscription pricing model, consumers pay a minimum each month to obtain your apps. SaaS companies have used this model for a long time now, growing by more than 300 percent in the last seven years. Many SaaS companies that use the subscription pricing model will opt to implement a tiered subscription model that offers several different subscription options with different features and, of course, different pricing levels. Using a segmented subscription model is beneficial because it provides SaaS a lower entry point, with both the opportunity to upgrade the feature. Many firms offer a most basic version of their apps free or discounted (7). 

One of the main advantages of this model is that it allows both company and your customers to budget conveniently, as the amount they pay is fixed monthly. The downside for SaaS companies that use the subscription pricing model is that high-use customers could be receiving more than their fair share out of the product, while low-use customers may feel that they are not receiving that much. Picture a company whose overheads increase as customer usage does, for example, a cloud storage platform, and begin to see how high-use customers on a subscription plan can have a major negative impact on your bottom line. Still, the subscription model doesn’t seem to be going anywhere soon.

The subscription revenue model is hardly a new one. It has been a staple of industries publications, utilities, and, more recently, software since it first emerged in the 17th century. But in the last few years, subscriptions have seen a little resurgence. Why because It’s straightforward: the subscription pricing structure benefits both consumers and companies. Customers appreciate the comfort of self-renewal and have access to the highest offer for low growing investments. Meanwhile, subscription companies can expand confidently, with consistent revenues and deeper relationships with their client base. It’s no wonder that ever more companies are moving to a business model of subscription (8). 

The subscription revenue model generates revenue by charging customers a recurring fee, which is processed regularly. Subscription revenue is based on establishing long-term relationships with customers who regularly pay for access to the product or service, referred to as recurring revenue. What makes subscription revenue so powerful is how growth is compounded over time. Instead of remaining flat month to month, each new subscriber accumulates revenue. As long as companies acquire new subscribers faster than they lose, revenue will grow exponentially. Customers will become more valuable the longer they use your product or service (9). 

 

Why companies support the Subscriber model?

The subscription model’s success is due to the optimal balance of value it provides to both the company and the customer. For customers, the value lies in their convenience. First, there’s the simplicity of the subscriptions that removes the thinking behind the purchase decision. Subscribers have never had to remember to reorder every couple of weeks, which provides them the guarantee that they’ll have anything they need before they need. Everything comes to your door like magic, removing the difficulty of making a trip to the store or the website to place an order. Second, subscriptions offer a flat rate that helps customers stay within their budget (10). 

 

Why Usage-based model?

The usage-based billing model essentially charges customers based on how many units of the product or service they use, calculated at the end of the billing cycle. For example, pay-as-you-go cell phone plans often charge for use, such as minutes of phone time used or several texts sent. International calls where you are charged per minute are another example of this. A use-based model can be well suited for certain services where customers only want to pay for what they use and where the business wants to match the revenue they use. A combination of fixed recurring and usage-based fees in a subscription plan is a common model that combines both worlds’ best.

 

So which is better?

More and more agile and scalable server environments have revolutionized the SaaS industry from top to bottom. Even when it comes to pricing and billing, SaaS companies can no longer afford to remain static by offering a few price-fixed options that only appeal to a limited number of potential customers. Real, use-based pricing allows for more flexibility and has become a key differentiating factor or an immediate necessity in competitive markets as they develop. For a subscription-based model, the benefit falls on behalf of the seller, and thus, he would want to benefit from it. There isn’t a very started competition from these two models, only that the way they have and will be used will be a matter of decision rather than time.

So, we cannot expect that market to evolve towards a new model immediately as it has its negative impact, and since the angle is always vice-versa, both have to agree, that is the buyer and the seller. Hence, it is better for things like these to evolve rather than apply.

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My passion is Reading and writing. Basically, an optimistic introvert. Always striving to be better. Writing as a passion leads me to become stronger and focused.

Disclaimer: The views, thoughts, and opinions expressed in the article have been curated for our audience and does not warrant a 100% accuracy. All the information mentioned in the article is subject to change according to the changing viewpoints. Feel free to reach us at [email protected] for any change or copyright issues.

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Abraham George
Abraham George
My passion is Reading and writing. Basically, an optimistic introvert. Always striving to be better. Writing as a passion leads me to become stronger and focused.

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