by Guest Post
There is no subscription billing model that works for everyone.
It’s crucial to weigh the pros and cons of each option before deciding how to charge your customers.
Moreover, your pricing strategy should be based on your value metric, and different value metrics require different types of subscriptions.
Let’s take a look at the seven most popular subscription billing models.
Which one should you use in 2019?
The freemium model is a subscription billing model where you allow people to use a basic version for free and then charge them if they want to upgrade.
This model is used by a lot of well-known companies such as MailChimp, Dropbox, Buffer, and others.
Evernote’s CEO Phil Libin even said that “The easiest way to get 1 million people paying is to get 1 billion people using”.
However, keep in mind that freemium comes with its challenges, and making this model work for your business might be harder than you think.
In general, free plans attract individual users for whom the basic functionality is often more than enough, as well as those who can’t afford to pay for your premium plans, which means that converting enough free users to paid users might prove to be complicated.
That’s why the freemium model works best when supporting the basic product isn’t resource-intensive and when there’s a clear path from being a free user to being a paid user.
MailChimp, an email marketing company that offers a free plan is an excellent example of a successful implementation of the freemium model.
Back in 2009, MailChimp introduced their Free Forever plan that allowed people to use MailChimp for free until their email list reached 100 subscribers.
According to Sumo, the co-founder and CEO of MailChimp Ben Chestnut said that in one year it helped them:
- Grow their user base 5X (from 85,000 to 450,000)
- Increase their number of paying customers by over 150% (despite offering a free product)
- Hit several days of 2,000+ new user signups (when they were averaging about 1,000 new user signups daily before then)
“Launching their “forever free” plan helped MailChimp grow their profit (yes, profit – not revenue) 650% in one year by lowering their customer acquisition costs,” says Chris Von Willpert from Sumo.
Note how Mailchimp tested the waters by offering a free plan with a 100 subscriber limit at first. Then they gradually increased it to the current 2000 subscriber limit which was introduced in 2011.
It’s important to understand that their product lends itself to the freemium model. Someone who put in the effort to grow their email list to 2000 subscribers won’t just abandon it. And they won’t be content with staying at their current level either, so it’s a seamless transition from being a free user to being a paid user.
The freemium model can work very well, but you need to think about whether it makes sense for your product before you implement it.
As Lincoln Murphy, the managing director of Sixteen Ventures, put it: “Freemium is a numbers game.”
It all depends on whether you can get enough people to use the free version of your product and then convert enough of them to paid users.
Evernote’s CEO Phil Libins outlines these three steps to freemium success:
#1 Win millions of free users
Evernote managed to acquire over 3 million free users in just two short years.
#2 Convert more active users to premium status over time
Their free-user-to-premium-user conversion rate over time was 0.5% after one month, 1% after six months, and 5.5% after two years
#3 Keep costs down
They also made the math work by keeping their costs down so that they would net $0.16 profit per active user per month.
Can you see your company acquiring over a million free users and converting enough of them to paid users over time while keeping your costs under control?
If so, it might make sense to experiment with the freemium model and see how whether it works for your business.
However, if your product is too niche to attract enough free users or too resource-intensive to support them, then other subscription billing models discussed in this article might be a better fit.
The fixed fee model is a billing subscription model where you offer a single monthly plan with a fixed price. The main advantage of this model is that the revenue is very predictable. All you need to know to do the math is the monthly price, the number of customers, and the churn rate, plus the number of new customers you should expect each month.
Sure, your projections might not be perfect, but they will probably be more accurate than with other models since the fixed fee model is so straightforward.
You might miss out on potential revenue by not offering pricing tiers, though. Not all customers need the same functionality, which means that different people prefer different pricing plans since no one wants to pay for features they don’t need.
Moreover, having a single price point means that you don’t control the frame of reference which the potential customer uses to evaluate whether the product is worth it. Meanwhile, offering multiple pricing tiers has an anchoring effect which can help you charge more.
Of course, one can also argue that presenting a single price point helps the potential customer decide by saying “Yes” or “No” is easier than picking from several options.
One well-known company that successfully implemented the fixed fee subscription billing model is Basecamp which sells product management and team collaboration software for $99/month.
This pricing is a competitive advantage because other well-known companies that don’t have all the functionality of Basecamp charge per user which can add up as your business grows.
In fact, on their pricing page Basecamp explains that their software can replace 4-5 apps that all charge per user. And they demonstrate it by comparing their product to other products you would need to get the same functionality.
It’s hard to argue that they don’t make a compelling case as to why you’d choose their product over the products of their competitors.
It’s probably safe to say that this competitive edge is the main reason why the fixed fee model works well for Basecamp. Consider trying the fixed fee model if you see a similar opportunity to offer a better deal than your competitors.
Tiered fixed fee
The tiered fixed fee model is a subscription billing model where you offer several plans with a fixed monthly price. This is a prevalent, maybe even the most popular, subscription billing model used by companies such as CrazyEgg, Drip, and ConvertKit.
The main advantage of this model is predictable revenue. Having only a few options for the customer to choose from makes it easy to calculate revenue projections. But some customers might want to tailor their chosen plan to their specific needs and dislike the lack of flexibility that comes with strictly-defined pricing tiers.
ConvertKit, an email marketing software company, offers three plans with a fixed price, and one where the price is calculated individually based on the number of subscribers the customer has.
It’s interesting to compare ConvertKit’s approach to subscription billing to that of MailChimp’s since they are both selling email marketing software.
On the one hand, ConvertKit probably attracts more serious customers since they charge a substantial monthly fee from the very beginning.
However, MailChimp probably has much lower customer acquisition costs, because when you are just starting a free plan is more attractive than a $29/month one.
It seems that when we compare the freemium model with a tiered fixed fee model, what it ultimately boils down to is the quantity vs. quality of customers (at least when we are talking about similar products).
The tiered fixed fee subscription billing model is often the safest bet for SaaS companies, and you should consider it.
The pay-per-seat model is a billing model where you charge for each user that has access to that particular account.
The main advantage of this model is that revenue is somewhat predictable, although not as predictable as with fixed fee and tiered fixed fee models because it’s harder to calculate how many new users you can expect each month.
However, as the customers’ teams and their needs increase, the costs start to add up. That might make them look for more affordable options (remember Basecamp’s persuasive comparison of their fixed fee price with their competitors’ pay-per-seat prices).
Still, this subscription billing model can work well if it makes sense for the product.
For example, Groove, a customer support software company, has three plans with a different price per seat.
This works for Groove because charging per agent makes sense for a customer support product.
You might want to consider this model if you have a product where one account can have several users who each need personal access to the software.
The pay-as-you-go model is a subscription billing model where you charge the customer based on their usage of your product.
The main advantage of this model is that it is attractive to customers since they only pay for what they use which means they can be sure they are getting the most value for their money.
However, their usage of your product might turn out to be sporadic, which makes it hard to predict future revenue.
This model makes sense for businesses such as hosting providers and payment processors where it’s logical to charge based on usage.
For example, Twilio mostly uses pay-as-you-go-pricing where they charge their users per minute or message and offer them volume and committed usage discounts.
The hybrid model is a subscription billing model where you combine two or more subscription billing models.
Here are some conventional approaches:
- Tiered fixed fee + custom
- Tiered fixed fee + per user
- Tiered fixed fee + pay as you go
There are other variants of this model, such as the Dutch model where the user pays a one-time fee to buy software and then a subscription fee for updates, but they are less common.
The main advantage of this model is that it provides the customers with extra flexibility because they can tailor their plan to their specific needs.
But it might also be somewhat confusing to the users, especially if they forget about the per-usage charge and then are surprised by it.
For example, Zapier uses a hybrid freemium model where they charge $250/month or $312.50/month for their Teams plan. But they also charge per usage for extra tasks.
The hybrid model makes sense if you have a product where the usage of a resource-intensive feature might vary a lot on a month-to-month basis. If so, your customers might appreciate the option of purchasing extra usage when they need it.
The custom model is a subscription billing model where instead of having a set price that applies to all customers your offer is customized to each customer based on their needs.
The main advantage of this model is that it attracts high-quality customers that want a solution tailored specifically to them and are willing to pay for it. But it also takes more effort to sell a product like that, which means that you may need to hire salespeople.
Moreover, it might scare away potential customers who might otherwise have purchased the product but assumed that it was too expensive for them without reaching out to find out the price.
We use this model at Chargify because every SaaS business has different needs when it comes to billing, so it makes sense to tailor our solution to each customer.
On our Plans page, we used our decade of experience to design three customizable offers that cater to the ever-changing needs of SaaS businesses.
Then we list our three plans: Core Plan, Enhanced Plan, and Startup Offer.
We then provide a comparison chart that makes it easy for the potential customer to assess each plan.
Finally, we encourage the potential customer to reach out to us if they are unsure which plan is best for them.
Note how we have seven call-to-action buttons on our Plans page that take the potential customer to the contact form. Once they submit the required information, we reach out to them to schedule a call.
Chargify’s billing engine simplifies the process by providing all the tools you need to launch, experiment, and personalize offers without custom code or professional services.
You should consider the hybrid model if you have a sophisticated product which solves a complicated problem that you then sell to businesses who want a solution tailored to their specific needs.
Your choice of a subscription billing model has a significant impact on your revenue so you should give it the thought it deserves.
Take a look at the way you are charging your customers now.
Is it sustainable? Does it fit well with your value metric? Could changing it give you a competitive advantage?
All these things need to be reconsidered with a fresh perspective.
Don’t be afraid to make a switch if you decide that a different subscription billing model would make more sense for your business.