Billing models are now increasingly being used as Service understood. Many subscribers would like to pay only thatwhich they also actually consumed have - so-called "pay per use". For products, the Production costs the Profit margins and on the basis of this the Price defined. But how do you define the price for a value proposition, an access, an event? And how is the price justified?
On the one hand, a company can use usage-based growth as a benchmark. This means that the more frequently the customer uses the same resource or the more resources are used by the customer, the higher the price. With Dropbox, for example, costs are incurred above a certain storage limit. The company justifies this to its customers by stating that the higher the usage capacity, the higher the prices. On the other hand, pricing can be based on function-dependent growth. The scope of the services then defines the price.
Another example is Spotify. In addition to a freemium version, there is also a premium version, which is justified in terms of price by more functions such as the offline listening mode for songs. Companies therefore benefit from flexibly structuring the billing of the service used by the customer and aligning it with their usage behavior. This promotes the transparency of the value proposition. Various billing models have developed over time - we have taken a closer look at them for you
Different services lead to different billing models
Fixed all-inclusive price: The simplest billing option is fixed flat rates. The company only offers a product at a fixed price which is organized in a regular Billing cycle is debited to the customer. This model is easy to communicate to potential customers and is associated with lower development and provision costs. However, this model is not recommended for larger and more complex offers from established companies, as Earnings potential unused remain and a High expenditure arise from specific customizations for a customer. In the area of standardized products or services, on the other hand, a fixed all-inclusive price is a good option, as consistent processes can be calculable are.
Price levels: In the Software-as-a-Service (SaaS) price levels are one of the best-known billing models and are being used in more and more sectors. In the process Different offer levels where the customer is prepared to pay more for a better range of functions. This model is easiest to combine with a freemium version, which is the simplest offering level. The disadvantages of price tiers are equivalent to the disadvantages of a fixed all-inclusive price. A price tier concept is an extension of the fixed all-inclusive price, but requires that the corresponding product or service is offered at a higher price. Various functions offers that independent from each other. An example of a tiered pricing model is the music streaming service Spotify, which offers a freemium version and a paid premium version.
Pay per unit (PPU): In the case of pay per unit, the customer pays for what they buy. actually needed or consumed has. For example, at the end of the billing cycle on the basis of the Terms and conditions of the contract and the usage data is used to generate the bill. This method is best known from the mobile phone industry, where the number of calls, text messages and mobile data usage for prepaid contracts lead to the amount to be paid at the end of the month. This modern approach has also spread to other sectors. So it is not only based on unit consumedbut also, for example, in the License business by number of users, number of transactions, storage capacity or similar. This generates a lot of data that is subsequently used for a Analysis of a product can be used. Examples of PPU can be found on Amazon and in the iTunes Store, for example when purchasing a music album or a single track. The customer only pays for the song they have purchased and does not have to pay the full album price. The disadvantage of a PPU approach compared to other billing models is that High expenditure, having to calculate each individual unit. In addition, each individual unit must function independently of other units, which can also generate a great deal of effort, particularly in the case of software products.
Pay what you want (PWYW): The most specialized billing method is when the Customers pay what they want (pay what you want). The model, which originated from auction houses, was first used on the internet by auction houses themselves, such as eBay. Local stores or cultural venues have increasingly introduced this model in recent years to attract customers to concerts or local grocery stores. This method is used more frequently by companies that donate part of their profits to social institutions or projects as well as Non-profit organizations (e.g. Humble Bundle). The advantage of a PWYW-approach is that it is possible to derive from the incoming sales what Customers are generally willing to pay for the offer. The disadvantage is that not calculated with a fixed turnover and the running costs are not covered if income is too low. This special billing model is not suitable for revenue-oriented companies but almost exclusively for non-profit organizations and for companies that establish an offer or service and one knows that there is also an appreciation of the customers to pay for it appropriately, e.g. good food, art, etc.
Discounts, promotions and coupons: To make it easier for subscribers to access the offer, a company can also Discount campaigns, promotions or similar. A discount campaign can either Time-based (e.g. 50% discount on the first two months of use) or level-based (e.g. the subscriber receives discounted conditions from a usage level that he reaches).
Overview of billing models
With this variety of billing models, it is easy to lose track. The following overview shows some of the advantages, disadvantages and possible applications.
| Billing model | Advantages | Disadvantages | Possible applications |
| Fixed all-inclusive price | A fixed all-inclusive price is easy to communicate to many customers, as this model treats all customers equally. It also involves less effort compared to the other models, as the price for the product is fixed once the price has been determined. In addition, costs can be saved due to economies of scale resulting from the sale of the product. Suitable for standardized products that do not need to be adapted to specific customer requirements. | Lack of flexibility for customer-specific orders. | Suitable for standardized products that do not need to be adapted to specific customer requirements. |
| Price levels | Different price levels can be easily combined with freemium and are more flexible for the customer at a fixed all-inclusive price. | Low flexibility for customized orders. | Suitable for standardized products that appeal to different user groups, such as business and private customers. |
| PPU | When paying by unit, the customer only pays for what they use. This ensures greater customer flexibility. It also generates additional data on the popularity of products at a precise point in time, which can be of benefit to product management when strategically aligning a product. | A high level of effort in the provision of individual components or products. Each product must be able to function independently and interact with other products at the same time. This results from the customer's ability to purchase products individually. | Suitable for individual products that can be combined with other individual products. |
| PWYW | The customer only pays the amount they are prepared to invest in a product - regardless of the costs incurred in purchasing and maintaining a product. This creates a high level of customer loyalty and the provider of the product receives feedback on the value of its product from the customer's perspective. | The profitability is usually not given and there is uncertainty about income, as customers can potentially pay less money than would be required/cost-covering and thus current or already incurred costs are not covered. | Suitable for specific community-related products in the cultural sector, e.g. at music concerts or art exhibitions. |
Are billing models no longer just a means to an end?
In the digitalization environment, the possibilities of Customized adaptations more important than ever before. This also applies to billing models, which no longer serve exclusively as a means to an end, but Additional services and customer specifications and thus contribute to Customer loyalty contribute to this. The focus is no longer on the classic model of the flat-rate price, but in particular on the Price level model and the approach Pay Per Unit - among other things in combination with a Freemium concept. These models offer a provider of products and services new opportunities to promote their own products and services. Expand services. For a company, the new billing models mean the possibility of a new strategic orientation in sales and in the Product development. The sales department plays a stronger Strategic role than before. Subscription management systems take care of the technical implementation and contain a great many Data on the usage behavior of the service by the customers. These can be used to Service in the interests of the customer further development. By combining these two components, the subscription management models and the associated systems, it is possible to successfully Long-term customer relationships and Business models with digital services to operate.
Which subscription management is right for my service?
You may also be interested in these blog posts:
Invoice chaos at Amazon - How Subscription Management avoids typical invoicing pitfalls
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Potential and possible applications of a blockchain-based subscription model
Securing the future of the automotive industry - with the successful switch to subscription models
Sources:
Bachelor Thesis "Business models in subscription management - Creation of a guideline for the introduction of subscription-based business models using a file sharing platform", 2020, Maximilian Toepler
Baxter, Robbie Kellman (2015): The membership economy. Find your superusers, master the forever transaction, and build recurring revenue. New York: McGraw-Hill Education.
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