Wednesday, June 9, 2021

Usage vs Subscription

Usage-based pricing models are all the rage these days. Buoyed by the impressive success of companies such as AWS, Twilio, and Snowflake, VCs across Silicon Valley are quick to say that usage-based models are the only way to go. These are useful conversations to have, but unfortunately, I think that many of them are based on a flawed premise.
Why? Because subscription and usage-based pricing are not an either/or choice. A subscription is a business model that enables an ongoing relationship with a customer. Usage-based pricing is just one of the many pricing options a vendor can offer to sell that subscription. There is no law that says that a subscription can only come at a flat fee per month.
Fundamentally, a subscription is an open contract. The customers – subscribers – enter into open-ended relationships with vendors to purchase their services. As long as the use of the services remains within the boundaries set in the initial contract, and the customer finds value in the service, the vendor will continue the ongoing relationship.
It doesn’t matter if the open-ended contract stipulates a flat fee for each billing period, or if the charges are based on a consumption basis. The “usage” can be pretty simple – Docusign might charge you for the number of documents you sign within a given period, for example. It can also be fairly complex — a rideshare service might charge you for miles traveled at a given location, during a specific time of the day, and using a certain type of vehicle. There are all kinds of ways to charge for a service.
Many subscription companies take advantage of consumption metrics in their pricing. For example, you might have an “unlimited” contract for your mobile phone with a flat charge for calls, data, and text messages. But a trans-Atlantic call will be metered at a rather costly price per minute (unless you have a more expensive international calling plan).
Similarly, your monthly home electricity bill will never drop to zero, even if you’re out of town for an entire month and you’re not using any power. The utility company still needs to amortize the cost of all their infrastructure, and so they’ll charge you a nominal fee.
In short, usage-based pricing isn’t a new concept. From mobile phone carriers to utility providers to Internet Service Providers, usage-based pricing has been around for decades. In fact, Zuora’s research shows that subscription companies that take advantage of some amount of usage-based pricing grow faster than others.
Does that mean that you can’t have a really fast-growing company with a flat monthly price? Not at all. For some businesses, that might be the best way to go, while others are better off with usage-only or with a hybrid model.
Either way, they are all subscriptions.
Note: This blog post was originally published as a post on the blog.