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 Subscribed.com blog.

Would You Want a Rolex for $50 a Month?

Apple is crushing the Swiss watch industry and it’s not with a cheap watch. The latest Apple Watch costs $400 and most users typically buy a second strap, a charging station, or another accessory. They likely spend close to $500. This is not the kind of pricing disruption that Swatch created back in the 80s with colorful $50 fashion watches mass-produced in plastic. Apple is selling a premium product that isn’t cheap at all. And while Apple keeps growing and growing, the Swiss watchmakers struggle1. 

The Apple Watch stands out with leading-edge technology, great user experience, but also a disruptive business model. Just like most Apple products, the Apple Watch has a relatively finite expectancy and most customers know that. They got used to that with their Apple iPhone – these devices don’t last very long. Apple releases a new model every year and while most people don’t buy a new watch (or a new iPhone) every year, buying a new one every two years is common. That's what most telco providers do when they sell you their “free upgrade” program. Sure, you can hold out a year longer but the experience starts degrading pretty fast. 

This is partially due to the relentless cycle of innovation, and Apple is a master at that. Every new release introduces something better than the previous release and if you are stuck on the old technology, you are missing out. There is also the ever-so evil planned obsolescence that Apple builds into its products. The old hardware can’t handle the new operating system, battery life degrades, and the phone jack is no longer supported – Apple is a master at that!

Swiss watches come with a history.

 And so, Apple watch users are finding themselves buying a new watch every 2-3 years, which translates into, $250 per year. That’s why it’s not a stretch to call it a subscription - you are effectively paying just over $20 per month to own an Apple Watch.  

Let’s compare that with owning a mechanical Swiss timepiece. You can get some amazing watches for $5,000 – Omega Speedmaster (the Moon watch), Breitling Navitimer, Tudor Blackbay, and many others. These watches do not only tell time, they are also a piece of jewelry, and they serve as a status symbol or a symbol of fine taste. They may not run hundreds of apps like the Apple Watch, but they offer something else – each watch is a hand-crafted mechanical masterpiece. Of course, there are some wonderful watches for under $2,000 and you are also welcome to spend over $20,000 if you like.  

My point is that for $5,000, you can buy a beautiful Swiss watch that will last you a lifetime. These watches are designed to be very robust as they have been built to keep time under challenging conditions - underwater, in the dust, mud, and even in space! Mechanical watches are definitely more durable than the Apple Watch. Patek Philippe – a company that makes some of the most luxurious watches money can buy – advertises with the slogan: “You never actually own a Patek Philippe. You merely look after it for the next generation.” While you won’t find anything for $5,000 in the Patek Philippe catalog, you can find many quality Swiss watches for that amount that will last you a lifetime.  

Comparing $250 per year with $5,000 for a lifetime becomes an interesting consideration. Why not sell the Swiss watch as a subscription? The manufacturer's payback would be 20 years which feels like a long time. But the manufacturers share 40% of that with the dealer and a subscription could (and should) be sold directly online which would reduce the cost of sale significantly. The manufacturer's cost of goods and the advertising expenses for all those ads with sailboats and racecar drivers would presumably remain the same. 

Now, you might object that I can’t compare an Apple Watch and a Swiss luxury timepiece. It’s a different class of wearable, aimed at a different audience. One can’t really compare those two markets. True. As the markets stand today, I completely agree.  

Yet, all those Swiss watchmakers would love to attract new audiences. Their present target market consists mostly of well-off male buyers with a love for mechanical watches or with the need to show off their status. Many of the watchmakers have been trying to attract different audiences by offering cheaper collections with quartz movements and through consolidation by buying up different brands. For example, the Swatch Group owns brands ranging from the high-end Breguet, to mid-stream Omega, to the more affordable brands like Hamilton and Tissot, and of course the cheap fashion watches by Swatch. 

The Apple Watch can do many things but there is a reason Mr. Bond is choosing another brand...

There were 20 million buyers of Swiss mechanical watches last year and the manufacturers would love to sell to another 5-10 million professionals who are perhaps not willing to spend five thousand dollars at once. A subscription-based business model could accomplish that.  

Now, the right price for such a subscription might not be $250 per year; maybe it’s $400. But there is probably a price at which the economies make sense for both the sellers and the buyers. The subscribers could buy into different levels of subscriptions that would give them access to different price levels of watches. If you get tired of the Omega Speedmaster after a couple of years, perhaps you can swap it for an Omega Seamaster. A Rolex, which costs about double that of an Omega, might be more expensive. Maybe $50 per month. The subscriptions could also include servicing once every five years.  

Interestingly, watches are more durable, preserve their value better, and their service costs much less than cars. Yet car subscriptions already exist – just check out Carbar in Australia or Clyde in Switzerland (ha, Switzerland!).   

Swiss watches were not always high luxury items. Before digital technology took over reliable timekeeping, mechanical watches were the only solution. They were designed to keep time especially for people who needed precise timekeeping to do their job: pilots, soldiers, divers, train engineers, etc. They were tool watches.  

Some Swiss watches became cult objects.

All of that changed when cheap digital watches came out in the 70s. All of the sudden, the timekeeping problem was solved cheaply and people didn’t have to buy any Swiss timepieces to tell time. The Swiss industry came under pressure and had to reinvent itself. It turned watches into jewelry and it worked for a long time. But now, maybe it’s time to reinvent itself again. And, maybe a subscription-based business model is the solution. 

Watchmaking is not the only manufacturing sector that needs to re-invent itself. At Zuora, we work with many manufacturers who transformed their business model from selling products to selling services as subscriptions – from medical devices to industrial machinery. One of the ways to build a recurring revenue model is to “repackage” your existing offering “as recurring”. Besides potentially reaching new audiences, the subscription-based model has proven itself as much more resilient than the traditional way of selling products. Especially in times of economic uncertainty like we have right now.