Consumption-Based Pricing vs Subscription-Based Pricing: Which Is Better and Why?

Consumption-Based Pricing vs Subscription-Based Pricing: Which Is Better and Why?

Consumption-based Pricing vs Subscription-based Pricing, who wins in this tug of war and which is more lucrative? Read on to know the ins and outs of this.

Consumption-Based Pricing vs Subscription-Based Pricing

There is a possibility that the question of choosing between, ‘Consumption-based Pricing vs Subscription-based Pricing’ might be keeping you up all night. And it has been statistically proven that the 98% of the SaaS companies see their success rates by the choice of pricing models. But before you pick from the above-mentioned, you should have a clear-cut background and have the back-up of sound research. To save you a lot on the clock, here in the blog you will find the differences between the two and which one to pick as well.

Table of Contents

  • What is the Consumption-based Pricing Model?
  • What is the Subscription-based Pricing Model?
  • Consumption-based Pricing vs Subscription-based Pricing
  • Which is Better?

What is the Consumption-based Pricing Model?

Quite contradictory to the Subscription-based Pricing model, here a consumer is charged on the basis of per unit of usage, and not on an overall monthly rate. In fact, only 38% of the SaaS businesses pick this pricing model over the Subscription-based one. While, where there are cons, there are pros as well.

This kind of pricing model seems fairer to the price. Here, the customer is paying for the exact amount of usage and not simply to the fact to access the platform, for their use. It is hugely fruitful for those businesses whose expenses rise up in direct proportion to customer usage. One such example is the cloud storage, where it is easier to apprehend the value and the expected cost too.

What is the Subscription-based Pricing Model?

However, in a Subscription-based pricing model, a customer is supposed to pay on a monthly or an annual basis for accessing the platform. Some of the popular models include NetflixHotstar, Amazon Prime, etc. most of SaaS companies use this kind of pricing model to implement a subscription charge in a tiered format. For example, the customer will see subscribing options in tiers of features, price range, or course. Here is a screengrab from Netflix that seconds this point.

Example of Netflix on Subscription-based Pricing Model
Source: Netflix

Now, a tiered subscription model is stated to be more profitable than the others. It gives your company the opportunity to enter the market with a low entry point and enhances your chances to upsell in the future. As a matter of fact, 75% of the SaaS companies opt for this kind of pricing model globally. Nonetheless, on the minus side, this kind of model has its own share of downs too. The high-usage of the customers might get more than the fair share out of the product, which can have a negative impact on the bottom line.

Consumption-based Pricing vs Subscription-based Pricing

For the businesses who need to accurately break down their service offerings to their customers per usage, the consumption-based pricing model is the one that should be used. Clouding computing and Marketing automating platforms are some of the industries that fall into this category. However, on similar tracks, it can be cumbersome for some to quantify the unit where the products and services are eclectic and cannot easily be put to exact data usage. That is when the Subscription-based pricing model can save you a fortune with the following advantages.

Which is Better?

Although both of these pricing models have their pros and cons, the subscription-based pricing model wins by a few segments. Let us get into that in details:

  1. Locks the Customer for an annual or monthly basis: One of the most strategic pricing-related decisions that you can take up is offering the customers an annual or monthly plan. It potentially locks in your customers for a longer period and thereby cuts down on your churn rates instantaneously. However, the other kind permits your customer to stop using your product at any given time, as and when they wish to – this minimizes your billables to a zero! Further, 54% of the SaaS companies wish to opt for an annual subscription plan as it is generally coupled with a discount offer, enabling them to pay less and enhances the customer stickiness quotient. This calls for a win-win situation for both.
  2. Customers find it easier to Budget: In a Subscription-based pricing model, the customers know before-hand how much they have to pay exactly. However, the same does not hold true in a consumption-based pricing model, your users will have to compute the budget based on their usage rate. Now, this can not only be highly subjective but will fluctuate every other month. This might cause a hindrance to the customers, which is not really the case in a subscription-based pricing model.
  3. One can foresee and plan out Revenue Forecasting: The thing with the Consumption-based Pricing model is that you may never predict how much your monthly recurring revenue will be, at least not quite accurately. Although you can always rely on some of the previously used historic data collected in the previous years, which should not be the benchmark for you to trust. You should always gear up to see a sudden surge or glitch in the revenue bar. This will come in the way when you plan out your annual revenue predictions, which may debar you from making any solid reinvestment decisions in the future.

That’s a Wrap

So, who outweighs in this game of ‘Consumption-based Pricing vs Subscription-based Pricing’? Well, it all depends on the nature of your business and how best you find these acclimating to your scopes. Nothing should stop you from performing your research and coming up with a firm decision for your company. But on a personal note, the Subscription-based pricing does have a couple of more pros over the cons list. In the end, the winner should be the one that makes your customer happy as they are the real queen of your business.

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