The Future of Revenue Models
Written by Jack Holliday
In the ever-evolving landscape of disruptive business models, the transition towards subscription-based services stands as a testament to the adaptability of companies in a competitive software market. As organisations seek to optimise revenue streams, they are pivoting from traditional product-centric pricing models to access-based subscription models. This shift ensures a steady and predictable revenue flow as the customer-base scales.
Target Audience: Enterprises with a well-established subscription revenue model seeking to augment their pricing strategy with a “usage” tier.
Key Performance Indicators:
Augmented Annual Recurring Revenue (ARR)
Average Revenue Per User (ARPU)
Revenue Per Employee (RPE).
So what’s the difference between subscription and usage?
Distinguishing between subscription and usage models is crucial in understanding the nuances of pricing strategies. Under a pure subscription model, customers pay a fixed amount at predetermined intervals for access to a service or product, akin to a gym membership or Apple Music subscription. This approach offers transparency and simplicity in pricing for customers, while providing businesses with predictable revenue streams.
On the other hand, pure usage models, also known as consumption-based models, relate the price paid directly to how much the customer makes use of the product. Examples include ride-sharing services like Uber, where pricing fluctuates based on factors such as distance, duration, and surge rates. This model reduces barriers to entry for customers, as they only pay for what they use.
However, both pure subscription and usage models present their own set of challenges. Pure subscriptions may incentivise overuse by customers, straining systems and operations while increasing the cost of goods sold (COGS). On the other hand, pure usage models introduce revenue unpredictability as consumption fluctuates, along with technical complexities in tracking and accurately billing usage.
Recognising these challenges, many companies are adopting a hybrid approach, blending elements of both subscription and usage models. An emerging trend involves identifying segments of "over-users" willing to pay more for increased usage and introducing tiered pricing structures to accommodate them. This implies the need to monitor usage for all customers, setting limits for pure subscription models and moving customers onto usage-based models where appropriate. Additional operational complexity here can be mitigated by keeping other elements of the product and pricing models as simple as possible, and the benefit of course is ensuring that the business can still generate healthy margins from customers that consume more resources from the business, as well as allowing for more targeted pricing approaches for different market segments.
Salesforce Revenue Cloud provides robust support for usage-based pricing models, enabling businesses to quote and price products based on predefined rates for future consumption. Leveraging consumption schedules, Salesforce Billing automates the creation of usage summaries, capturing usage data from third-party systems in real-time and facilitating accurate invoicing based on agreed rates.
For organisations seeking to augment their existing Salesforce CPQ setup with new revenue models or evaluating CPQ solutions, our team at Mint Consulting stands ready to provide guidance and support.
Contact us today to explore innovative pricing strategies tailored to your business needs.