Consumer demand sparks a recurring revenue revolution
March 10, 2015 05:17 PM
Pay for what you use, when you use it, for however long you want to use it. As consumers get increasingly comfortable living, working and shopping in the digital world, they’re becoming more accustomed to being in the driver’s seat of their online experience. One of their top demands is flexibility in buying and paying for things as they wish to – whether it’s through credit cards, digital currencies or virtual wallets. This flexibility for the consumer is fueling the increasing demand for usage-based billing. For digital services companies that have not yet started to integrate usage-based billing into their business models, now is the time to start. As for those companies that have only dabbled in this emerging trend, it might be time to consider diving in deeper. When strategically deployed, usage-based billing can unlock new revenue streams, keep customers satisfied and loyal, and keep your company competitive in an increasingly crowded environment.
As ecommerce and digital services companies begin to shift from the traditional single-purchase model and adopt usage-based billing, there are specific things to keep in mind when it comes to monetization and implementation. What models should you consider? Start with subscription and “freemium” models.
Subscription models: unlocking merchant and consumer benefits
We’re all familiar with traditional subscription models: the magazines on the coffee table and Netflix options awaiting your next TV binge session are all examples of how we use weekly, monthly and yearly subscriptions to unlock content for a predetermined period of time.
In the world of digital services, the single purchase model of the past is evolving into a modern subscription model. Let’s think about how it used to work: using Adobe’s creative software as an example, designers would make a single purchase of the program, install it and use it. Several months later, there would inevitably be an upgrade and a new version of the program would be released. In order to gain access to the upgraded features, designers would have to buy the new version at an upgrade price in another single purchase transaction, presumably doubling their upfront investment.
Today, upgrade cycles are shorter and digital services live in the cloud. A designer can now purchase a monthly subscription giving him or her access to all the tools and features the program offers, while also guaranteeing they can take advantage of any software updates that occur during the subscription period. This removes the large upfront payment for the software. Instead, customers can pay for exactly what they need, for however long they need the service, with no additional charges– a fundamental change to the traditional model.
Outside of the world of digital services, new companies are emerging –built entirely on the subscription model. For example, there is an abundance of companies that sell solely online and deliver to your door – offering everything from dog food to razor blades – in exchange for a standard monthly payment. As predictive analytics become more readily available to merchants, subscription models used for tangible consumer products will grow and recurring, complex orders will be possible with little human intervention.
For companies capitalizing on this trend, there can be substantial benefits, including a reliable stream of revenue and increased customer loyalty. The key to success is convincing the consumer that having a subscription is not just convenient, but also valuable. The value typically lies in a lower price tag compared to the same product purchased without a subscription. This model is particularly beneficial in the frequent and consistent replenishment of commodity goods and building continuity programs that are well-timed for delivery of speciality items.
Freemiums: helping SMBs grow
“Freemium” is a model that has been particularly successful with early-stage software companies. This model allows consumers to use a product or service, typically software, media or web services, free of charge at a basic level. To take advantage of additional features or services, there is a premium fee. For companies new to the market, this allows them to get their name in the mix, grow their user base and hopefully be a market disrupter. Consumers can try the product with no financial commitment, only making an investment once they’ve decided that the service is worthwhile. Allowing users to identify the value on their own makes it an easier sell when it comes to getting them to commit to the premium fee.
This model is ideal for small or medium-sized software businesses because it significantly lowers the barrier to entry for customers, allowing an emerging business to grow its user-base and spread engagement and advocacy. Successful implementation relies on a number of factors, not the least of which is customer reach. Businesses need to realize that only a small percentage of users will ever pay for the premium product, so this should be considered in any pricing model and the overall business strategy. Banking on users signing up for a premium service in droves will only lead to disappointment. Also, the free version cannot be too basic; it must provide enough of a value that it convinces customers that upgrading to the paid version is worth it.
Spotify is an excellent example of how the freemium model can be successful. Listeners can access the Spotify library for free and, if they want premium service, pay for additional benefits, including no advertising and offline listening.
Join the recurring revenue revolution
Though these models will likely dominate the future of billing for online services, there is no one-size-fits-all solution. Ultimately, it is up to each business to implement the strategy that best meets the needs of its target market and customer base. You might have to get creative, for example, offering a combination of subscription and freemium services.
In the ever-changing world of digital services, as technology continues to foster innovation in content-based industries such as music, television and gaming, we will also see innovation in the monetization models that support them. The businesses that join this usage-based billing revolution today will be best positioned to take advantage of the opportunities offered by the digital economy tomorrow.
Digital River provides e-commerce technology and online payment services.