For the longest time, pricing was stuck in transactional and ownership mode. Products, services, and software were sold using a one-time transaction fee. Of course, we had warranties, maintenance agreements, and other membership innovations that could be charged on a recurring format. But the predominant pricing model was transaction-based. Pricing innovation was constrained and focused mostly on discount optimization, bundling, and value-based optimization. That period lasted for centuries!
Then the subscription pricing model started to emerge as the preferred go-to pricing model across many industries. Tired with commoditization and price wars, companies wanted to disrupt their pricing models and offer more flexibility and less upfront cost to their customers. That transition to subscriptions is still on-going today but some of the primary target markets have been saturated with subscription offers. That transition was also fast, and it only took two decades or so for the subscription economy to reach over $500B in market size.
Fast forward twenty years, the same trends in commoditization and saturation are now hitting the subscription world especially with the elevated level of competition in the SaaS world and subscription fatigue experienced by consumers in news, entertainment, and streaming. Everything-as-a-subscription is at times going too far.
Today, usage-based pricing models are becoming increasingly popular and are becoming the most-talked about pricing innovation. Of course, pay-per-use and usage are not new concepts. What is new is the dramatic and fast change from pure subscription business models to usage-based subscription models. In addition, some companies have moved 100% of their revenues to pure usage-based models. That transition has taken place in just a few years and the adoption of usage-based pricing is growing extremely fast.
There is a pattern emerging. And that pattern is accelerating with time. I propose that there are five forces at play.
Pricing model innovation: pricing models need to innovate with business models. They cannot be constrained by lack of system capabilities or by the reluctance of internal stakeholders to transition from one model to another.
Optimized monetization: at the same time, with new pricing models come the need to optimize monetization and not leave money on the table. When usage-based pricing models become richer and more customer-metric centric, it is important to have the right usage-based monetization platform to manage multi-metric and hierarchical pricing models and to be able to bill customers with accurate usage data.
Increase hybridity: The evolution from a predominant pricing model to another does not mean pricing models are mutually exclusive. With great customer segmentation and versioning strategy comes the opportunity to offer different pricing models for different segments. Deploying the right pricing and billing system allows you to manage the increased level of hybridity.
Positive complexity: not every usage-pricing model is created equal. With great innovation comes complexity in pricing model design, in required billing capabilities, and in the need for data intelligence. But this is a good thing. Being able to manage greater complexity and make things simple for end-customers is the name of the game.
Competitive advantage: for many companies, innovation in pricing becomes a competitive advantage. But pricing models cannot be constrained. Unleashing pricing model innovation and leveraging usage-based pricing complexity can lead to differentiation especially in the SaaS world where competition is fierce.
Unleashing pricing model innovation requires great collaboration and alignment between pricing , IT, and billing teams. There is not doubt that the increasing level of positive complexity in usage business model and hybrid models can create some frictions in execution. Some of the traditional pricing and billing systems cannot manage the innovation in pricing metric for example, or the advanced design of usage pricing conditions. That leads to manual interventions and interface issues with legacy systems. Dedicated usage-based monetization platforms like Monetize360 can remove these roadblocks and enable optimized monetization.
I have a few personal favorite quotes. One of them is “structure follows strategy” by Alfred Chandler in 1962. Another one is “pricing and billing systems follow pricing models” by me in 2022! Do not let your pricing and billing systems constrain your pricing innovation and revenue potential.
Bio
Stephan Liozu (www.stephanliozu.com) is a Strategic Advisor to Monetize360 and a thought leader in digital pricing models, value-based pricing, and monetization strategies. Stephan holds a Ph.D. in management from Case Western Reserve University (2013). He wrote and edited twelve books on the topics of pricing and value management. His latest book published in January 2022 is “The Industrial Subscription Economy” available on Amazon.com (The Industrial Subscription Economy: A Practical Guide to Designing, Pricing, and Scaling Your Industrial Subscription: Liozu, Stephan M.: 9781945815102: Amazon.com: Books). Stephan sits on the Advisory Board of Professional Pricing Society, is a Strategic Advisor at DecisionLink, and a Senior Advisor at BCG.