All You Need To Know To Make A Choice Between Consumption-Based Model and Subscription-Based Model

It is crucial for any business in the market to be aware of the effectiveness of its pricing model. And if you are in the same boat, then there is a piece of good news for you.

Yes, You read it right.

Well, it is pretty essential to look for the answer to the question so that you can make alterations to your pricing strategy in order to take your business to the next level. The good news is that this article, by the time it ends, will clarify all your doubts and will surely help you to Select Among Consumption-Based and Subscription-Based Models.

Pricing models

Pricing models are the strategies used by businesses to determine the cost of their products or services. Pricing models are essential because they help businesses to maximize their profits and ensure that their products and services are priced appropriately.

Ready to know what would be the right fit for you?

Well, from a business perspective, the answer pans out to two most famous strategies, which they need to understand well before they opt out for either of the two - A Consumption-Based Model and A Subscription Based Model.

What is the Consumption-Based Pricing Model?

A consumption-based model, also known as pay-as-you-go billing, metered billing, or usage-based pricing model, enables businesses to charge customers only for the amount of usage, neither less nor more.

The basic concept of this billing model for service providers is to track the consumption of the service provided and charge them for the same amount.

What is Subscription Based Pricing Model?

A subscription-based model is a business model in which customers pay a recurring fee in exchange for a product or service. Subscription-based models offer customers the convenience of regular access to products or services without the burden of an enormous upfront cost.

In the subscription-based model, customers make a recurring payment in exchange for access to a product or service. This could be a monthly or annual payment, depending on the type of subscription.

Consumption-Based Model Vs. Subscription Based Model

Before looking out for the best strategy for your business, it becomes significantly important to understand the difference between a consumption-based model and a subscription-based model. These are the two different ways of selling products or services. The differences between a consumption-based model and a subscription-based model lie in the facts stated below.

The significant difference between the two models is in the way in which customers pay for the product or service. Where Consumption based model charges only for the per unit of usage, the subscription-based model has a fixed monthly rate that has nothing to do with the usage. So even if a customer doesn’t get the time to make use of a service or product, a fixed amount for a set period of time still would be charged. This means that in a consumption-based model, customers only pay for what they use, and the cost is typically lower than in a subscription-based model.

Another difference lies in the fact that the consumption-based model is often more flexible than the subscription-based model since it lets customers purchase as much or as little of the product or service as they need, in contrast to the subscription-based model in which customers may be locked into a long-term subscription even if they don’t end up using the product or service as much as they expected.

So, basically, it is important to carefully consider the type of product or service you are offering and the needs of your customers before deciding the model which is best suited for your business.

Consumption Over Subscription-Based Model

Although the Consumption-based pricing model is not suited for all products or services, the strategy is still gaining much popularity amongst subscription-based businesses and migrating to a Consumption-based model.

Although both models charge customers for the services but take an entirely different approach while doing so, the subscription-based model grants access for a finite period of time and are often seen with the benefits such as streaming media like Netflix or software services like Adobe Creative Cloud.

Consumption-based model, on the other hand, is popular amongst providers of cloud computing services, as customers can scale their usage up or down as needed. It is also used for services like online backup storage, where customers pay only for the amount of storage that they use, hence making the consumption model an excellent choice for businesses to choose as their pricing model.

Let us move ahead and discuss what value can consumption pricing model give to businesses as well as customers.

Advantages to Customers

The most significant benefit of this model to customers is the amount that they pay only for the service they use, which reflects increased customer satisfaction.
Considering pricing to be directly based on usage, the model is beneficial for customers since they know their cost upfront and can assist clients in managing their spending and budget accordingly.
This can be beneficial for customers since they don’t have to commit to a long-term subscription and can purchase precisely what they need.

Advantages to Businesses

Due to the multiple benefits, many subscription-based businesses are navigating their way to a consumption-based model. The model offers businesses advantages over traditional models in a number of ways:-

The model helps businesses in reducing revenue leakage as excellent optimization of products or usage of services can be done efficiently.
Customer retention is another notable feature that a company with a Consumption-based model can enjoy, as it makes customers upgrade or downgrade their plans actively as per their usage.
The model simplifies the process of designing a correct pricing model for businesses because any business can combine additional features to this model as per their requirements to create a customized pricing package for their use.
The model allows businesses to quickly scale up and down as needed, allowing them to respond better to changing business needs.
This model allows businesses to quickly and easily update their infrastructure as needed, meaning they can respond rapidly to changes in the market or customer demands. This agility helps companies stay competitive and ensure they remain up to date-with the latest technology.
As per the reports, businesses with Consumption-based pricing strategies are on the higher side of generating more significant revenue.
This model has become increasingly popular as businesses of all sizes strive to reduce costs and increase agility.
It allows businesses to align customers billing effectively while pricing for provider costs accurately.

After listing all the advantages to both the entities concerned, it is fair enough to consider whether there are any drawbacks to the consumption-based model, of which we have been talking about benefits for a long. Well, keeping the facts straight, despite the many upsides to the models, there are a number of disadvantages to the pricing model, which could be the significant reasons behind this model not being the best fit for your business.

Disadvantages to Customers

Customers have less control over their spending. Instead of paying a one-time fee for a product or service, customers must continuously pay for the software or hardware they use. This can add up quickly, resulting in a significant financial commitment for customers.
The cost of the product or service may get higher in the long run since customers will be paying for each use. The subscription-based model, on the other hand, is often more cost-effective in the long run since customers pay a fixed fee regardless of the Consumption.
A consumption-based model can be challenging to manage; as customers use more services, they must keep track of their usage and ensure they don’t exceed their usage limits. This can be difficult and time-consuming, especially for businesses that require a large number of services. In addition, customers may find it challenging to track their usage across multiple services, making it difficult to manage their overall spending.

Overall, while the consumption-based model offers customers access to the latest technology, it does come with several disadvantages. Customers must be aware of the potential risks before committing to this model, as it can significantly increase their financial commitments and reduce their control over their spending.

Disadvantages to Businesses

While this model may offer many advantages, there are also some potential drawbacks that businesses must be aware of. A plethora of explanations can be put forth in describing why a consumption-based model might not be the best option for your company.

First and foremost, the most significant disadvantage of a consumption-based model is the lack of predictability in revenue generation. No matter the size of the company or the stage at which it is running, it gets difficult to get into the details of come coming your way. And even if you do, they might not be too accurate.
Setting up annual charging becomes impossible for businesses with a consumption model strategy in action, which ultimately escalates the chance of customer churn while plummeting the cash flow.
Another crucial drawback of the model is getting paid for your services in arrears. Instead of a subscription-based model where you get to charge customers before they use your service or products offered, businesses cannot charge customers until the end of a particular duration in the consumption pricing model.

Final words

The crux of this entire discussion can be summed into the fact that landing on any kind of pricing model first requires deep digging. This thorough investigation can help businesses analyze which strategy would work best for them before they make any decision. Despite the disadvantages, the Consumption-based model is an excellent fit for many businesses like cloud service companies, marketing automation platforms, and many others.