There has been much written about the benefits for a business of a subscription recurring revenue model. Financial forecasting, revenue stability, and the overall relative certainty that it provides are immense. Only having to find that customer one time and continuing to reap the financial rewards of landing that customer over and over each month is fantastic.
I have been able to see first hand the benefit of recurring revenue in my productized service business, and can say without a doubt that it’s been one of the main reasons we’ve had the success we’ve had to date.
However, with a flat pricing model of a certain fixed amount per month this leaves us with the only option for increasing revenue to be to get more customers. The fact is the same customers rarely end up paying us more each month…
While this isn’t impossible by any stretch of the imagination, it is a bit restrictive in terms of the levers of growth at your disposal. To increase revenue you have to get more customers. No two ways about it.
But, with Metered Pricing, you can also add the option of just having your existing customers use your tool more, and thus they will pay more each month as well. If your solution is built well and solves a real problem for your customers this should happen naturally, without much influence from you.
A few examples of where we typically see metered pricing are in hosting (the more traffic you have the more you pay), email marketing (the more people on your list the more you pay) or in CRM software (the more ‘seats’ you have the more you pay). This brings into light two different aspects of metered pricing: User Based or Usage Based.
User Based Pricing
In a User Based model you typically pay per person. If you have a small team you’ll pay less, and as you add more people to the tool your price will increase usually per person or by tiers with that growth.
HelpScout (the popular help desk email tool we use at PodcastMotor) is a good example of this. We pay more with each person we bring onto the team.
Theoretically the more people we have on the team handling support the more business we have, and thus overall our business is growing.
Usage Based Pricing
In a Usage Based model you pay more depending on how much you use the tool. Email marketing software and website hosting are great examples of this. You pay directly in relation to how much you use the tool, and hopefully how much business value you get out of the tool.
In my opinion this form of metered pricing has a better potential for organic growth, and speed of growth, because you don’t need to add people to your team to increase the usage of the tool. For me to send an email to 100 people is the same work as to 10,000 people.
Either way, whether through Usage or User based metered pricing models, you can quickly see the benefits of this type of structure. Both of these scenarios should allow for a certain amount of organic growth of your existing customers over time. You’ll naturally add people to your helpdesk software as your business grows. You’ll naturally add people to your email list over time. Both of these result in these companies rightfully charging you more per month, and growing their MRR over time.
Affects on Churn
Often this variable pricing contributes to reducing the overall revenue churn of an organization, and can result in the infamous negative revenue churn. In this scenario the business as a whole has increased the revenue from existing customers overall in a given period. Typically only with metered pricing is this a possibility.
With the ability for existing users to move up in value to your business each month, without specifically opting into a higher tiered plan based on features, your conversions are all but automatic.
Metered Pricing In Action
I’m looking at designing a new business from scratch now ahead of a fun new project I’m excited to share with everyone here in a few weeks. In this I’ll be live blogging and revealing everything from how I’m actually learning the development of the project, to why I chose the niche/industry I’m going into, to marketing methodology, to how the business is actually growing.
I’ve not historically been a huge fan of these types of open startup movements, just because I don’t know that the value is there for everyone, but in this instance it makes good sense. I want to be able to show the whole enchilada to folks out there who haven’t done this before from zero to revenue. I think this will be particularly interesting because to date I have not developed, launched, or grown a SaaS tool…and in this experiment I’ll be doing all of those things, right in front of you and the world.
No pressure, right?
So, I think it’s important to ask yourself how you can implement metered pricing in your business? Can you give your customers a way to enjoy your tool more every month, and in turn pay you more for that increased usage? If so drop a comment in below and tell us all about it.