Why consumption-based models are a key to success in our current climate
Over the past fifteen years, subscription models have exploded and have often become a secret weapon for companies. As the very first adopters began to see resounding success, others followed closely in an attempt to grab some of the revenue benefits.
Fast forward to today, and the landscape is much more saturated, with every company seemingly jumping on the subscription bandwagon. This movement has led to the widespread adoption of many other innovative business models – from monthly recurring services to pay-as-you-go and more complex consumption-based offerings. The options are endless, which is why it’s more important than ever for businesses to be strategic and focus on the needs of their customers.
In today’s highly competitive environment, customized, customer-focused offerings are what set the success stories apart. Yet too many companies remain fixated on tactics like raising prices, often ignoring the critical importance of nurturing customer relationships. This oversight can lead to increased customer churn, underscoring the need for a more nuanced, customer-centric approach to recurring revenue models. It’s important to be open to evolution as times change, prioritizing lasting customer relationships over short-term profits.
Against this backdrop, it has become clear that we are in the midst of a market transition. As companies enter this new era, there has been a shift in focus. It’s no longer just about recurring revenue, but about centering decisions around customer satisfaction in a way that drives recurring growth. Promoting customer retention and expansion is the way to achieve staying power. After all, when 65% of an average company’s revenue comes from existing customers, it makes financial sense that maintaining ongoing relationships is the key to creating a sustainable competitive advantage.
Monetize through multiple models
What does putting customer-centric principles into practice mean in this next phase? The move to consumption-based business models plays a major role and offers proven value in driving revenue retention and growth. That’s because companies with the right consumption-based model have the ability to adapt to changing customer needs and economic conditions, giving them the tools to create ongoing value and flexibility. As new technology continues to shape the landscape, with artificial intelligence (AI) and the Internet of Things (IoT) becoming increasingly ubiquitous, such offerings will become increasingly valuable.
Modern companies are already taking notice, recognizing that recurring growth depends on gaining a deep understanding of how subscribers consume their products. In fact, new research shows that almost half (46%) of companies analyzed have implemented some form of consumption-based pricing in the past three years. While consumption-based models are certainly not new to the market, these models have evolved to become more effective through a hybrid approach, combining usage with other business models such as subscriptions. The same study found that companies that adopted hybrid consumption models outperformed all others when it came to annualized annualized revenue growth.
In addition to the benefits of more predictable revenue streams and meeting demand for a customer-centric approach, hybrid consumption models can provide flexible and scalable growth. Customers can be confident they have the right package to meet their current needs and can move to a more robust package as they grow, without facing high barriers to entry. They can also gain insight into their consumption, allowing them to monitor their spend, anticipate overages and view billing costs – capabilities that in turn support customer satisfaction.
Getting consumption-based pricing right
While the benefits are compelling, identifying the best consumption-based model to meet future needs can be complex and often iterative. That’s because tracking consumption provides a wealth of data about how a product is used, and this raw usage must be translated into the right pricing model. To avoid missing out on growth opportunities, companies must carefully consider the ‘what’, ‘when’ and ‘how’ of consumption and build the right operational capabilities.
The ‘what’ is the company and the product. When choosing the right pricing model, companies must consider multiple dimensions of the technology stack, choosing between a product-driven or sales-driven approach and choosing between fixed and variable economies. The “when” are the use cases companies want to target to align with the benefits and value they deliver and maximize implementation success. And if not all consumption-based models are post-pay, the “how” involves choosing between options such as committed spend contracts with flexible consumption and usage-based overages on top of basic subscriptions.
Successful companies must also invest in helping their customers create value. Best practices include proactively understanding their product usage and any barriers, with an emphasis on delighting them, such as a free usage fee before being charged, and aligning the price-value equation to avoid limited growth to prevent. Combined with the right operational capabilities, such as scalable IT infrastructure, usage tracking and analysis, and billing and revenue management, these considerations will help businesses hit the ground running.
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