Usage-based billing is revolutionising the ecommerce industry as consumers demand ever more flexibility in the way that they buy, and pay for, goods and services. With technology increasingly making it possible for consumers to pay only for what they use, we are set to see significant changes across sectors in 2015 and beyond. Digital services businesses should be looking to integrate at least one method of usage-based billing in their business model in order to tap into new revenue streams and maintain customer satisfaction in an increasingly competitive environment.
As we move away from the traditional model of single purchase and use, and enter the usage-based billing age, what monetisation models should companies be looking to implement? There are two main models businesses should consider – subscription and freemium.
Subscription models: a big but valuable shift
Most people will be familiar with the subscription model, whereby the customer pays a set price for access to a product or service over a set period. This can be a weekly, monthly or yearly subscription, and examples would include Netflix and The Times online website.
In some cases, the subscription model will have evolved directly from the single purchase model used in the past. For example, previously designers using Adobe’s creative software would purchase a single copy of the software that would be in use until an updated version of the software was made available. Customers then would have the opportunity to use the product until they wanted to pay for the upgrade to the next version.
Today, with shorter cycles of smaller updates and the use of cloud computing, this model has evolved for users of Adobe’s creative services. A designer can now purchase a monthly subscription giving them access to all the requisite tools, whilst ensuring they benefit from any software updates. This removes the large upfront payment for the software in favour of a smaller monthly payment – a fundamental change to the business model.
Some businesses are building their model from scratch around subscriptions models made possible by digital technology. For example, there are an abundance of companies, which sell solely online, offering everything from dog food to razor blades, delivered to your door, in exchange for a standard monthly payment.
We expect the number of subscription models for tangible products to increase as predictive analytics enters the mainstream, making more complex repeat orders possible with little intervention.
Businesses that capitalise on this emerging trend will see substantial benefits: including a reliable stream of revenue and a reduced risk of customers switching to competitors. In order to operate a successful subscription model, companies must demonstrate the value to the customer of having a subscription. This will tend to be a discounted fee compared with non-subscription. This model is particularly beneficial in the frequent and consistent replenishment of commodity goods, every month for example, and building continuity programmes that are well-timed for delivery of speciality items.
Freemium: perfect for SMBs
Freemium is a model that has been particularly successful with early-stage software companies. A freemium model will make a product or service, typically a digital offering such as software, media or web services, available free of charge as standard but with a fee (premium) charged for additional features or functionality. Early-stage market entrants and market disrupters will often use this model in order to allow users to try the service for free and once the benefits have been realised the sale of additional features becomes a simpler process.
An example of a successful use of the freemium model is enterprise social network Yammer. Organisations and employees can sign up and start using Yammer free of charge. However, in order for the employees to receive additional collaboration tools, the organisation will be charged a fee on a per user basis.
Small or medium-sized software businesses should consider this model as it significantly lowers the barriers for customers, allowing you to grow your user-base and spread engagement and advocacy. However, successful implementation of a freemium model relies on a number of factors, not least of which is the customer reach. Business should consider that only a small percentage will ever pay for the premium product, so this should be considered in any pricing model. In addition, the free version needs to provide value in order to convince customers to upgrade to the paid version, with compelling additional features for which customers are willing to pay extra.
Revolution today, business success tomorrow
Though these monetisation models will dominate the billing of online services, they are by no means definitive. In the end, businesses should implement the model most suited to their target market and how their customers use their products or services in their daily lives. For example, a business could offer a combined subscription and freemium service. Spotify has followed this path. It can be classed as a freemium service that also incorporates a subscription for additional benefits such as no advertising and offline listening.
One thing is certain, however; 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 embrace this usage-based billing revolution will be best positioned to take advantage of the opportunities offered by the digital economy.
By James Gagliardi, Vice President of Product and Innovation at Digital River.
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