Subscription vs. usage-based revenue models: Pros & cons

You’re probably wondering which revenue model would work best for your business: Subscription or usage-based?

That’s precisely what this post is about: Arming you with enough knowledge to make an informed decision that will satisfy your customers and protect your revenue. 

To do that, we’ll cover:

• The key differences between subscription revenue and usage-based revenue models
• A definition, pros, and cons of both models
• Tips to help you choose between the two

Let’s get started.

What’s the difference between subscription and usage-based revenue models?

Here’s a quick and easy comparison between how subscription and usage-based revenue models differ:

What is a usage-based revenue model?

Unlike traditional subscription models, where users pay the same amount each month, implementing a usage-based revenue model means charging customers based on how much they use your product. 

Companies offering cloud services (like Amazon Web Services), phone or messaging services (like Twilio), or even payment processing platforms (like Stripe) implement the usage-based model. 

The core idea is that users shouldn't have to pay for features they don't use or capacity they don't need.

Pros of usage-based revenue models

• Customer appeal: Paying only for what they use offers a sense of fairness and control. This is ideal if their needs change from month to month, or they don't use your SaaS product heavily.
• Low entry point: Since there's no big upfront contract, new customers can quickly try the service at low risk, which can lead to faster customer growth overall.
• Potential for quick revenue growth: If a customer's usage increases dramatically, your revenue grows alongside it. This aligns the business's success with the customer's success.
• Flexible discounting: With usage-based models, you can offer discounts to customers who hit a certain usage level. This encourages higher usage and creates additional revenue streams.

Cons of usage-based revenue models

• "Sticker shock" risk: If customers don't fully understand how their usage translates into cost, they might be surprised by a higher-than-expected bill. This can erode trust.
• Low switching costs: Customers can easily switch to a competitor since they're not locked into long contracts, which makes customer satisfaction even more important.
• Revenue unpredictability: Forecasting revenue can be harder, as income depends on fluctuating customer usage patterns.
• Scaling is trickier: You have to ensure that your pricing metric is easy for customers to understand and reflects the value they get from your SaaS.

What is a subscription revenue model?

With this model, the customer pays a recurring fee (monthly, quarterly, or annually) and gets ongoing access to a product or service. It's a familiar and popular approach used by many businesses, including SaaS customer platforms (like Hubspot) and streaming services (like Netflix).

The core idea is that the customer pays the same amount each time, regardless of how much or how little they actually use the service.

Pros of subscription revenue models

• Predictable income: This is the standout benefit. Companies know how much revenue they'll generate, making planning and budgeting much easier.
• Customer relationships: Subscriptions help build strong relationships, as customers interact with your product/service regularly, creating opportunities for valuable feedback.
• "Sticky" customers: With recurring payments, there's less worry about customers jumping ship every month. This lowers customer acquisition costs.
• Suitable for stable markets: Subscriptions work well where customer needs are predictable and the market isn't subject to wild changes.

Cons of subscription revenue models

• Higher churn risk: Subscriptions require excellent service to keep customers happy. They can still leave if they don't get enough value, leading to lost revenue.
• Keeping things fresh: You need to continually provide enough value to justify a customer's ongoing payments. Stagnant products can lead to higher churn rates.
• Vulnerable to trends: If a hot new competitor enters your space or there's a shift in customer needs, your recurring revenue stream could take a hit.

Which revenue model suits your SaaS business?

Choosing between usage-based and subscription models for your SaaS company isn't one-size-fits-all. Let's look at some key questions to help you figure out the best fit:

1. How complex is your SaaS product?

• Subscription revenue model: If your product is straightforward to use and customers grasp the value quickly, subscription pricing is easier to manage.
• Usage-based revenue model: Complex products with different feature sets or usage patterns might benefit from the flexibility of usage-based billing. However, you must make sure your pricing scales reasonably with customer usage.

2. What's your customer behavior like?

• Subscription revenue model: Does your product cater to consistent needs? Subscriptions work well when customers use your product regularly.
• Usage-based revenue model: A usage-based model might offer more appeal if customer usage is unpredictable — some months high, some low — or if they need time to explore features before committing.

3. How important is predictability?

• Subscription revenue model: If stable revenue is crucial for your business planning, subscriptions are the winner.
• Usage-based revenue model: If you're comfortable with some fluctuation and want to align revenue growth directly with the value customers get from your product, the usage-based model could be tempting. 

4. Can you handle the overhead?

• Subscription revenue model: Subscription management is often more straightforward to set up and maintain.
• Usage-based revenue model: Tracking customer usage, ensuring billing accuracy, and preventing "sticker shock" demands robust systems, but platforms like Orb specialize in making this process easier and more cost-efficient for SaaS businesses.

Here are a few more things to keep in mind:

• Don't ignore customer preferences: How do people in your market typically pay for similar services? Going against the grain can hurt adoption.
• Transparency is key: Especially with usage-based models, make pricing clear upfront to avoid surprises and build trust.
• Hybrid models exist: Some companies mix a flat subscription fee with usage-based charges for specific add-ons or premium features.

Next steps

Now that you have a solid understanding of the pros and cons of usage-based and subscription revenue models, implementing the right model and ensuring the technical infrastructure is in place to support it can present significant challenges.

One of the biggest hurdles is building reliable systems to track usage, manage subscriptions, and issue accurate invoices. 

Orb is a done-for-you billing platform that makes implementing any revenue model a hassle-free experience.

 Here's how Orb supports your evolving billing needs:

• Flexible pricing model support: Orb's adaptable configuration tools let you easily model a wide range of pricing structures, from complex usage-based pricing to more straightforward subscription plans, and even hybrid models.
• Real-time usage tracking: Orb's robust metering infrastructure captures usage data accurately and in real-time, ensuring your billing always aligns with customer consumption.
• Effortless invoice generation: Orb generates detailed invoices that provide full transparency to customers, fostering trust and minimizing billing disputes.

Learn how Orb can solve your billing effortlessly.