Why consumption-based models are a key to success in our current climate

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Over the past 15 years, subscription models have exploded, often becoming a secret weapon for businesses. As the very first adopters began to see resounding success, others closely followed their lead in a bid to take a share of the revenue benefits.

Fast forward to today, and the landscape is much more saturated, with every business seemingly jumping on the subscription bandwagon. This movement has spurred 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 what their customer’s need.

In today’s highly competitive environment, tailored, customer-centric offerings differentiate the success stories. Yet too many businesses remain fixated on tactics like hiking up prices, often overlooking the vital 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, while prioritizing sustainable customer relationships over short-term gains.

Against this backdrop, it’s become obvious that we are in the middle of a market transition. As businesses 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 will drive recurring growth. Championing customer retention and expansion is how to achieve staying power. After all, when 65% of the average company’s revenue comes from existing customers, it makes financial sense that nurturing standing relationships is key to creating a sustained competitive advantage.

John Phillips

GM for EMEA at Zuora.

Monetization through multiple models

So, what does putting customer-first principles into practice mean in this next phase? The move to consumption-based business models has a huge role to play, offering proven value in driving revenue retention and expansion. That’s because with the right consumption-based model, businesses have the ability to adapt to changing customer needs and economic conditions, therefore giving them the means 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 more and more ubiquitous, such offerings will be increasingly valuable.

Modern businesses are already taking note by recognizing that recurring growth relies on gaining a deep understanding of how subscribers consume their products. In fact, new research reveals that nearly half (46%) of the companies analyzed implemented some form of consumption-based pricing in the last three years. While consumption-based models certainly aren’t new to the market, these models have evolved to become more impactful with a hybrid approach – combining usage with other business models, such as subscriptions. The same study indicated that businesses that adopted hybrid consumption models outperformed all others when it came to year-over-year annual recurring revenue growth.

Beyond the benefits of more predictable revenue streams and meeting demand for a customer-centric approach, hybrid consumption models can offer flexible and scalable growth. Customers can feel confident that they have the right package to support their current needs and can move toward a more robust package as they grow, without facing high barriers to entry. They can also gain visibility into their consumption, allowing them to monitor their spending, anticipate overages and view billing charges – capabilities that in turn support customer satisfaction.

Getting consumption-based pricing right

While the merits are compelling, identifying the best consumption-based model to meet future needs can be complex and often takes iteration. That’s because tracking consumption produces a wealth of data on how a product is used, and this raw usage needs to be translated into the right pricing model. To avoid missing out on growth opportunities, businesses need to carefully consider the ‘what,’ ‘when,’ and ‘how’ of consumption, as well as building the right operational capabilities.

The ‘what’ is the company and product. When choosing the right pricing model, companies need to consider multiple dimensions, from the technology stack, opting between a product-led or sales-led approach and choosing between fixed and variable economics. The ‘when’ is the use cases companies want to target to align with the benefits and value they bring and maximize deployment success. And when not all consumption-based models are paid in arrears, the ‘how’ relates to choosing between options such as committed spend contracts with flexible consumption and usage-based overages on top of base subscriptions.

Successful businesses must also invest in helping their customers achieve value. Best practices include proactively understanding their product usage and any barriers, focusing on delighting them, such as a free usage allowance before charging, and aligning the price-value equation to prevent constrained growth. Combined with the right operational capabilities, such as scalable IT infrastructure, usage tracking and analytics and billing and revenue management, these considerations will help ensure that businesses can hit the ground running.

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John Phillips is GM for EMEA at Zuora. John has been at Zuora for over 9 years and has over 25 years of expertise in general management of businesses across SaaS, Enterprise and Open Source models.