Recurring revenue business models introduce new challenges for you and your channel partners. Customers are more empowered and informed than ever before. As my previous blog stated: customers only want to pay for what they use. More specifically they only want to pay for the value received from a product or service—and they only receive value when they are using a product or service effectively.

As the following graphs demonstrate, based on some usage profiles a subscription model could see as much as 99 percent erosion in revenue—unless you develop strategies for pricing and customer adoption to prevent that loss. And if you sell through a channel, you need to ensure that your partners are empowered to drive adoption and demonstrate value as well.

The switch from purchase-to-own to purchase-to-use is now here to stay, even though it varies by industry and vertical segment. My previous blog documented how this trend is evolving in B2B SaaS, while this blog will show the impact when tying revenue and profits directly to usage. The following charts show how different per-user charge models impact revenue when a user is active only one day per quarter. The first charge model is for the increasingly outdated “perpetual license,” where the user pays a sizable up-front charge and then pays a yearly maintenance charge (e.g., 20% of original purchase). This perpetual charge model clearly benefits the provider: the average sale is highly profitable, and the customer is locked in by high switching costs. The customer carries most of the purchase risk.

The second charge model is per-user per-month, which cuts into that upfront cost and allows a customer to pay over a longer time period. This model delays breakeven and profitability for the provider, but it is more attractive for customers, as they can pay for what they expect to use. This model allows customers to add or remove users as their business requirements change. The purchase risk is shared more equally, but in many cases the customer still bears the majority of the risk (e.g., making a multi-year commitment to a set of monthly users).

The third possible charge model is per-active-user per-month, which truly flips the risk to the provider. In the example, the charge model starts to change radically: Now rather than simply figuring out how to translate the perpetual user licenses into a monthly per-user payment model, revenue becomes directly dependent on usage. If a user is active only one day per quarter, revenue for that user would suddenly drop from twelve months of charges down to four months.

The fourth and fifth charge models show revenue going down even more dramatically. In a per-week charge model, revenue would be cut by 92 percent.

In a per-day charge model, revenue would drop by 99 percent.

The Implication

Would you pay a cell phone bill that had overage charges but didn’t show usage information? That kind of transparency is expected from customers, and it’s here to stay—thanks to the cloud, mobile, and sensors. And customer behavior will continue to evolve, as competitors continue to offer more usage based pricing models. Customers are already migrating towards services and products that provide transparency and only charge for usage. Businesses that want not only survive, but thrive will make customer usage a central part of their operations, because:

  • Pricing based on value attracts customers
  • Faster onboarding accelerates time to value
  • User adoption delivers business outcomes
  • Keeping users engaged retains and grows revenue

The future is clear: delivering value drives revenue. Rather than accept 99 percent less revenue (such as in the scenario above), figure out how to price and package usage, and then foster that usage in each of your customers.