When starting your business, generating consistent revenue is the main objective. You can only remain or grow your business if you continue makings sales. Establishing a strong customer base is a challenge. Particularly in this internet decade, many players are joining each niche in the market. Competition has become the nature of the business arena.
For this reason, any entrepreneur seeking to remain in business must come up with a model that will help your venture retain customers. You need to consider a way of enhancing customer convenience in the buying process. Some of the power customer retention models are Pay as You Go and Subscription.
As a business owner, you may have challenges in choosing between the two. In this article, we break down the pros and cons of these two business models.
Pay as You Go vs Subscription Model: How Do They Differ?
Many people confuse between Pay as You Go and subscription. Maybe you are among them. Probably you cannot distinguish the difference between the two. As launch your business, you might have a challenge choosing between the two models. So, how do they differ?
Pay as you go is a business model where you allow your customers to pay per usage. Here, customers do not pay the entire purchase fee. This means they pay for what they use and for the time they use it. The model is common services industry where providers fix a meter to assess the usage level of the customers.
For instance, your electric and water provider charge you according to your usage. You do not pay a flat rate per month. So, if you spend $100 this month and $90 next month, you will pay that amount. Another name for this concept is the utility business model.
On the other hand, the subscription model involves charging a recurring fee for a particular period. Your customers subscribe to what you offer and they expect you to deliver on your promise. This model means that your customers pay a flat rate per month regardless of the amount of service or quality you use.
For instance, you can subscribe to receive the monthly issue of a given magazine. You pay a flat rate each month and receive your magazine throughout the year. In this decade, subscription is a common practice. Many businesses are using this model as a way of keeping customers attached to their services.
Probably, you are a subscriber to different online service providers and TVs. Also, many businesses offering SaaS (Software-as-a-service) are using this model in their operations.
The Pros and Cons of Pay as You Go
The Pay as You Go business model is a great way of enabling customers who cannot pay the whole price to access your products. This model has many benefits and disadvantages that you need to know before adopting it. Here they are:
Pros
Chance to attract more customers
The utility model offers customers the freedom to control usage. Your customers do not need to commit to your products and services. Instead, they can use the services when their budget allows them. By allowing customers to manage their usage, you attract many people to consider what you are offering.
Enhances your inventory management
Pay as you go model allows you to align your business costs with the consumption rate. Hence, it makes it easy for you to track and manage the cost per use. As such, it becomes easy for you to retain inventory that is in line with your current customer demand. So, no cases of overstocking or out-of-stock in your business.
Cons
Low customer retention
Pay as you go model comes with zero customer commitment. Customers consider using your products based on their quality. So, when the customer feels what you are offering is of low quality, they will consider your competitors’ products. This means that you have zero customer retention guarantee. As such, you have to convince your customers to stay by focusing on the quality of products or services.
Hard to predict your income
As noted, Pay as you go allows customers to use your products and services on a need basis. They can choose to use it this month but and avoid it next month. This way, it becomes hard for you to predict your income in a given period.
Pros and Cons of Subscription Business Model
Like the Pay as You Go, subscription business has its share of benefits and challenges. Here are the pros and cons of the subscription model you need to know before considering it in your business:
Pros
High customer retention
No doubt, customer retention is central to the prosperity of any business. For this reason, every entrepreneur must come up with a strategy for creating recurring sales. Keeping customers buying from your venture is not an easy thing. Here is where the subscription model becomes crucial
The subscription model operates on enhancing customer retention rates. It introduces a way of retaining customers through a subscription fee. This means that customers remain attached to your business for a longer duration than in the pay-as-you-go model.
High income predictability
Knowing how much you will generate in your business enables you in planning and budget. Many business models do not achieve this aspect. But with the subscription model, you can easily predict the potential income. Even without new subscriptions, you are confident that current subscribers will pay their fees which you can use to run your business and cater for other aspects.
Retention of a strong business-customer relationship
In the subscription business model, the relationship between a business and its customers is essential in determining its success. You need to retain a strong connection with your customers to enjoy continuous sales. However, establishing this relationship is a process that requires time and consistent interactions between the parties.
Through the recurring subscription fees, the vendors and subscribers remain connected. The connection allows regular interaction where the vendors can learn and understand the needs of their subscribers. This way, they can offer products and services that match customer needs – an act that enhances their relationship.
Cons
Susceptible to a change in customers’ interest
The subscription model thrives on the nature of customers’ interest in your services. If they lose interest in your services or products, you will lose business. As you know, customers’ interest is not static. For you to remain in business, you have to be innovative and provide products that align with the prevailing customer’s interests.
Conclusion
In a summary, both pay as you go and the subscription model is viable business models. They can work on your business. However, you need to understand the goal and purpose you want to achieve. Pay as you go will work well when you want to enhance customers’ freedom on how they use your products.
On the other hand, the subscription model is a perfect choice for those seeking to enhance customer retention. Otherwise, you can opt for a hybrid of the two models if you have a challenge in considering one of them.
