As a business, you are likely to be signing up for a number of third party software and services – be it for accounting, marketing, HR, finance or just web hosting. Back in the day, these business software tools were available to download for a lifetime license fee. Users simply paid a few hundred dollars to download the software and it was theirs for a lifetime. Many other developers sold an annual renewal fee which gave its users access to periodic software updates and technical support as well. From a user’s perspective, this often meant large capital investment in software tools which could all be down the drain if the developers folded or stopped updating their software.
But with SaaS gaining ground over the past decade, a large chunk of software makers have migrated to the cloud. This has given rise to a subscription model where the service provider hosts all the tools and data on their servers and users pay a monthly fee to access them. This has been a pretty popular option compared to licensing fee primarily because of the cheaper monthly costs and also because you only paid for as long as you need the service. Established service providers also provide annual subscription for a cheaper cost from users who prefer this option.
While the subscription based billing model is definitely an improvement over lifetime licensing, it still has its flaws. These subscriptions often come in a tiered structure where lower priced subscription plans offer fewer resources and features which expand with every higher tier. Most SaaS services come with an ‘Enterprise’ plan which is often the highest tier of subscription – here the pricing is custom quoted for power users based on their specific usage requirements.
At the outset, this seems like a fair pricing model where you are only billed for what you need. But that is not always the case. An alternate pricing model that has been getting popular in recent times is Pay-As-You-Go. Similar to the model followed on the PAYG phones, these services let users add “credits” to their account which get used up based on your consumption. For services where consumption could change quite drastically, you also have metered billing where you are invoiced at the end of a billing cycle based on your consumption.
Predictable Pricing
One of the arguments made for subscription billing is that your expenses are predictable each month and you do not get rude shocks at the end of the month. While this is true, it also means that your consumption levels are limited to what your plan provides. For instance, if your hosting plan limits your monthly bandwidth consumption, you are likely to miss out on additional revenue if you have a great month with a higher than planned web traffic. Most services do allow you to upgrade or downgrade your plans each month, but then, this defeats the purpose of subscription billing which is to make expenses predictable.
Charging For Unconsumed Resources
The biggest problem with subscription plans is that you are always charged for resources you did not consume. To take the same hosting plan example, let us say the starter plan offers 10 GB of bandwidth at $ 10 a month while the upper tier offers 100 GB at $ 30 a month. For a business to enjoy the $ 10/month subscription, they need to always consume less than 10 GB of bandwidth. Thus, a business that only consumes 2 GB a month continues to pay for 8 GB of unconsumed bandwidth. Worse, if you are a business that consumes 12 GB of bandwidth, you are essentially paying for 88 GB of unconsumed resources.
Compare this with a credit or metered billing structure. A business that consumes 12 GB is only billed for the resources consumed. Subscription billing is fantastic as a service provider but terrible for users.
Money Getting Locked
There are instances where a credits based system does not work well. Service providers that offer credits based billing often have a ‘minimum refill’ amount and it is not possible to add credits fewer than this amount. Some providers require a high minimum refill which could lock your money into their system for a long period. For instance, if you use $ 10 worth of credits each month and the minimum refill is $ 100, your credits would not be used completely for ten months. And in case you are not happy with the provider, the money you have already paid for can be hard to retrieve.
Where Subscriptions Make Sense
There are certainly instances where subscriptions do make sense. Internet service providers typically provide an “all you can use” pricing that is billed monthly or yearly. Here, users are billed one amount every month regardless of how much they consume. Here too, heavy users get their consumption subsidized by light users whose consumption does not justify their monthly billing. But the pricing still makes sense because the provider often has operational expenses that are incurred regardless of usage. That is, it takes the internet service provider resources to keep the traffic flowing regardless of how many users use their service and the bandwidth they consume. But for these subscriptions to make sense, there is only one pricing for all consumers with only the outlying very heavy consumers priced differently.
As a consumer, this begets the question – does it make sense to pay a monthly subscription for all the SaaS tools you use – be it for accounting, marketing or anything else. The answer is mostly no. If you have alternate providers who offer all the features you need with a credits system or metered billing model, always go with them. This not only saves your business a lot of cash, but can also protect you from instances where you subscribe to try a new service but forget to sign out before the end of trial period.
THIS ARTICLE ORIGINALLY APPEARED ON THE HUBBION BLOG
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