What is a Complex Subscription Model?

What is a complex subscription model?

A complex subscription model is a pricing mechanism where customers are liable to pay for services on a recurring basis, having options of tiered plans, usage-based charges, and more. It offers flexibility for customers as they can opt for a subscription plan that aligns with their needs. Instead of one fixed price for a service/product purchase, customers can choose a plan that is easier and not heavy on the pocket. Customers are thus billed on an annual, biannual, quarterly, or monthly basis. Also, this model accommodates upgrades/downgrades and cancellations, so customers are not bound to stick to their subscription if they change their mind.

A complex subscription model facilitates businesses as it encourages revenue inflows and allows customer retention by rendering user-friendly plans. SaaS businesses, streaming and telecommunication sectors can in particular benefit from the application of this type of payment model. Tiered subscription model, recurring revenue model, and hybrid subscription model are some of the other names of this model.

Example 1: Spotify

A great example of a complex subscription model is Spotify’s tiered plan structure:

Free Tier: Ad-supported, limited skips, and no offline listening.

Premium Tier: Ad-free, unlimited skips, offline listening, and improved sound quality.

Family Plan: Multiple accounts under one subscription, with parental controls.

Student Plan: Discounted premium subscription for students.

This model allows Spotify to cater to diverse user needs, increasing customer retention and revenue. Other businesses can similarly tailor their subscription plans to suit various customer segments.

Example 2: Adobe’s Creative Cloud subscription model

• Individual Plan: Access to Creative Cloud apps like Photoshop, Illustrator, and Premiere Pro for personal use.
• Business Plan: Additional features and support for teams and enterprises.
• Student and Teacher Plan: Discounted subscription for students and educators.
• Free Trial: Limited-time access to Creative Cloud apps for new users.

This tiered structure allows Adobe to target different customer segments, from individuals to large businesses, and provide options that fit their specific needs and budgets.

What are the various types of complex subscription models?

Tiered subscription model, usage-based model, hybrid subscription model, shared or bundled subscription, and feature-based pricing are some of the types of this model. Their details are as follows:

Usage-Based Model

It is a pricing model based on how much of a service is consumed by customers. It is reliant on actual usage instead of a fixed fee. Some industries that utilize this model are telecommunications, API services, and cloud computing.

For example, AT&T’s mobile data plan is an example of usage-based pricing where customers pay based on the data they use.

Pay per megabyte: Some plans charge customers based on GBs they use.

Tiered data limits: Some tiered plans have specific data limits with overage charges if the limit is exceeded.

Tiered Subscription Model

This type allows customers to opt from multiple pricing levels based on usage, service quality, and features as per preference. It is designed to consider various segments of the customer base where affordability is a priority.

For example, LinkedIn offers categories of subscription plans for various types of customers. It has a basic free version with limited features, Premium Career with enhanced features, and Premium Business with LinkedIn Learning, Sales Navigator, and recruiter tools. Whereas, Sales Navigator Pro is especially offered for sales personnel.

Hybrid Model

It is a mixture of tiered, usage-based, and one-time purchase models, offering flexibility for customers. It is used by SaaS businesses to attract a wide range of customer bases. For instance, Dropbox offers a mix of free and paid tiered plans based on storage capacity and a one-time purchase option for a permanent license. This flexibility allows Dropbox to cater to a broad customer range. It addresses the needs of businesses with basic storage needs to those requiring advanced features and storage solutions.

Feature-Based Pricing Model

In this type of pricing model, customers subscribe to a basic plan and pay extra for premium access to additional features they may require. It enables recurring revenue for businesses as upgrades are not imposed on customers. One fine example is Slack, where the basic plan is for small teams, and additional features must be subscribed to access advanced analytics, increased storage, and improved security protocols, alongside integration options with third-party apps.

Bundled Subscription

In this model, one all-rounder plan involves multiple services to attract customers and improve customer retention. Services are bundled up for customer facilitation and ease, thereby eliminating the need for separate purchases of plans.

What are some complex subscription model use cases?

A complex subscription model is best suited for start-ups, thriving businesses, businesses with a broad customer base, businesses in highly competitive landscapes, high-risk businesses, and those who need a quick start.

Startup businesses

Small-scale companies often have limited resources and budgets to begin operations. Moreover, they are financially bound and cannot take risks of loss; thus, they offer complex subscription models to stick around affordability.  They offer tiered-based membership plans to avoid financial burden.

Thriving companies

With growth, companies often require scaling up of their financial roadmap. Thus, they opt for subscription-based models and introduce high-value tiers. It allows expansion and launch of new innovative services/products with high pricing. Thus, as soon as companies expand, they can launch new products and multiply tiers to align with the demands of thriving businesses.

Broad Customer Base

Tiered pricing is often favorable for companies seeking flexibility. Businesses can opt for the best fit as per needs via tiered models. Businesses with a broad customer base can address the needs of every segment with ease, thereby avoiding churn.

High-risk companies

The tiered model reduces risks by offering a cost-effective solution for nascent businesses prone to risks. Experimentation and product testing get easier with a tiered model. Businesses can test, start small, and refine their products without incurring additional costs. This mitigates potential losses and offers a myriad of learning opportunities.

Highly competitive markets

Tiered subscriptions allow new businesses to make a strategic mark by offering a cost-effective entry point. They can easily engage price-sensitive customers who have the potential to upgrade to high-level tiers as per expansion needs.

Quick Start-ups

Businesses that are looking for launch and establishment opportunities can benefit from this model, as they may initiate service offerings at low rates and expand with time. It eases the implementation process and allows them to make their presence count.

What are the challenges of complex subscription model implementation?

Some of the complex subscription model implementation challenges include customer retention issues, billing intricacies, revenue recognition compliance, integration with ERP/CRMs, payment failure, and handling complex pricing structures.

We have elaborated on each of these for your understanding.

Customer retention

With myriads of subscription options available, customers may get confused with limited flexibility or unexpected charges on upgrades, leading to churn. It is imperative for businesses to offer easy subscription plans and communicate effectively about the chosen plan so that extra charges on add-ons can be dealt with.

Billing complexity

Handling a variety of billing cycles, refunds, upgrades, and downgrades can create operational disparities. Billing can become a tough task for the workforce. Thus, it is best to automate billing to effectively mitigate errors and avoid revenue leakages.

Revenue recognition

Revenue recognition compliance is crucial for businesses, in particular for businesses with complex subscription models. Proper revenue calculations and financial reporting can help avoid errors.  

Integration

For smooth implementation of complex subscription models, subscription data must synchronize efficiently with customer relationship management tools and ERP tools. If integration is flawed, the chances of data synching remain at risk.

Fraud or Failure

Declined payments, chargebacks, or even fraudulent sign-ups on services affect revenue. To avoid them, businesses must use fraud detection, dunning management, and secure payment processing mechanisms. These can help with the identification of revenue leakages and ascertain a smooth payment experience.

What are the key performance indicators for a complex subscription model?

Customer lifetime value, customer acquisition costs, monthly recurring revenue, churn rate, average revenue per user, and retention rate are some of the KPIs for a smooth, complex subscription model. Here is a detail of each one:

Customer Lifetime Value

This metric is crucial for estimating the total revenue expected to be generated from a customer over his entire customer journey with your brand. It gauges customer loyalty and showcases how willing a customer is to stick around your brand. CLV involves expected future purchases and goes beyond transactions. It helps businesses to understand the long-term value of a customer, and maximizing CLV ensures increased revenue.

Customer acquisition cost

The total cost borne by a business to acquire a new customer is customer acquisition cost. It involves expenses inclusive of marketing expenditure, sales, and overhead costs. It is the value of company expenses to gain one new customer. A lower CAC indicates more efficient customer acquisition strategies. Businesses should aim to keep CAC below Customer Lifetime Value (CLV) for sustainable growth.

Monthly recurring revenue

It is a critical financial metric that shows the revenue a company expects to receive on a monthly basis from customers on the rendered products/services. MRR analysis helps SaaS companies to effectively design future strategies and forecast growth. It gives insights into predictable revenue streams and enables tracking and identification of trends and patterns in consumer preferences. The formula for MRR calculation is

MRR = (Number of customers x Average Revenue Per User (ARPU))

Churn rate

It is the percentage of customers who stop or unsubscribe to using your products/services after a certain time. It is a natural part of the business cycle and involves losing customers. Every company experiences churn. It also includes subscribers who do not renew their subscription plans after a certain time. The lower the churn, the higher the retention rate.

Formula for churn rate:

(Number of customers who churned / Total number of customers at the start of the period) * 100.

This formula gives you the percentage of customers who left your service during a specific time period.  

Average revenue per user

It is a financial metric that gauges the average income from each user over a certain period. ARPU is determined by dividing your revenue total by the number of users total over the period of time you would like to measure. This can be a week, a month, a year, a season, or any time frame that matches up with a specific campaign or initiative where you require average revenue gained from each user. The formula for ARPU is

ARPU = Total Revenue / Total Number of Users or Customers