What is a Complex Subscription Model?

A complex subscription model is a recurring revenue pricing model where the customer doesn’t pay a single fixed fee per period. It involves charging customers as per their changing needs like metered usage, different tiers, prepaid commitments, special discounts, and negotiated terms, etc. Unlike the simple subscription model, it adapts to subscriber’s requirements instead of forcing them to a rigid pricing structure. 

Examples of complex subscription model 

One common example is a subscription to an AI assistant platform or chatbot. Consider the base plan cost $30 per user and includes a monthly allowance of 5 million tokens of model usage across the team. Beyond that allowance, additional usage is billed at $15 per million tokens consumed, with the input and output tokens metered separately at different rates since output generation costs more to process. The plan also offers optional add-ons priced independently like access to a more advanced model tier for an extra $10 per user per month, or a higher-context mode that enables longer documents and conversations for an additional per-token surcharge. This subscription model becomes complex as the final cost depends on several variables that shift independently. The number of active users can grow or shrink as the company onboards or removes team members, changing the base fee as well as variation in token consumption.

Consider another simple example. A B2B SaaS company introduced an enterprise plan structured as a three-year contract with several pricing elements at once. The customer pays a fixed platform fee of $2000 per month along with $40 per seat for 50 included seats. They are also given the freedom to add or remove seats at any time. Additionally, the plan includes 1,000,000 API calls per month, with any usage beyond that billed at $0.50 per 1,000 calls. This makes this subscription model a complex one, as no single number describes the price. Complexity here can simply be recognized by the fact that price is a function of several moving variables rather than a fixed lookup value.

Companies like Spotify, Adobe’s Creative Cloud subscription model, etc have implemented complex subscription models to facilitate their users. 

What makes a subscription model complex?

The complexity in subscription model can be due to pricing scheme (usage-based, tiered, freemium, metered, hybrid), changes in plans (upgrade, downgrade, proration), billing frequency (weekly, fortnight, monthly, annually), geography and regulatory complexity (multi-currency billing, regional payment methods, tax and compliance variations), etc.

Common factors that derive complexity are:

Hybrid seats plus usage 

Many B2B contracts charge a base fee for seats or platform access, then layer metered usage like API calls, data volume, transactions, etc., on top. Each invoice needs both counts before it can be calculated. 

Ramps and multi-year contracts

Multi-year deals often price year 1 differently from year 2 or 3, either as a negotiated discount that burns off or a planned step-up. The system has to know which contract year it’s in to bill correctly. 

Mid-term amendments and proration

Seats added or removed mid-cycle, plan upgrades, or add-on purchases all need to be prorated to the exact days active. 

Co-terming 

When a customer adds a new product or seats mid-contract, co-terming aligns the new item’s billing cycle and renewal date with the existing contract instead of starting a separate cycle. 

Prepaid Credits and Drawdown 

Some contracts have the customer prepay a credit pool that usage draws down against, with true-up billing once the pool is exhausted. Tracking the remaining balance against live usage adds another variable to every invoice. 

Multi-entity and multi-currency 

Enterprise customers may need one contract billed across multiple legal entities or currencies, with consolidated or entity-level invoicing and FX handling. 

ASC 606 Revenue Recognition 

Combining fixed and variable consideration in one contract means revenue can’t simply be recognized ratably. It has to be allocated across performance obligations under ASC 606, separately from how the invoice itself is calculated. 

Simple vs. Complex Subscription Models

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 for 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 = Total Number of Active Accounts x Average Revenue Per Account (ARPA).  

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.