For On That Ass, subscriptions have several advantages. A subscription creates a so-called "lock-in" effect. Customers are more likely to purchase all their boxer shorts from On That Ass because they already have a subscription. The number of decision points is reduced, and there is a strong chance that the average man—if satisfied with the boxer shorts—will not quickly consider switching to another brand. This pricing model generates recurring, predictable revenue for On That Ass. Another example is Bold King, a razor brand that delivers blades to your home on a subscription basis using the same principles. You get it: "Never run out of razor blades again."
The question, "What are you pricing?" can have such a significant impact that it disrupts entire industries. Take the global software industry, where the so-called Software as a Service (SaaS) model has quickly become the norm. Do you remember the days when you simply bought a Microsoft Office package for a one-time fee? Nowadays, more and more people purchase a subscription to Microsoft Office (Office 365). In the business software sector, the SaaS model has become indispensable. Most software vendors now only sell subscriptions to businesses for using their software.
Consider Netflix, which at the end of the last century became the first player to offer video rentals in the form of a subscription. For a fixed monthly fee, you suddenly had unlimited access to movies and later series. The Netflix example also contains the answer to the second pricing model question: How do you price? Netflix chooses to sell a subscription (what are you pricing?) for a fixed monthly fee (how do you price?). Regardless of usage—whether you watch 100 hours or 10 hours of video per month—every Netflix user pays the same amount for their subscription.
The "how do you price?" question is becoming increasingly relevant due to technological developments
Technological advancements and digitalization are making it easier to measure usage. Where it was once impossible to measure the usage of many physical products or services, this is now becoming increasingly feasible. Netflix can precisely measure how many hours a user watches video content. When Netflix used to rent out videotapes or DVDs, this was, of course, impossible.
Smart sensors are also becoming better at measuring the use of physical products. In the future, you might even buy running shoes with micro-sensors that count every step. This could allow for a subscription model where you pay per kilometer run. If you use them less, you pay less; if you use them more, you pay more.
The Dutch company Swapfiets innovatively introduced subscriptions for bicycles. "Always a working bike" is hugely popular, especially among young people who dislike repairing flat tires or greasing chains. Swapfiets charges a fixed monthly fee, regardless of how much you use the bike. Someone who cycles six times as much as another pays the same amount. In the future, Swapfiets might price based on usage by incorporating smart sensors into their bikes. Heavy users could pay more, and light users could pay less, making the subscription more attractive to casual riders. Thinking about your pricing model—especially how you price—is a great way to differentiate your pricing further.
Other examples and possibilities
Netflix could also consider pricing more based on usage. With increasing competition from streaming services like Disney+, Amazon Prime, and Videoland in the Netherlands, Netflix might struggle to attract potential users who are only looking for a few specific films or series. As the range of options grows, users become more selective and want to watch a smaller, curated selection of content. Subscribing to all platforms simultaneously is too much for many potential customers. After the revolutionary shift where Netflix offered unlimited films and series via subscription, we might be on the brink of another revolution that could shake up the relatively new streaming industry.
How? Netflix (or a competitor) could introduce lighter subscription tiers based on limited usage. This could include a cap on streaming minutes per month, or access to only certain types of content, such as a limited number of titles. Netflix could also keep the base fee the same for everyone but charge extra for usage above a certain threshold. This approach could allow for more competitive pricing of the base subscription.
Beyond usage-based pricing, many other options exist. In the software industry, pricing is often based on the number of users. In modern consulting, clients increasingly pay based on performance—the so-called pay-for-performance model. We don't necessarily need to look only at innovative startups for examples. Usage-based pricing is actually a very old method. Lawyers and accountants have used the hourly billing model for over a century, which is usage-based pricing in its purest form.
Take a car-sharing service like Greenwheels, which combines a fixed monthly subscription fee with usage-based charges (in hours, kilometers, or days). Booking platforms like Opentable and The Fork charge restaurants a fixed monthly fee for access to their platform and an additional fee per reservation made. These are examples of combined pricing models.
In Part 2 of this blog series on pricing models, I will guide you step-by-step on how to get started.
[i] Nathan Reiff (2020). ‘HowNetflix makes money: Netflix's international streaming is its fastest growingcategory.’ Geraadpleegd op 4april op https://www.investopedia.com/insights/how-netflix-makes-money/