How to value a subscription software company

Angelica A.

Many businesses choose to rely on subscriptions for paid user service. And that’s true even though people are perhaps less and less inclined to pay for software that way. On that note, McKinsey & Company actually recorded 46% of customers who already pay for an online streaming service. And the same survey spotted 15% of users who subscribed to an e-commerce service within a year. With those figures in mind, the current business challenge has more to do with correct pricing and the most adequate strategy to motivate clients to pay for a subscription than anything else. Yet, how do you value a subscription software company?

Defining correct pricing for a startup

Naming the correct pricing for a company can be tricky. At first, entrepreneurs can reasonably wonder which way to go and why to set their pricing the way they do. Because we know how hard it is to get this right, we’d love to help companies make the right decision that benefits them and their client base. For that, we put together a few pros and cons of different types of pricing. Next, we’ll focus on usage-based, per-user, and per-feature pricing to help companies determine which may be the best direction for their business needs.

Pros of usage-based pricing

This type of subscription model is also known as Pay As You Go. As you can probably tell, the model’s based on users paying just for what they actually use. It’s widely popular among infrastructure and platform-related software companies. However, more and more SaaS companies seek to integrate this model into their businesses. 

Pay as you go bears many advantages. Some of those include price scaling. Customers who only need to use a little of a given service are commonly happy. It works for them not to commit to much as a paying sum for the little use they’ll give a particular app or function. Another pro to this specific kind of pricing is how it cuts back on who gets to use the service. Without hefty fees upfront, per usage pricing makes it more affordable to acquire a specific offer. A third big pro of usage-based pricing is how it holds heavy users accountable for their needs. 

Cons of usage-based pricing

No model is perfect. There are naturally some cons to usage-based pricing that also need to be disclosed. The first big one has to do with how hard it is to predict final figures. And that applies several ways. The first logical implication is how hard it is for users to predict their final bill every month. Yet, there’s also a business aspect to it. This model also makes it difficult for a company to predict revenue when customer usage fluctuates every month. 

Another con to this model is how customers won’t necessarily care about the number of application programming interfaces (API’s) they generate. And that means that the product’s value won’t be as seen as we might like it to be.

Pros and cons of per feature pricing

As the name suggests, the model is based on features in which users might be most interested. This kind of pricing availability might also be an excellent choice for people who are only interested in some of a service’s settings and are unwilling to pay for full functionality. In general, users are mostly okay only using some aspects of a full version.

The pros of this particular type of pricing model include how it incentivizes people to upgrade. They efficiently help with scaling as users navigate into more features. Those who start with only a few features at their disposal can get more comfortable with the tool as time passes. They might be more interested in exploring more of a company’s services over time and, therefore, can end up paying more for broader access. Another great pro with this model is how it balances and exercises feature accountability. Meaning, some features might call for more resources before a service can be delivered. With per-feature pricing, we get to charge those additional resource needs accordingly.

The cons with this model start with how hard it can be to get the right mix of features to attract initial clientele versus features worthy of a higher rate. And the model tends to call on experimentation a bit and at first before we get our offer right.

Pros and cons of per-user pricing

Pricing per user is another reliable pricing option. Customers who want to try a service or platform first to decide if they wish to pass this on to bigger teams can find this pricing model quite useful. Companies tend to designate a guinea pig who can use a tool to its full extent and then deliver it back to small groups. Usually, a first user means other account holders or team members will join over time. This model’s pros have to do with customers only paying for the people actually using the tools and revenue scaling with adoption as a result. However, its cons include limited adoption as big teams tend to hesitate more before giving a specific tool a try.

A few other tips on subscriptions 

Offer options. Most people want to feel they have the power to choose where they spend their funds. Give that option to your customers. Offer options that work best in your kind of service line. And give clients different types of services for which they might be looking. 

Avoid hidden charges. Being charged a figure that we didn’t expect can be a highly unpleasant occurrence. To keep client dissatisfaction away due to payment information, simply seek to be very clear about your pricing and all your tailored or different plans include. Also, be very transparent on functions excluded from a particular subscription plan or pricing. Don’t surprise users with hidden fees. Doing so will only lead them to want to stop paying for a given subscription altogether. 

How about integrating it all?

All of the diverse kinds of pricing we’ve discussed up to now can be enhanced. Suppose we integrated all of our SaaS applications. In that case, we could quickly get valuable vision and advice on what’s working and what isn’t being maxed out to great capacity. For that, we’ve come up with a tool that also runs on subscription to manage a startup or business’ SaaS applications out of a single virtual space. It helps users get direct advice on the apps and processes that are working well for a company internally. At the same time, it gives smart recommendations on what can be reconsidered as a resource for a particular team. As subscription software that can actually help save money, Monthly certainly makes it easier to edit, update, and cancel subscriptions, all in one place!

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