The ultimate subscription model: A job well done
August 21st, 2008 by 
Chris Harris
I’m currently working on another startup with some good friends and we’ve been debating whether or not we should offer our services in a transactional or subscription business model. The subscription business model advocates point to their hockey stick charts and wonder how anyone could argue with them. The transactional argument is more instinctual - it’s one that starts with the user experience and basically asserts, “You can’t be doing the wrong thing by doing a better job for your customer.”
It’s a tough call.
Don Reisinger wrote a very interesting piece, Google’s search secret: It gets rid of you, that struck a real chord with me. In discussing a recent report on how Google is stealing market even more share in the search market from Yahoo and Microsoft they note that Google is the only site which really encourages you to leave! By doing so, they seem to indirectly be encouraging you to come back.
“But Google, unlike Yahoo and Microsoft, has made it a key point in its business model to ensure that you get off the Google search result pages as soon as possible. Its competitors, on the other hand, fail to fully understand that premise.”
There is so much discussion, on the web especially, about subscription business models its refreshing to hear that Google’s capitalizing on the ultimate subscription lock-in: doing a good job for their users!
Posted in Entrepreneurial, Innovation, Start-up | 
August 22nd, 2008 at 10:16 pm
There is a major difference between the subscription and per-usage pricing. Subscription users are encouraged to overuse (think buffet), while per-usage pricing requires to consider cost/benefit of each transaction.
How do you expect your users to want to use your services?
August 23rd, 2008 at 9:14 am
Jane -
You’re 100% right! This is a classic microeconomics concern called “marginal pricing.” Thanks for reminding me about it.
Our product is similar to TurboTax or LegalZoom - so I think that per-transaction is probably the way to go. Partially because, as with LegalZoom, we’ll have a moderate amount of human effort per-transaction.
October 29th, 2008 at 6:49 am
We have also been struggling with these pricing models.
What are your thoughts on a dual system? Some infrequent or highly targeted users could pay per use at a higher margin per transaction; and frequent or more diverse users could subscribe at a lower margin per transaction.
Is it better to give the user a choice, or simply offer the model you feel is best, convey the value proposition, and hopefully convert?
Obviously we would love to have the time/money to run beta or A/B testing this. But it would sure be nice if someone else already had results to share. Do you have or know where to find any research on this?
November 25th, 2008 at 11:27 am
Hey Chris… are you still monitoring this blog?
I hope so… as I found an interesting piece of research on this subject: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.42.5953
Although I don’t understand one bit of the math… this sentence caught my eye: “…subscribers often prefer fixed-fee or flat-rate pricing to per-use pricing, for reasons such as overestimation of usage and avoidance of worrying about occasional large bills or whether each usage is worth it, even when the fixed-fee option costs more over time.”
The success of Google PPC, Apple iTunes would seem to disprove the above research; whereas the land phone, cell phone and cable companies tend to prove it.
At first blush, I tend to agree with the stated research, but what do GOOG and AAPL know that the rest of us don’t?
Perhaps for cash flow, per-use is best early in a product/service life cycle and fixed fee is better for more mature markets?
Any thoughts? Anyone… Anyone… Anyone?
November 25th, 2008 at 3:50 pm
Hey Steve -
Ya, still very much monitoring it… I just didn’t have anything useful to say to your earlier comment!
The paper you cite is interesting - although very much a paper based on mathematical theories - I’m skeptical how directly it translates into reality.
However, your right that in the real world people (consumers?) do tend to prefer subscriptions over per-use pricing for things they use all the time (phone, internet, cable, etc.).
The success of Google, Apple, and even Amazon’s per-unit pricing is hard to reconcile. I think there’s actually a lot going on here at the same time.
Have you read my post on What Big Oil can stand to learn from Google? That’s a great study on how your pricing is perceived by your customers.
Apple’s able to charge two different prices for their iPhone/computers. One to the people who are more price sensitive and another to those who are willing to pay more to get it just right. Have you read anything about price discrimination or price targeting? Consider that adding various “upgrades” to any item you buy is generally a high-margin business. It’s because those companies know you’re willing to pay for the additional benefits, so they can extract more money from you for the service. Those willing to settle on the less customized option however, are able to pay less.
Google’s successful business model isn’t just that it charges more or less for its ads, it’s that it provides a market signal to all the advertisers involved to spur competition among rivals. The advertisers all work tirelessly to be more relevant than their competition, because that lowers their price per click. This, in turn, makes the ads better for the primary users which makes them more willing/interested in clicking on them.
Amazon’s issue is closer to the one which my friends and I face at the startup I opened the post with - which is that they are providing a service who’s costs are largely tied to usage. The more gigabytes people want to use, the more that Amazon has to buy. Therefore, as Jane indicated, the per-unit pricing makes the “ecosystem” better off by communicating that cost clearly to the customer and asking the customer to make whatever trade-offs are appropriate to conserve usage to reflect their willingness to pay for each unit.
April 18th, 2009 at 4:54 pm
Thanks for this thought provoking write up. Subscription users are expected to overuse the source while per-usage pricing policies force the users to consider cost, quality and utility of the benefits of each transaction, they made.