When old becomes new again, ISVslook to telecom for pricing inspiration. For decades, the telecom industry has been honing what other industries are only now getting into–business models that start with simple subscriptions, then add complex pieces such as sign-up/activity/event fees + bundles + add-ons + incentives + promotional products.
This reality is driven home by the results from Softletter’s recent SaaS survey. I was lucky enough to obtain an early look at some of the key findings and was struck by the fact that “transaction” or, as I tend to think of it, activity-based billing had become the single most used billing option, surpassing the “named subscriber” model popularized by the success of Salesforce. Activity-based models were used by 29% of the survey’s respondents, vs. 25% for named subscriber. This continues a trend noted by Softletter three years ago.
SaaS operators are evaluating new ways to create multiple revenue streams from each customer by blending limits and usage (usage being the “activities” in which end-users engage in consuming or interacting with goods and services). They also know that the more touch points with each customer, the deeper the loyalty and the less likely it is the customer will churn.
The drive for multiple revenue streams comes from the realization that customer relationships drive profitability and loyalty, as well as longer-term sustainability in your business model.
Relationships are cultivated by customizing product value to the end-user subscriptions, bundles, value-adds, promotions and pricing options that dynamically change as customer usage and activity changes.
Reality Check: ERP and GL Do Not Offer Activity- to-Cash Processes
Unfortunately, the nirvana of personalization and activity-based billing is often thwarted by limits on the flexibility and number of variables and parameters that can be manipulated for new marketing schemes and creative pricing and charging.
The problem is really one of the process. Most GL and ERP systems can accommodate only three simplified price levers:
- Quantity based pricing
- Duration of a subscription and
- The product mix of the subscription.
These levers are a default with any off-the-shelf ERP or G/L application. Yet, over time, being limited by these three levers leads to lower ARPU (average revenue per user) and disenchantment of profitable customers.
To truly cultivate activity-based relationships with customers, the initiation and cultivation of the relationship depends on two critical processes: Order-To-Cash and Activity-To-Cash .
Order-to-cash begins with the first activity in which a customer engages: placing an order or a request for a good or service. This process includes order handling, fulfillment, billing and invoicing, payment processing, and collections. Order-to-cash does not have a recurring or an activity-based element.
That’s where the activity-too-cash cycle starts. Activity to cash involves the critical processes that deepen a relationship with a customer and monetizes the many ways in which they use your product or service. Those activities can include many things, such as:
- Use of bandwidth
- Number of downloads past a defined limit
- Access to additional premium help content
- Creation of an object in a SaaS application, e.g. a new project in a program
- Output from the application such as an expense report or a time-sheet
- Scan of a barcode or QR code
- Coupon redemption
Regardless of the ISV’s product features, to properly capture activities and transactions, there is a requirement for real-time rating, charging, analytics, and entitlements to charge for different levels of usage and activities. In essence, ISVs have a new opportunity to convert just about any customer activity into an opportunity if they understand how to combine subscriptions, promotions, coupons, discounts, bundles, add-ons, and incentives.
In doing so, SaaS providers can insulate themselves from the variability of customer’s lives and can profit from it. And, the business becomes more sustainable in the face of change.
With that in mind, ISVs should not only think about appealing to the ‘greater whole,’ but perhaps to niches where people are willing to pay premiums for content, services or goods that resonate with their lifestyles, wants and needs.
“ISVs have to accept the concept that a single market no longer exists,” says Chris Couch, Chief Operations Officer, for Transverse, makers of TRACT, a subscription platform that focuses on activity-based billing transactions.
“What matters is how quickly you can support the launch of new pricing models. While super-segmented markets create new opportunities, the speed by which you capitalize on those opportunities matters more than anything,” said Couch.
“You need open-ended flexibility in creating new parameters and attaching a price to the value-adds that are appealing and enticing to different types of customers – whether segmented by age group, geography, usage patterns or any other characteristic,” adds Couch, noting rating and charging engines should accommodate virtually anything marketing can dream up, thus moving companies toward the concept of “dynamic revenue management,” where you can say “if it can be measured, we can charge for it.”
With a more dynamic approach to rating and charging, it becomes possible to stimulate customer consumption with offerings and price plans that combine relationships (via subscriptions) and dynamic sources of revenue (via consumption or usage).
“In the same way mobile service providers learned, other industries can learn that they can engage people with base offerings available for predictable rates, and then deepen the loyalty with add-ons that are appealing enough that people pay extra for the access to the value adds as they build over time,” observes Couch.
In other words, companies can start out with ‘all-you-can-eat’ charging and pricing, but strive to introduce usage and caps and then personalization that carries them toward true personalization of services in the same way mobile carriers have since the days of ‘friends-and-family.’
Competition and commoditization of services will necessitate this evolution in all industries. The ones who survive will be the ones who heed the lessons learned in telecom by building in flexibility into billing and charging capabilities sooner rather than later. The consistent goal should be the endless creation of not only predictable revenue streams that first entice customers, but to further engage those customers in more personal ways.
But that requires that billing and charging become truly automated and intelligent. It also requires understanding what markets fit best to activity-based and how to package and present the various options in ways that don’t confuse or irritate potential subscribers. In part two of this article, we’ll examine some case studies.