04 May 2018  |  Guide

The Importance of Figuring Out the Right Billing Model

3 minute read

Here's an overview of the importance of billing models, and how you shouldn't decide yours without careful consideration.

Software companies are never done. There’s always a new major version to ship, an expansion into a new target audience or geography, or a new product that your existing customers may be interested in.

Determining how you’re going to make money with your billing model, is one of the most important decisions you make and will impact the ultimate success of your launch. Here’s a rundown on why your billing model will have such a huge effect.

The Importance of a Billing Model

Customer monetization plays a huge role in your cuccess, however it’s surprisingly the part on which software companies tend to spend the less time - in our experience, a couple of hours of research and meetings is not uncommon. In comparison, think of how much time you spend talking to customers or thinking about your roadmap.

There are typically three main ways you can grow your business: acquire more customers, monetize them better or manage to retain them longer.

Most of the advice you can find online tends to relate to customer acquisition, whereas any improvement to monetization is, in our experience, much more effective. And we’re not the only ones thinking so: a study from Price Intelligently with over 700 software companies found that a large majority of them saw monetization as the most impactful lever to revenue.

What impacts revenue

This is something Littledata also observed first hand, reflecting on the impact of going freemium and concluding that they “are increasingly content that 80% of [their] revenue comes from a tiny handful of loyal and satisfied users”.

Spending time figuring out the right billing model and pricing will therefore have a major impact on your business, whether it’s about growing faster or just reaching viability. There are however still other reasons to look into it, beyond revenue optimization.

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Your Customer Relationships Are Affected By Billing and Pricing

Although price optimization may sound like a spreadsheet exercise run in a vacuum by a smart bunch of data scientists, your decision will impact how your customers see you.

Price too high, and you will have damaged the trust they placed in your product and your brand. Hearing the dreaded “you don’t respect the early adopters anymore” can happen faster than you think.

Price too low, and you will lower the perceived quality of your product. There’s a reason Apple doesn’t sell cheap iPhones. This may also lead to an unsustainable model where your customers expect to pay your app $5 and receive updates for life.

Unfairness, or perceived unfairness where customers know or think that others are getting a better price can also hurt you. Reserving a better price to your newest customers rather than your oldest fans can have an impact on their advocacy, or even attrition. Relying on discounts and special prices can have the same impact.

Pick the wrong billing model - a flavor of subscription, one-off or a hybrid model - and you risk killing conversion rates and creating a vocal backlash of your existing customers.

Of course communicating your benefits and pricing the right way can minimize these issues.

Communicate a strong, differentiated value proposition (like Apple) and premium prices can follow.

Explain why you can be cheaper without compromising on quality (a technical innovation, cutting the middleman…) and lower prices can become a key selling point.

Conclusion

As you can see whether your goal is to reach and increase profitability or grow as fast as you can, it’s worth spending as much time determining the right billing model and the optimized price points as you would spend on a marketing campaign.

Our guides are here to help make this easier. The next steps are to determine your customer personas and decide which billing model works best for your product and customers.

Keep reading more guides

Read the previous guide in the series:

Our billing model guide

Read the next guide in the series:

How to Determine your Customer Personas

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