This Monetization Approach Is Becoming More Prominent in Software Sales

Subscription software monetization is clearly popular today. I use a number of subscriptions and I’m sure you do, too. So each of us can recognize how reliance on subscription is growing.

Approximately 9 out of 10 (89%) of software suppliers use subscription monetization models at least moderately, as detailed in Revenera’s Software Monetization Models and Strategies report, up from 82% just a year ago. And 61% anticipate that subscription is set to grow as a percentage of overall software license revenue in the coming 12–18 months.

But hot on the heels of subscription are usage-based monetization models. This approach is being embraced widely, with 59% saying that usage-based are set to grow as a percentage of their overall software license revenue between now and 2026.

Neither subscription nor usage-based models exist in a vacuum. Today’s approach to software is largely hybrid, blending approaches to both monetization and deployment models. Subscription and usage-based monetization can—and should—coexist to help software producers and IoT device manufacturers take a comprehensive approach to software monetization that helps drive annual recurring revenue (ARR) and optimize sales strategies.

While it isn’t quite time for usage-based monetization models to overtake subscription in terms of revenue, it’s definitely time to realize the complementary nature of these models.

Why Subscription and Usage-Based Models Are Good Together

A user might need both subscription and usage-based access to products in your portfolio. They’re looking for the right tool at the right time at the right price. They’re facing ‘subscription fatigue’, craving a customized user experience, with access that’s easy and affordable.

Software that’s monetized via subscription provides a recurring revenue model, with a customer paying for access on a monthly or annual basis. Some of its many upsides contribute to its popularity. The software supplier has financial stability and predictable revenues. The buyers benefit by gaining access with expenses that are OpEx, rather than CapEx; subscriptions are often somewhat flexible, meaning that the customer isn’t locked in to perpetual licenses.

But the flexibility of subscription also has limits. Say I want to try a new feature in a product for which I only have a basic subscription. I may not be able to access that new or premium feature. Or if I want to use a different application in a suite of products, I might be locked out—and therefore look at a competitor’s product.

A usage-based model, offered in tandem with subscription, helps alleviate the hurdles that can lead to customer churn. Usage-based monetization models are defined by usage metrics, such as consumption, pay-per-use, credit-based tokens, elastic access, or metered access. Software buyers appreciate usage-based models because they deliver on-demand access to a product, streamline procurement (which can help avoid project delays), allow allocation of costs to specific business units, and deliver an improved user experience. Usage-based models permit the user to gain access to a product just when they need it—maybe to test out a new feature, use it for a seasonal project, or to work outside of their primary job tasks on an occasional basis, for example.

Today, among the software producers who are planning to change monetization models in the coming two years, 37% will be doing so to offer usage-based models to align with customer value. They recognize that by offering usage-based models, they sell software in the ways customers want to buy it, remove barriers for small- and mid-size enterprises, are able to make rapid changes, lower risk of software misuse, and are able to identify upsell and cross-sell opportunities.

Integrating Monetization Models Requires Usage Data

All of this is well and good, unless the software supplier gets hung up on how to actually implement usage-based pricing alongside other monetization models. Despite the high number of companies that plan to implement usage-based models, many of these same producers lack the insights they need to make their goals actionable: 44% say that a top hurdle for aligning price and value is that they “lack insights to monetize the most valuable features.”

Improved usage data is essential for getting products to market quickly—and to monetize the features that are most in demand. Implementing usage-based models is only possible with accurate usage data. Though valuable for all monetization models, it’s essential for usage-based pricing. It can help teams from across the organization—marketing, product management, software engineering, sales, customer service, and compliance—with everything from feature prioritization or roadmap development to pricing decisions, billing, software version decisions, piracy tracking and more.

How do you get from where you are—offering pure subscription or even a mix of subscription and perpetual licensing—to the point where you have a healthy blend of subscription with consumption opportunities for your end customers? Begin by taking two key steps:

Step #1: Identify Potential

Begin with a data-gathering period. Get the telemetry data that will provide a sense of the utilization—the appetite—for occasional use of your software.

Close to ⅓ (29%) of software producers surveyed collect telemetry data, but don’t use it. Whether you’re collecting data and letting it go to waste or don’t yet have robust software usage analytics initiatives in place, now’s the time to let telemetry data give you insight into potential.

By gathering data, you’ll have a sense of what products your customers may want to try. With an approach like elastic access, you can offer customers some product tryouts. Provide free tokens to see what products or features they adopt. Use this period of fact-gathering to work out the average cost and utilization of product or feature utilization for each customer persona. This will provide a valuable sense of what they’d use if they have access to the entire portfolio. It will also help provide answers to considerations such as what products to include in your price list and how many tokens you should charge for a software product.

Step #2: Refine Your Offering and Pricing

As you get used to looking at this data while it accumulates, you’ll be able to refine the offering and the pricing. As customers get accustomed to easy access to your software, you’ll be able to make the shift from free tokens to paid tokens. Roll out an initial cost rate table, based on the trial data, telemetry, and usage feedback.

You’ll then be ready to iterate, using a progressive cycle to refine your offering and the pricing, arriving at a cost that accurately reflects the value that customers derive from your software. The feedback you receive during this time can also help drive new initiatives and promotions.

Your Customers Benefit. You Benefit.

Whether you consider it as part of the overall customer experience, a key to smart marketing, or an approach that eases your sales team’s work, the bottom line is that integrating usage-based monetization is good business. Gathering the usage data to make it happen will pay off–for you and for your clients, alike.