Inventing a new business model is hard.
At Terkel, marketers pay to answer unlimited questions on our platform. We have three plans: a free Lite plan, a $99 / month Premium plan for individuals, and a $199 / month Team plan where marketing agencies and in-house teams pay a subscription plus a per user fee.
The model has worked well for us. But, I’m always curious about what others think and feel about our model. Specifically, around the pay per user model.
So to gauge how people feel, I asked the community at Terkel for their thoughts on pay per user business models.
Do Pay-Per-User Business Models Work?
Pay-per-user business models have been a topic of debate among industry experts, with some praising their effectiveness and others questioning their long-term viability. In this article, we've gathered insights from six professionals who share their thoughts on whether pay-per-user models work well, discussing the pros, cons, and strategies for striking the right balance between value and revenue.
- Effective for Recurring Customers
- Pros and Cons of Pay-Per-User Models
- Striking a Balance Between Value and Revenue
- Risky but Potentially Lucrative
- Unpredictable Revenue and Customer Risk
- Lower Entry Costs and Increased Customer Loyalty
Effective for Recurring Customers
A pay-per-user business model can be an effective way to bring in revenue. Observers have noted that the limited lifetime value per user can be quite low, making it a more labor-intensive model than one that brings in substantial income. This model works better when selling products or services to customers who will need to come back more than once, as this increases their lifetime value exponentially. The biggest key with pay-per-user models is ensuring there is enough time investment to make sure customers are getting the most out of the offerings and continue returning for more.
Pros and Cons of Pay-Per-User Models
Pay-per-user business models can be effective for certain types of products or services, but their success ultimately depends on a variety of factors. Offering long-term contracts or subscription packages can help the business provide a more predictable revenue stream by charging customers based on the number of users or subscribers. If some users or teams primarily used the product or service within a larger organization, a pay-per-user model may make more sense.
There are potential drawbacks. For one, scaling can be more difficult as the user base grows, particularly if pricing is not adjusted accordingly. Customers may be hesitant to adopt new products or services if they feel like they will be penalized for adding new users or expanding their usage. Last, if the product or service is not well-suited to a pay-per-user model, it may not generate sufficient revenue.
Striking Balance Between Value and Revenue
This business model can be effective if the cost per user is reasonable. However, many companies aim to maximize their revenue, which leads them to charge excessively per user. This can make it difficult for customers to justify the cost, ultimately causing them to cancel their subscriptions.
Conversely, if the cost per user is reasonable, and the company offers exemplary service, then pay-per-user models can be a viable option. The crucial factor is striking the right balance between providing value and generating revenue.
Risky but Potentially Lucrative
Pay-per-user business models can be risky for businesses looking to cut costs, but lucrative for those who make it work. On the surface, it has the potential to yield enormous returns if correctly leveraged. However, companies relying on a pay-per-user model need to ensure they've done their due diligence to ensure they're signing up customers who will not only stick around long-term but also have enough disposable income to pay for the services provided.
Businesses should think constructively ahead and consider scaling fees that are sustainable. In all cases, approach this business model with caution—after all, too little money coming in can be just as disastrous as too much leaving your wallet!
Unpredictable Revenue and Customer Risk
This business model may not be the best option, as it places all the risk on the customer. With this model, the more users a company has, the more they pay, regardless of actual usage. This can lead to unexpected and potentially steep costs, which can frustrate customers. It encourages companies to focus on acquiring more users rather than improving their products or service.
Research shows that the pay-per-use model can suffer from unpredictable revenue and may not always be less expensive in terms of the total cost of ownership.
It might be more beneficial for companies to consider alternative models that balance revenue with customer satisfaction and product quality.
Lower Entry Costs and Increased Customer Loyalty
Pay-per-use models work effectively by shifting the contact between the user and the company from a single purchase focus to a more service-oriented approach. As a result, users are less inclined to switch to rival services. Additional benefits such as installation, maintenance, and support add value for the consumer, increasing the product's worth.
Pay-per-use decreases entrance barriers by lowering entry costs for various client categories. Customers may become discouraged if they need to pay a higher price to buy or rent a machine that they won't use frequently. In contrast, the "pay as you go" approach can persuade buyers to use a specific good or service.
With no significant upfront expense for easy access, customers have more straightforward access to the costs of goods and services. Instead, a flexible, easy-to-monitor monthly fee based on actual usage is applied. For this strategy to be viable, businesses rely on customer loyalty.
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