Over the past two decades, marketers have speculated that consumers are overloaded with choices. The thought was that although people want options, when they are presented with too many, they may end up making no decision at all. This means lost revenue for businesses.
According to a recent Stanford University study, consumers do desire options as long as they’re not overwhelming. In October 2016, the Journal of Consumer Psychology released a report looking at the impact of assortment size on purchase decisions. According to those findings, increasing the number of available options actually has a positive effect on the likelihood of consumers making a purchase.
Providing consumers with more choices is one of the reasons many subscription-based companies are looking to hybrid pricing that combines recurring billing options with one-time sales. Hybrid pricing gives businesses the opportunity to differentiate themselves from other subscription-based service providers, while giving customers an experience tailored to their unique needs.
How much is too much? The truth is that consumers like having options, and there’s usually no one-size-fits-all model that works for every customer. The hybrid pricing strategy combines usage-based and fixed pricing models to help companies better serve customers and diversify their revenue streams.
Let’s have a look at how four business verticals are experimenting with hybrid pricing to offer their customers more options.
1. Streaming with Hybrid Billing Options
This year, Netflix announced it would be raising prices on all of its video streaming plans. The $1 and $2 price hikes to Netflix’s plans is the fourth price increase in the video content company’s history and the latest increase since 2017.
Other than regular price hikes, Netflix has made few changes to its pricing strategy over the years. In 2011, the company unbundled its DVD-by-mail service from streaming services, but Netflix’s structure has largely remained the same.
However, its largest competitor, Amazon Prime, has risen to the top by providing a variation on the traditional streaming service while customizing its pricing options to meet different customer needs. Not only does it offer a variety of streaming entertainment in its recurring membership fee, but users can combine their subscriptions with one-time payments by renting or purchasing video titles.
The company’s video streaming service is included in the retail giant’s larger Prime membership, which gives customers everything from free two-day shipping on certain products to unlimited photo storage. This marketplace giant has effectively captured a large market share by offering an array of conveniences that a streaming service such as Netflix lacks.
With 137 million subscribers, Netflix continues to dominate the video-streaming market. Amazon Prime, which hasn’t been around as long, clocks in at a not-so-distant second place with 100 million subscribers. As Amazon continues to set itself apart with different fee and content structures, the e-commerce leader could one day outrank the streaming giant.
2. Playing Games with Hybrid Pricing
In 2018, gaming titan Blizzard switched up the pricing strategy for their most popular game, World of Warcraft (WoW). Beginning last summer, WoW players no longer have to actually purchase the game to play. Instead, they can access Blizzard’s online world for a $15 monthly subscription.
Blizzard is no stranger to mixing pricing strategies. Like the hybrid characters in WoW, the gaming business uses hybrid pricing to continually provide players with fresh content.
However, the 2018 change was noteworthy, given that WoW has always been a largely subscription-based game. Previously, this fee was in addition to the initial cost of the game and subsequent expansion-pack purchases. Now, it’s all included in the monthly fee.
However, Blizzard isn’t getting rid of the one-time payment aspect of WoW altogether. While all of the game’s first expansion packs are now included in the monthly subscription fee, in August 2018, the company released new expansion content for a one-time payment.
Blizzard is just one of many gaming companies that have experimented with hybrid pricing strategies to offer customers different options.
Competitors have recognized the power of a recurring billing model and are looking for ways to integrate subscriptions into their games.
Meanwhile, others who are already providing subscription-based gaming are looking for ways to enhance their offerings with one-time payment options.
For example, there are free-to-play games that include microtransactions where players can make in-game purchases to enhance their experiences. Even more popular are video games sold for a one-time fee that also give players the chance to subscribe for additional content and perks.
Most common are games that combine various elements of all of these pricing strategies to give players additional options, such as the ever-popular game Fortnite, owned by Epic Games. Fortnite has a few different game modes and purchase options, including a free-to-play option and a one-time payment option.
Epic Games offers subscription-like passes that promote unique perks and must be purchased every two months. A large portion of the game’s revenue also comes from microtransactions that let players make cosmetic changes to their characters. Ultimately, in order to play any of the game modes, most customers must also have a subscription through their gaming console.
These different fee structures give both casual and serious gamers different participation levels. By providing customers with different pricing options, companies can appeal to a wider range of consumers than a narrow pricing strategy would allow.
3. SaaS-ters Love Hybrid Pricing
When it comes to customer relationship management, Salesforce is the SaaS (Software as a Service) provider to beat in 2019. However, last year, competitor Zendesk made a move to challenge the SaaS giant when it announced plans to release a CRM (Customer Relationship Management) platform of its own.
One of the things that could help Zendesk draw in customers is its use of hybrid pricing. Like many SaaS companies, Zendesk offers customers different packages with varying levels of features and service. However, unlike some of its competitors, Zendesk doesn’t just offer monthly pricing options. Several of the company’s products also feature annual billing options which customers can mix and match according to their needs.
Additionally, Zendesk’s Connect software solution offers further options for customization. Zendesk Connect takes a proactive approach to CRM by allowing users to communicate with customers across multiple channels in real time. To best serve its customers, Zendesk’s pricing is based on how many messages a user anticipates sending each month. This hybrid pricing strategy gives customers the option to buy only what they need.
While SaaS has quickly become the go-to software delivery model, some companies are turning to one-time fee licensing to give consumers more options. This is a great option for software providers whose platforms don’t require regular support and updates.
Another pricing strategy in the SaaS arena involves a hybrid of both SaaS and on-premises software. Some businesses want the benefits of SaaS, but are hesitant to give up the feeling of security that can come with in-house data storage.
Hybrid SaaS companies provide plenty of flexibility by offering both options, while giving companies the ability to switch between the cloud and physical infrastructure. These SaaS companies can charge one lump sum for the physical infrastructure costs, as well as ongoing annual license fees.
4. IoT and Other New Economy Businesses Innovate Around Hybrid Pricing
The “Pay As You Go” (PAYG) pricing strategy has allowed new economy businesses like Uber to create a huge open market based on the forces of supply and demand. Predictors indicate that the PAYG business model will evolve to include other pricing options to personalize services as part of their strategies.
The PAYG business model also holds potential to bring about bigger changes like providing solar electricity access to 600 million people in sub-Saharan Africa who currently have no access to affordable electricity. This business model includes renting solar home systems that are used to generate electricity. Payments are automatically collected on a recurring basis via mobile phones, usage of which is widespread in the region. Hybrid billing models can increase the convenience and affordability factor in these scenarios, too.
The IoT (Internet of Things) promises to bring even more opportunities to innovate with IoT specific pricing models that combine, usage based billing, one time costs, volume pricing, and other billing models. Home sensors and connected homes is an area where there is already lot of appetite for IoT driven services. For example, home security providers leverage these connected sensors to deliver services around tiered models that start with a low recurring fee for basic security monitoring. Additional tiered charges then apply for services like incident response, threat prevention, etc.
It is reasonable to infer that emerging IoT technology driven businesses will leverage similar pricing models to capture market share.
Billing systems will be increasingly tasked with not only tracking usage but also supporting agile monetization that allows businesses to deliver additional value to end users.
Agile billing and invoicing systems need to be able to effectively justify charges, and communicate to customers how consumption-based value is delivered.
Legacy Billing Systems Fall Short
Subscription-based business models certainly open the door to predictable recurring revenue, but in order to remain competitive, companies must look for ways to incorporate hybrid pricing options into their business model.
When businesses provide multiple options by adopting pricing models like a hybrid pricing strategy, the customer wins. These innovative pricing models could give consumers more options and a tailored experience better able to meet their needs than one-time pricing models.
Traditional billing systems that are often built in-house, become insurmountable roadblocks to the flexible pricing strategies that are expected of vendors by customers. To give customers what they want, vendors must support the implementation and maintenance of diverse billing options.
Point billing systems are not built to handle the compliance complexities that come with recurring billing models, such as revenue recognition. Additionally, visibility into and agility in billed transactions have become a business necessity in the era of subscription commerce.
Transitioning from a singular billing method to a hybrid pricing model that includes one-time payments, usage-based pricing, subscriptions, and multiple variations requires a flexible subscription management and recurring billing solution. Vendors need a comprehensive, robust billing system that can handle all of these tasks to complement and support their diverse offerings.
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Quick FAQs about Hybrid Pricing Strategies
Q: What is a hybrid pricing strategy?
A hybrid pricing strategy combines usage-based and fixed pricing models, enabling companies to better serve their customers and diversify their revenue streams. It allows businesses to differentiate themselves from other subscription-based service providers while offering customers an experience tailored to their unique needs.
Q: How does the hybrid pricing model benefit both subscription-based businesses and their customers?
Subscription-based businesses can remain competitive by incorporating hybrid pricing options, which provide multiple options for customers to choose from, resulting in a more tailored experience. Companies can adopt flexible pricing strategies to better meet customers’ needs and ultimately increase customer satisfaction and retention.
Q: How has Amazon Prime successfully applied a hybrid pricing model?
Amazon Prime uses a hybrid pricing model by offering not only a variety of streaming entertainment within its recurring membership fee but also enabling users to rent or purchase video titles separately. This way, Amazon Prime can cater to different customer preferences and distinguish itself from competitors like Netflix, which has a more traditional streaming service and pricing model.
Q: In the gaming industry, how have hybrid pricing strategies been used to offer customers different options?
Gaming companies have experimented with combining subscription-based models with one-time payment options. For example, games can be sold for a one-time fee and also provide players with the option to subscribe to additional content and perks. The popular game Fortnite utilizes a hybrid pricing model, offering a free-to-play option, a one-time payment option, and subscription-like passes that grant unique perks.
Q: How do hybrid SaaS pricing strategies work, and how can they benefit customers?
Hybrid SaaS pricing strategies work by offering customers both cloud-based and on-premises software options. Companies can charge a lump sum for the physical infrastructure costs and ongoing annual license fees. These strategies provide customers with a greater sense of security and flexibility, as they can switch between cloud-based and physical infrastructure based on their requirements.
