In a world that’s filled with ways to track data, not all data is created the same. Usage data is considered the “next frontier” in the subscription business industry — but why? Market research and studies point to a shift in how companies sell and deliver services. Now more than ever, measuring usage data has become very important for industry verticals.
Patrik Bruce, lead product manager at DigitalRoute, has been in the business of building applications on usage data for over 15 years. During his session at Subscription Show 2021, he shared key insight into why usage data is the natural next step for many businesses.
What does usage data tell us?
A common misperception of “usage data” is that all data is usage data.
“When I or others say the term ‘usage’…what does that actually mean? There are a lot of different types of data out there [but] the primary characteristics of usage data is that it describes the consumption of a product or service like who is actually using it, who is the user, where is it being used, when is it used, how much is being consumed, for what duration [and] things that really tell you what is going on and who is really using the service,” said Bruce.
There are many examples of this in industries across the world. Some examples include:
- Unlocking a shared kick bike
- Swiping a card on public transport
- A road toll camera identifying a license plate
- Clicking play/start on an online movie or game
Usage data is the next step in taking the data within a company; it’s finding the data that can be monetized and creating a revenue model based on it.
Why go beyond flat subscriptions?
“What’s the point of adding a capability of measuring service consumption on top of one-time product sales and service subscriptions?” asked Bruce during his session on usage data.
For subscription businesses, this can seem like a shift that might not make much sense for their bottom line. But as Bruce pointed out, introducing a usage-based model can help reduce churn, increase company valuation, accelerate growth, lower the barrier of entry for customers and optimize revenue streams.
While this list isn’t exhaustive, all of these outcomes can have a meaningful impact on business operations.
“Subscriptions are, in many ways, great and I think for some customers it really is a fantastic model for both parties. But they don’t necessarily cater to every type of consumption model and every type of customer,” says Bruce.
This holds true in a variety of industries. Take streaming services, for example. Many consumers subscribe to more streaming services than they can actually consume. Eventually, some end up canceling their subscriptions to save money and better match their own consumption pattern. If a streaming service were to charge less in a period when their consumers used less, they may be more likely to retain those subscribers. Even if a customer is paying less in the short term, their lifetime value increases if they remain a customer.
Most businesses know the cost of getting a customer to become a subscriber but asking for a commitment to a full subscription upfront can be a big ask in some industries. Introducing free offerings can get customers into the ecosystem of being active users, lowering the barrier of entry to do so. Lower barriers to entry increase the opportunities for new customers to subscribe and increase bottom-line potential.
Boosting company valuations
Usage data can also help with company valuation. This is an important consideration for those looking to sell their businesses.
“There are a lot of statistics and research out there around companies that introduce a use-based pricing component to their pricing model and how it can lead to a higher, in some cases a lot higher, company valuations,” said Bruce.
Predictable revenue streams paired with usage data can make it easier for companies to predict their earnings and start forecasting for the future. In today’s environment, being able to future proof and depend on revenue, despite fluctuations in the market, is a huge asset for any business looking to sell.
Reduce customer churn
Lastly, optimizing revenue streams through a combination of subscriptions and usage fees can help reduce customer churn. This phenomenon happens for a variety of reasons, one of which can be the sense of cost fairness. When heavy users and light users pay based on their consumption, they often feel the pricing model is fairer. This creates a more equitable system that customers are more likely to stick with long-term, reducing churn.
When combined, said Bruce, these positive aspects of a usage-based model can lead to faster growth than pure subscription businesses.
Business model evolution
“The basis of any revenue model, regardless of how it’s being sold, is the actual product,” Bruce explained.
Many companies start with selling and shipping actual goods for a one-time transaction. This is still a predominant revenue model in the global economy today. However, recent changes in the global economy and digital transformation have led to an increase in subscription models over the last decade or so. Not only are digital services almost exclusively offered as subscriptions, but consumers are seeing an increase in subscriptions for physical goods as well (e.g., Stitch Fix and Adobe products).
Bruce considers this a natural progression for businesses, as they discover the stability that comes from this type of revenue model. While subscriptions offer businesses many benefits — recurring revenue, ease in forecasting and planning, and higher customer interaction — the next step in the evolution of many business operations is the consumption model. Once the structure is in place to sell and deliver a good or service as a subscription, adding in the measurement of how that offering is being consumed is a natural add-on.
This allows companies to charge based on how much is actually being used, creating a fairer pricing model. The price a consumer pays is directly related to how much they use a product or service. This has become the standard for many businesses, as seen in the ridesharing industry, for example. The consumption model in many businesses today is done in conjunction with a subscription model, creating a hybrid pricing model. This offers customers a better deal while offering businesses all of the benefits of a subscription model.
When a company incorporates a usage model into its business, additional opportunities open up for diversifying within that model. One such opportunity is tiers and overage, a rating model that computes the price based on the consumption of a service.
“With this [model], you’re able to price using a rising or falling price as the consumption increases [or decreases] over time,” said Bruce.
This is a way for subscription businesses to protect themselves from really heavy users whose consumption can end up costing the business more than what the consumer actually brings in through their usage fee. It can also ensure that customers are paying for exactly what they need, rather than what they don’t. This communicates a sense of fairness to customers through the pricing model.
Shared consumption is another popular model that shows up in B2B and B2C relationships. “Family plans” or “commercial” relationships are great examples where there’s a different setup for the consumption, but the usage of individual users in that group must still be tracked. Depending on the industry, this can be a lucrative way to increase the number of customers while still providing incentives for them to sign up. Cell phone plans serve as a great example. “Sign up three people on a family plan and get a fourth line free!”
Partner ecosystems is another model that’s very common in the B2C space. When companies bundle their services or offerings with other companies to create a more compelling product for consumers, they’ve created a partner ecosystem. Oftentimes, there is a revenue share with the partner, that is based on the actual consumption of the service or a revenue share split based on the payments. In either case, those models are trackable from a consumption perspective.
Taking it to the next level
Subscription businesses wanting to take the next step in their evolution as a company must consider a usage data model. In the short term, it can create opportunities for different offerings within the business, reduce churn and allow for competitiveness in a given industry. Long term, it can increase the value of customers, support overall growth and valuation, and help companies make better decisions based on their customers’ behaviors.