Last editedApr 20233 min read
An effective pricing strategy can boost profit, increase customer satisfaction, and improve your sales conversion rates. Subscription pricing models offer a way for customers to make recurring payments for greater flexibility and convenience. How does a prepaid subscription model work, and is it right for your business? Here’s a closer look at the advantages and disadvantages of prepaid subscriptions.
Subscription pricing advantages and disadvantages
With a typical subscription business, customers make regular, recurring payments to access continuous goods or services. This might take the form of a monthly delivery of household essentials, a weekly recipe box like Hello Fresh, or access to streaming content like Netflix or Spotify. So, what are the subscription pricing advantages and disadvantages?
Flexibility for customers and businesses.
Costs are spread out over time.
Businesses have incentive to improve their products to increase customer retention.
Pricing models are simple and straightforward.
High churn rates if customers tire of the service provided.
Higher cost involved with customer retention and ongoing product development.
What is a prepaid subscription?
The pros and cons listed above apply to a pricing strategy involving recurring payments – usually on a weekly or monthly basis. These give “prepaid” access for the week or month ahead. However, prepaid subscriptions can also work in the longer term. The prepaid subscription model allows customers to make a larger upfront payment for services.
One example would be to pay annually for access to software. The annual prepaid subscription might automatically renew once a year. Magazine subscriptions are another example of a prepaid subscription model, with customers paying in advance for three, six-, or twelve-months’ worth of delivery.
Advantages of prepaid subscriptions
There are clear advantages of prepaid subscriptions, both for business and customers. The customer benefits from getting payment out of the way and then enjoying unrestricted access to their service. They don’t have to go through the hassle of remembering an ongoing weekly or monthly payment.
Advantages of prepaid subscriptions also include:
Predictable revenue – Your business receives payment in advance, making it easier to know how much cash you have on hand to work with. This leads to more accurate financial forecasting and a steady stream of income.
More valuable customers – While it takes effort to attract new prepaid subscription customers, these hold higher value because they’ve already committed to a long-term engagement with your brand. You can analyze user data and behavior over time to provide better value in return.
Improved services – With long-term, high-value customers locked into contracts, businesses can really fine-tune their services to best suit client needs. A customer-centric business approach and pricing model allows you to focus on product development. With predictable revenue, you’ll have the income to reinvest into this development.
Disadvantages of prepaid subscriptions
The prepaid pricing model won’t be right for every business. One potential disadvantage to be aware of is the risk of burning through prepaid revenue too rapidly. For example, imagine that a customer pays for a full 12 months of subscription services in advance. Your business will have immediate access to a year’s worth of prepaid revenue. If this is invested into long-term projects and developments or taken as profit, it means you run the risk of not having enough left over to cover everyday costs. Without adequate budgeting, businesses might not be able to provide the services promised.
However, you can offset budgeting-related disadvantages of prepaid subscriptions with a well-organized accounting system. Take future product spend into account when determining how to deal with a sudden cash inflow.
Should you offer prepaid subscriptions?
The prepaid subscription model makes a great deal of sense for content-based and SaaS businesses. It can also be beneficial for any B2C companies selling the types of products that customers will want to gain access to on a recurring basis. With prepaid subscriptions, customers and businesses alike can benefit from more predictable cash flow. At the same time it’s vital to keep tight reins on your budget to manage uneven payment cycles.
GoCardless helps businesses retain greater control over recurring and one-off payments, making it a perfect choice for subscription services. Businesses can collect payments directly from the customer’s bank account via direct debit, putting them in greater control over payment amount and date. This takes all the guesswork out of prepaid subscription payments, for a smoother service all around.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.