PAYG v Subscriptions - Which Should You Use?

Most businesses have a choice between pay as you go pricing and subscription pricing. Some businesses operate purely on one or the other. In many cases, however, businesses get the best results by combining both.

Pay as you go pricing vs subscription model

Pay as you go pricing is the default pricing structure for most transactions. This applies both to goods and services. Typically, the customer is quoted a price upfront. They often pay this in advance but may pay in arrears.

For big-ticket purchases, customers may prefer to pay in instalments. Even though these look a lot like subscription payments, they are actually part of the pay as you go pricing model. This is because the customer is simply spreading the cost of a one-off purchase rather than receiving products or services on an ongoing basis.

With the subscription model, customers receive a product or service on an ongoing basis for as long as they keep paying the subscription. In some cases, the product or service they receive is theirs to keep if they stop paying the subscription. In other cases, they lose their access completely.

The basics of pay as you go pricing

With pay as you go pricing, the customer pays for what they use – no more and no less. Neither the customer nor the merchant needs to commit to a long-term relationship. In fact, with Instant Bank Pay (powered by Open Banking), collecting one-off payments by Direct Debit is faster than ever.

The customer simply needs to confirm that they want to make the purchase. Once their confirmation has been recorded, the funds are secured. Merchants can have the money transferred into their bank account the same or the next working day.

Merchants can also use instant payments for collecting instalments. In this situation, however, it can be more convenient to take one-off payments through the traditional Direct Debit system. That way, the entire process can be automated. This offers more convenience to the customer. It also means that invoices can be automatically reconciled.

That said, many merchants will aim to convert pay as you go customers to recurring customers. If they succeed, it may be more appropriate to put the customer onto a subscription pricing model. This would have to be assessed on a case-by-case basis.

The basics of subscription pricing

With subscription pricing, the customer commits to paying the merchant an agreed sum on a periodic basis. In return for this payment, they receive a guaranteed amount of product and/or a guaranteed level of service.

In recent years, there has been a strong move towards subscription pricing models. These make it easier for customers to predict their bills and for merchants to predict their revenue. What’s more, with Direct Debits, the payment process can be totally automated. This creates a seamless experience for both customer and merchant – and it’s why GoCardless offers a Direct Debit payment mechanism.

The key to success with subscription payments is to make sure that your pricing offers value to both the customer and you. If you set your prices too high, you will struggle to attract and retain customers. If you set them too low, however, you will impact profitability. You may even reduce the perceived value of your offering.

Combining pay as you pricing with subscription pricing

For many businesses, the best approach is to provide customers with the option to use either or both of pay as you go pricing and subscription pricing. GoCardless offers both options, as it guarantees the most flexibility for users. Typically, light users will only use pay as you go pricing. Heavier users may choose subscription pricing only, especially if you can offer some kind of unlimited deal.

They may, however, choose to use subscription pricing for their core needs and pay as you go pricing for goods and/or services they only need occasionally. Medium users are also likely to go down this route.

We can help

If you’re interested in finding out more about pay as you go pricing versus subscription pricing, get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.