Once-off payments vs digital subscriptions: Which pricing model is best for your digital business?

Key points:

• We are increasingly wary about digital subscriptions: am I getting value? Can I easily unsubscribe?
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• Once-off payments are friendlier and more accessible to understand, and whilst they convert at a lower rate than subscriptions, the revenue is faster.
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• Subscriptions are often seen as the holy grail for digital businesses, though they come with administrative costs and burdens. While they convert better than once-off payments in a relative situation, the revenue is slower.
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• In many circumstances, once-off payments and subscriptions are not relative and cannot be substituted.
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I had breakfast with a client last week.

Her business is a B2B consultancy in governance, with a growing Prosumer proposition sold directly via eCommerce as packaged courses and associated services.

The long-term goal is to grow the eCommerce/Prosumer channel.

In previous discussions, I mentioned the possible goal of moving her online business to that of a subscription service. They’re the holy grail of digital businesses, right?

Maybe.

After we had finished our eggs, my client asked what I thought of once-off payments as an alternative to digital subscriptions.

She framed the question in the context of her dislike for digital subscriptions and her suspicion that she is by no means alone.

I don’t necessarily think this dislike for subscriptions comes from disliking the actual mechanism of subscriptions.

Sure, suppose you’re putting monthly subscriptions on a corporate credit card and need to reconcile through an expense platform like SAP’s Concur. In that case, I completely understand why you’d dislike subscriptions. I’ve used platforms such as Concur, and subscriptions are a total pain and waste of time reconciling through such platforms month after month.

Instead, I suspect my client’s dislike of subscriptions stems from a general perception that the value exchange involved in many digital subscriptions doesn’t sufficiently justify the costs or mitigate the pain associated with managing subscriptions.

I suspect part of this is the general perception that the web's overall quality and “value” has declined. Media companies are selling their souls via clickbait and ads for belly fat tips.

Scammers and more and more of them. AI garbage. AI chatbots with the humanity of a toaster. AI anything. Google is frankly getting worse, not better. SPAM.

And subscriptions everywhere. Everything behind a monthly subscription. Music, toilet paper, Microsoft Excel, movies.

**And there, I think, is the crux: there is insufficient value in too many subscriptions, which then become too many, and then there is the reality of administrating and managing these subscriptions.

Add in the degree of sneakiness in many subscription products that rely on customers finding it difficult to cancel or forget their subscriptions, and I get the resentment.**

Subscriptions have been transformative for the web in terms of commercialising so much. Subscriptions gave us a mechanism to pay, which slowly taught us that we should, and in certain circumstances, need to pay for content and online services.

I suspect we are reaching a ‘come to Jesus’ moment on a couple of fronts - search, AI, and social - and subscriptions/commercialisation will be one of those fronts.

To be clear and move on, this blog does not examine the existential dilemma undermining digital subscriptions or predict where we might land. As I indicated, I don’t think subscriptions are the issue; instead, it is what is behind them.

While we as an industry have answered whether micro-payments work - they do not - monthly, six-monthly, annual, or more subscriptions are the current de facto way to monetise content and services.

Let’s compare subscriptions to once-off payments to determine if one or the other - or both - is right for you.

Get it wrong, and you’re leaking revenue.
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Defining once-off payments vs subscriptions

A once-off payment is precisely that: a once-off payment for access to a product or a service, such as digital downloads, software licenses, online courses, and eBooks.

There should be no inherent limit on access to the product or service over time. However, there might be explicit limitations, such as limited or no updates or support.

As a general industry rule, once-off payments will have lower conversions, though they mean faster revenue.

Subscriptions are where customers are asked to pay periodically for access to the product or service. This payment could be made weekly, likely monthly, biannually, annually, or perhaps longer.

Discounts are often afforded for more extended subscription frequencies, and a free product or service trial frequently accompanies subscriptions.

Subscriptions typically experience higher conversion rates than once-off payments, though the revenue is slower.

In a world where customers are measured by ‘average lifetime revenue’ (ALR) – a metric that measures the amount of revenue you can expect from any single customer for as long as they remain a customer – the questions to answer are:

• Which payment works best for my digital business? One, the other or both?
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• What are the best configurations (pricing, frequency, inclusions, exclusions, etc) for these payments?
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• How can I experiment, optimise and grow my Retention Rates (RR) and ALR?
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Once-off payments

Once-off payments for a product or service might seem virtuous, and they possibly are.

But they can also make sense for a business and customers.

As mentioned, they’re suited more for once-off products and services, not where the business continues to provide services, upgrades, storage, or ongoing support that could be unlimited for the customer's lifecycle.

If the cost is a one-off to the business and the value is immediately obtained and accessible to the customer, one-off purchases make the most sense.

Perhaps there is an argument that even if a business adds value to a product or service over the customer lifecycle, a once-off payment could make sense if the business aims to aggregate customers and upsell them to other products and services.

But that is a maybe, and commercially and strategically, it isn’t a pathway I would pursue; unfortunately, once-off payments do not lower the barriers to entry.
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Advantages of once-off payments

1. Perceived value: A one-time payment can convey a better value proposition. There are no recurring charges or subscription fatigue.
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2. Immediate revenue: As a business, you get the money upfront. That’s cash flow.
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3. No rebilling challenges: Involuntary - and voluntary - churn is a massive issue with subscriptions. It is expensive to manage and a business on its own. A once-off payment solves this and takes a lot of headaches off the table. I can’t stress that as you get to scale, recurring payments are a huge deal to analyse and manage.
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Disadvantages of once-off payments

1. Long-term revenue is potentially limited: A once-off payment is potentially a once-off purchase. Potentially, unless you have more to offer through additional purchases.
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2. The need for updates: If your product needs updates, this will come at a cost, eroding the value of the once-off purchase.
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3. Customer retention: If I buy a font, I don’t want a relationship with you in the future unless I need another font. And when that time comes, we probably won’t have a relationship.
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Subscriptions

Subscription businesses work on a fundamentally different basis.

The holy grail for almost all subscription businesses is a virtuous loop, though not every virtuous loop is the same.

For example, Pinterest’s virtuous loop is a network effect: the better the discovery experience → the more users pin, → more content, → better the discovery experience, etc.

Media businesses must continue to produce new and great content etc.

You need to be indispensable, and you and the customer are on a continuous program of development and growth.

Now, of course, this doesn’t work for font downloads.

Though could it work for your business?

Can you offer your customers a lifetime journey of benefits that will keep them subscribed and genuinely thrilled by what you offer them?

And here, I think, is a bit of the crux.

If you genuinely can’t, customers will churn, and the longer-term revenue upside is lost. (Not aside from your costs of managing customers and trying to avert churn.)

But if you can, go another step and push back on one of the criticisms my client rightly levelled at subscriptions.

Prioritise clarity and simplicity and make exiting the subscription as easy as getting into it. This creates trust; in my experience, it is your only possible pathway to the resurrection of churned customers.

Individually, you can’t change the perception of digital subscriptions or devious tactics known as ‘dark patterns’, though if you’re going down the subscription business path, remove all obstacles to unsubscribing. Only scumbags build their business model on making it deliberately, deceptively difficult to unsubscribe.
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Subscription pricing advantages

1. Recurring revenue: Steady, predictable recurring revenue, which allows for business planning.
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2. Customer retention: Customer retention is a job in itself, though if you get it right by continuously adding value and benefit, customer loyalty and revenue will follow.
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Disadvantages of subscription pricing

1. The investment and whether it suits your business: Subscription businesses are different, and they have an ongoing investment in your service and maintaining your subscription business. If it doesn’t make sense and you can’t offer the value exchange, there is possibly your answer, at least in your early days.
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2. Subscription fatigue: Customers come and go, and I have become more acute about cancelling services when the monthly credit card statement comes in. Even if you offer value, people have tipping points, especially when paying it on a personal card.
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3. Recurring billing challenges: I cannot stress here again the effort and headspace that goes into recurring billings, which are often opaque. Chasing revenue, you might need people on phones. Why are 90% of debit cards failing, though only 30% for PayPal? What caused a 10% drop in customers this month?
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So, which is suitable for your digital business?

For the operational reasons alone involved in recurring billings, if you can make a downloadable, live the simple life.

I’ve been there, and chasing subscriptions is a business on its own.

But so is the money.

I wouldn’t do once-off payments for altruistic reasons alone because that isn’t what it boils down to. However, if I were advising a subscription business, you have my stance on transparency and the need to ‘single-click’ exit the subscription without the need to call a call center.

This is not to say that your business model cannot pivot.

Your revenue goals will change. Your resources will change. The competitive landscape might well change.

And indeed, perhaps a hybrid approach could work for you in the medium term.

A once-off payment for the core product or a subscription for the premium features and support. You could also look at pay-as-you-use models, though they have administrative and technical costs.

The key is to know what you want your business to be at any given stage and have the metrics to guide you: conversion and churn rates, customer feedback, and, of course, revenue metrics, of which there are many. (And this is a job in itself!)

Experiment with pricing. Experiment with it all.

You’ll get there.

(And one last thing: annual subscriptions. I’ll leave you with that. Think yearly subscriptions. It could be your middle ground, and I’ll come to it later in my next blog on annual subscriptions.)

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