Virtual economies need flexible pricing and packaging

June 29, 2009

K. V. Raoby K. V. Rao

 

Last week I had the chance to meet with a group of very smart folks at a dinner hosted by Canaan partners on virtual economies.

 

One of the subjects that was discussed was something all of us in ‘real’ economies understand too well: the importance of pricing flexibility to reach every micro-segment, and the potential loss of economic value when merchants cannot offer variable pricing and packaging targeting different segments.

 

Atul Bagga from ThinkEquity, who probably knows more about virtual economies than anyone else in the world, offered this very interesting analysis. A gaming company offered recurring pricing to its subscribers and had attained fairly respectable revenues. But the revenue growth appeared to be slowing down. The company, after much soul searching, decided to move away from recurring pricing to a free-to-play model with a pay-to-play option (we at Zuora call this usage pricing).

 

They were afraid of the revenue drop with the switch and how long it would take for them to get their revenues back to what it was with the recurring pricing. It turns out that the dip lasted only a few months, and in fact usage revenues started accelerating soon after, quickly exceeding the projections with the recurring model.

 

Why was this? It turns out, in the virtual world, folks are reluctant to commit to a recurring payment each period (I think fear of commitment is true in the real world as well, so maybe there is something here for the socio-economists to analyze). A lot of people are happy to pay usage fees, even if it means they pay more over time. This probably goes to their feeling of control, including the thinking that their expenses will actually be lower – i.e. why pay $10/month if you can pay only $1 per use and you think you will use the service less than 10 times, maybe only once or twice.

 

This for me brought home a few points:

 

While the recurring model works for many people, it does not appeal to folks who do not want commitment (sort of like dating), people really want to feel in control, and pay for what they use, i.e. a usage model.

 

This flexibility is important for almost everyone in a recurring revenue business. But many businesses start with simple recurring pricing because:

 

  • Their financial/billing systems do not support usage charges (or as the industry calls it, their billing systems do not have a rating and billing engine)
  • The recurring model yields a more predictable revenue stream
  • Usage revenue is usually billed in arrears, while recurring revenue is usually billed in advance – thus the merchant gets money up front with a recurring model

 

In our business, we see a lot of innovative companies who understand the implications of these pricing models well, and use our flexible billing system to target different segments:

 

  • Offer usage pricing, but bill in advance based on a committed volume, or based on a previous month’s (or quarter’s) volume, and then “true up” for the actual usage in the next bill cycle
  • Offer some products on a recurring basis, and some on a usage basis
  • Offer some products on an overage price basis – i.e. charge more if you go over your committed volume

 

In fact, our subscription management, billing, and payments platform supports 30+ charge models, and a variety of payment options to our merchants, to give them the flexibility to target different segments, optimize for cash flow, or for market share, or for predictable revenue streams.

 

Our goal is to support a marketer’s dream: infinite pricing and payment flexibility, so that merchants can price and package products according to what an individual customer wants to pay – no more one price fits all, but one price per customer!

 

Our belief is that businesses should only be limited by their imagination and the innovation in their products and services they can offer to their different customers, not by the limitations of their subscriber management and billing system.