New monetisation models: subscriptions and beyond

Agile monetisation rising

As individuals, we are now accustomed to discovering and engaging with products and services from the palms of our hands. Commerce leaders like Amazon and the myriad platform businesses built on top of the iPhone (like Uber, Airbnb or Delivery Hero) have made the purchase and delivery of all types of goods and services incredibly simple. They have also brought new pricing and monetisation models into the mainstream. Instead of owning something, the concept of renting or subscribing to a service is now a possibility. These two pervasive trends – the notion of frictionless commerce and acceptance of new pricing models that enable completely new types of businesses – are now transforming nearly every industry around the world. At the root of these trends is the notion of monetisation: the process through which customer demand is created and translated into revenues, profits, and business differentiation.

At MGI Research, we see three over-arching macro drivers for monetisation. First, innovative and highly disruptive business models have irrevocably altered consumer expectations. Either in a B2C scenario or a B2B context, buyers of goods and services today expect a ‘one-click’ purchasing experience, available anytime, anywhere. The notion of omnicommerce that came out of the retail industry now applies to all industries. Disrupters across a wide swath of industries from hospitality (Airbnb) and grocery (Instacart), to transportation (a plethora of ride-sharing services) have forced companies of all sizes to rethink their product and services offerings. New subscription offerings and ‘as a service’ business models are putting pressure on existing systems, highlighting their age and lack of agility as product managers, sales leaders, and even CEOs demand faster time to market (even though many of the operational and financial systems in place aren’t designed for these new models and/or rapid change).

Secondly, regulations and government intervention into ‘digital business’ are on the rise. Tax regimes are changing as governments seek to fill fiscal gaps by imposing new taxes on digital goods and services. Modern technology also is changing the nature of regulation and the ability of the regulatory bodies to collect; tax authorities are able to track and record digital transactions in ways that weren’t possible in the analogue world.

Thirdly, cloud computing and the scalability of agile monetisation solutions opens up all kinds of new possibilities. Global giants with hulking legacy infrastructures can gain the speed and faster time to market that their startup competitors have. Conversely, startups can now afford sophisticated systems and monetisation services that can instantly enable them to reach a global customer base. The single demand driver for new monetisation solutions is speed. Companies big and small share a hyper-intense need for speed. Faster time to market, faster time to introduce new offerings, faster time to expand geographically, faster time to respond to customer demands – everyone wants to move faster.

Monetisation models

In 2016, MGI Research conducted a survey of organisations around the world, asking various questions regarding the evolution of pricing plans and current and future plans for adopting new modes of monetisation. Despite years of past investment in enterprise business applications, nearly 60% of the respondents cited significant customer friction due to billing disputes. This single issue underscores a common challenge. For all the emphasis on improving the customer experience and digital transformation, organisations of all types are struggling to operationally keep pace with the needs of their customers and their own desire to introduce new offers into the market. This, in part, explains the growing interest and investment in monetisation.

The survey data also uncovered a key insight. Organisationally, it was a challenge to make the move from product model with a single price to delivering a subscription service. However, once companies move to a recurring revenue model, they experience the success of offering a broader range of pricing models and quickly want the freedom to present customers with a wider variety of pricing plans beyond just subscriptions.

The survey data at the time clearly illustrated the shift from simple one-time charges and simple subscription models towards sophisticated, hybrid approaches that combine subscription, tiered pricing, usage, and volume purchasing options.

share of fixed one time charges (OTC) is on the decline from 22% in 2016 to 11% by 2018;

share of simple subscription plans is expected to decline from 23% in 2016 to 19% by 2018;

usage-based is expected to gain share modestly from 19% in 2016 to 21% by 2018;

complex combinations of subscription pricing with usage tiers are expected to gain share from 18% in 2016 to 24% within by 2018.

In 2019, the market evidence supports what the survey data predicted. Interest in offering complex subscription plans – eg product bundles, tiered models with a combination of upfront commitment and usage-based charges, et al – is exploding. Growing demand for supporting complex pricing models is also evident in the performance of the billing vendors. Vendors who only offer simple subscriptions are at best growing in line with the overall industry while billing companies that support simple to complex subscription models, as well as more sophisticated rating capabilities, are growing faster than the market average. The early leaders in subscription billing are moving into usage-based and support for more complicated business models.

Responding to the customer’s needs requires investment in tools and capabilities that provide functionality that is far deeper than where most ‘digital transformation’ efforts are focused today. They require a rethinking of business models and a re-invention of the monetisation engines that power them.

For more articles and interviews on this topic, check out our Monetisation of Digital Business Models 2019 – Insights into Billing and Recurring Payments Report.

About Andrew Dailey

Andrew Dailey is a Managing Director of MGI Research, an independent research and advisory company focused on disruptive business and technology trends. Mr Dailey leads the agile monetisation and quote to cash coverage for MGI. He has over 25 years of diversified technology and financial services experience as a software executive, industry analyst (Gartner), and advisor to Fortune 500 companies. He is a co-founder of Gartner’s Software Asset Management service, and served on the team that coined the term ERP in the early 1990s.

About MGI Research

MGI Research is an independent industry research and advisory firm focused on disruptive trends in the technology industry. The firm was founded in 2008 by a team of senior analysts and executives from firms such as Gartner, Mastercard, and Morgan Stanley. MGI is the only firm with a dedicated practice around agile monetisation, including billing, CPQ, financials, commerce, payments, and revenue recognition.