Flat-rate billing when used as a subscription pricing model refers to the practice of charging a single, fixed, upfront price at regular intervals for a recurring product or service. It is undeniably straightforward and an excellent tool for appealing to unique demographics or limited buyer personas.
Although nearly extinct in the SaaS world, flat-rate billing still has great usability in a variety of other industries. Freelancers and contractors that used to charge per hour can generate more revenue if they find themselves consistently working at a faster pace. Even some law firms have introduced flat-rate billing to streamline routine legal services.
Modern buyers tend to have plenty of flexible pricing options available to them, so implementing a flat-rate billing model can either sink your business or make you stand out from your competitors. The key to ensuring the latter occurs is a firm grasp of your billing model and comprehensive market research; really get to know your potential customers and make sure your offering caters to their needs. The perfect strategy will require some fine-tuning and won’t happen overnight.
Want to explore a specific aspect of flat-rate billing? Skip ahead by clicking on the topic.
- Unpack the pros
- Unpack the cons
- 4 flat-rate pricing strategies
- Understand revenue recognition and deferred revenue
- Implement and manage the complexity
Understand the benefits and challenges of flat-rate billing
Unpack the pros of flat-rate billing
- The pricing strategy is straightforward. Free of frills and extra gizmos, this is by far the easiest billing model to explain. Its simplicity appeals to traditionally minded customers.
- You can appeal to a specific demographic if you’re not trying to tailor your pricing strategy to diverse buyer personas. Companies with a single buyer persona or narrow product can allocate more resources to tasks like monetization, acquisition, and retention. Go deep, not broad.
- Revenue recognition is much simpler with a flat-rate billing model than any other SaaS pricing model. There’s no need to manage deferred revenue or revenue reallocation, unless you’re using another strategy as well, like applying a discount.
- Flat-rate pricing can help prevent scope creep, especially for businesses that provide a service. You and your customer will be more aligned on targets and goals of the deliverable, which will reduce the chance of a cost dispute.
- Customers know what to expect and how to budget for flat-rate pricing, which allows them to feel confident with the upfront costs. Customers managing multiple projects or complex endeavours will appreciate the predictability.
Unpack the cons of flat-rate billing
- A one-size-fits-all approach may alienate potential customers as they do not feel there is enough flexibility to meet all their needs. Some customers might seek out competitors that provide a cheaper or more personalized experience.
- Large business buyers can inflate operating costs. Quality servers and good customer service are not cheap, and with a flat-rate billing model, you won’t be able to gain more revenue from your customers if their usage strains your resources.
- You lose the ability to align your pricing with your value metric. Because your pricing is fixed, you won’t be able to make additional revenue for additional value.
- Companies compete for the lowest pricing in the industry, which can pressure your business to reduce your rate to stay competitive. This can have negative impacts on your revenue.
- Rushed deliverables are frequent to maximize revenue under a flat-rate model, leading to worse product or service quality.
4 flat-rate pricing strategies with examples
There are several different ways to charge a flat rate, so this list is to help you determine which approach might work best for you. Below quickly summarizes the various strategies, and you can click the pricing strategy of your choice to jump ahead:
1. Basic flat rate | Explanation and example
A basic flat-rate pricing model is as straightforward as it gets when it comes to subscription billing. There’s one plan made up of one price and one offering. Traditionally minded customers tend to appreciate these plans because in some respects they’re easier to use than daily errands like buying groceries or pumping gas.
Basecamp is a project management tool specifically designed for companies with employees who work remotely. They charge a flat fee of $99/month, which allows them to remain relevant in their industry because their competition relies on per-user billing models. Emphasizing the unlimited access to their product appeals to customers that may be already using a similar product but are looking for another option.
2. Membership | Explanation and example
Most people enjoy being part of the ‘in’ group, so framing your subscription service as a membership will allow your customers to feel special. Co-ops, societies, and online communities are common businesses that use membership fees to support operating costs while gaining revenue. This tactic works best when your offering needs to cater to only one buyer persona.
Nature is a scientific journal with a strong reputation for cutting edge publications and high standards for peer-reviewed research. They offer a flat rate subscription for individuals or institutions to receive weekly issues for one year. These registrants also gain access to over twenty years of previous issues if their subscription is active, which is highly valuable to their target demographic—researchers.
3. Targeted discount rates | Explanation and example
YouTube Premium, originally known as YouTube Red, charges a flat fee of $11.99/month, but they also offer discounts for students and families. Families of up to five people pay $17.99/month and students pay $6.99/month.
These limited discounts are a smart move because they target demographics that maybe cannot afford the basic flat rate now but will ultimately grow out of their current financial situation (e.x. children, students, etc.). If done correctly, you will see good retention and loyalty from customers who started with the discounted rate because they will be familiar with your product and appreciate that they were able to access it earlier than your competition.
4. Flat rate per product| Explanation and example
Similar to the feature-based billing model, this strategy offers a fixed price for each product or service offered by the same company. Businesses that have only one buyer persona, appeal to a niche audience, and sell a limited line of products or select services may benefit from using this model. By building in some choice, this strategy helps to counter the con of a one-size-fits-all approach and may generate more revenue if customers subscribe to more than one offering.
Frock Box is a clothing subscription service where stylists will put together a package of clothes or shoes for the customer based on their style profile. The service is priced at a flat fee depending on the subscription box. Since products from the different boxes can ultimately be mixed and matched to create different ensembles, customers are guided towards subscribing to more than one option or seeing the most expensive box as a good deal.
Revenue recognition for flat-rate billing
Flat-rate billing results in the most straightforward accounting out of all the different SaaS pricing models. Understanding the process of revenue recognition is crucial to remain compliant with accounting standards like ASC 606 and IFRS 15. Unless you’re offering a discount or blending pricing strategies not discussed in this article, you shouldn’t need to handle deferred revenue.
Just like in traditional accounting, after your service or product has been delivered you can recognize the revenue immediately. A powerful billing solution can help you to manage your subscription service by automating annual or monthly fees and bill customers without complications. Additionally, as your customer base and offerings grow, you might find that you need the flexibility to incorporate more advanced billing strategies or different options. Having a system already in place to handle complex accounting will save you time and money as your operations scale. You can also benefit from insights from churn rates and MRR reports to track key metrics.
Managing the complexity of flat-rate billing
It perhaps comes as no surprise that companies will not implement flat-rate billing effectively if they rush it. Here are the three critical elements of the billing model that will aid your growth journey.
The 3 critical elements of your flat-rate billing strategy
1. Transparent pricing
Potential buyers should be able to quickly absorb the ins and outs of your pricing with a flat-rate model and appreciate the added transparency as a sign of trust. You’re telegraphing that you say what you mean and mean what you say, which can enable smooth management of the customer journey and give your business a competitive advantage.
2. Target audience
One of the most strategic ways to implement flat-rate billing is to apply it when you’re trying to target one buyer persona or a niche demographic. Before choosing your billing model, make sure to complete comprehensive market research to understand your potential customers, your competitors and the current state of the industry.
3. Predictable revenue
A powerful recurring billing solution is indispensable to streamlining your subscription service. Predictable revenue and straightforward forecasting will enable you to make data-driven decisions and proactively manage cash flow. With the right system you can automate revenue recognition and reporting, remain compliant with accounting standards like ASC 606 and IFRS 15, eliminate errors, and gain the flexibility to add new elements to your billing without creating an administrative nightmare.