Recently sign up for a gym membership as part of a lofty new year’s resolution? Me too. Well, just a little more than a month into 2017, I’ve already failed in my attempt to work out a few days each week. That said, I was wholly willing (and even excited) to sign up for a new gym membership despite past failed attempts to get my money’s worth from the local Boston Sports Club. And (thankfully) it’s not just me. An article published last year by the New York Times reports that every January many Americans sign up for the gym but hardly visit in the months following.
The article goes on to cite supporting research from economists Stefano DellaVigna and Ulrike Malmendier who studied usage patterns at three Boston gyms. The economists found that on average new members paid over $70 per month for their membership, but used the gym only 4.3 times over the course of each month (which amounts to $17 per use). They concluded that most customers would have been better off paying per use, which on average costs only $10 per visit. Doing so would have saved these consumers $600. Despite this simple math, we continue to pay a flat rate (rather than per visit) for a service we may or may not ultimately end up using.
And this paradox isn’t specific to gym memberships; I see it time and again in subscription businesses. Notable examples include the Uber Plus program, an Amazon Prime-like subscription offering unlimited UberPool rides in select cities; Apple’s iPhone Upgrade Program, which is essentially an iPhone subscription; and graze, a subscription snacking service.
Whether or not consumers get their money’s worth from these unlimited services remains to be seen. But the fact of the matter stands that we gain some sort of intrinsic value from an unlimited membership. That’s primarily because a flat monthly or yearly rate:
- Removes barriers to usage: We do use something more when we have a flat rate compared to when we pay by the use. For instance, in 1996 AOL replaced its metered dial-up pricing where you paid by the hour with a simple flat rate. AOL found that the amount of time their customers spent online nearly tripled as customers got used to the internet being “always on”. Part of why we pay extra, then, is to motivate ourselves to start going to the gym more than we currently do.
- Overestimation: While we do end up using a flat rate more than pay-per-use, we start with inflated expectations and don’t ultimately use it as much as we think we will. DellaVigna and Malmendier, for instance, found that gym goers anticipated that they would work out an average of 9.5 times per month, but only went 4.3 times. (But, hey, 4.3 times is a whole lot better than 0 trips to the gym!).
- Insurance: With a flat rate, we have peace of mind that our budget won’t skyrocket during months of high usage. This is doubly critical in the Enterprise space where Finance and Procurement start getting involved in a purchase decision.
- Taxi-meter effect: We actively feel discomfort when we have to link each and every use to an increased price and then mentally justify whether it was worth it.
- Convenience: We just don’t want to be bothered with paying each and every time.
- Community: Paying for a membership makes us feel part of a group or community (we belong to our gym), whether or not we use it as much as we want to. The Guardian has smartly embraced this benefit with their Guardian Members program, which is a subscription service for their readers to support their journalism, attend live events and get invited to behind-the-scenes functions.
SaaS businesses can apply these same insights to deliver a better customer experience while also increasing revenue. Here are three ways how.
- Introduce unlimited (Enterprise) plans for high usage customers: At a certain point, a large Enterprise customer doesn’t want to have to worry about tracking their usage and have their monthly bill fluctuate up and down. Many buyers would prefer to lock in a flat rate unlimited plan, even if it comes at a premium to the price that they would pay given their typical usage. You can use these flat rate plans either as a fence to upsell customers to a higher tier package, a tool to charge more to customers whose usage has flat-lined, or as an incentive to get customers to commit to longer-term contracts. SurveyMonkey, as an example, smartly uses unlimited usage as a means of fencing between their Basic (100 responses), Select (1,000 responses) and Gold (unlimited responses) packages.
- Test a three-part tariff: As Tomasz Tunguz points out, a three-part tariff balances some of the benefits of linear, usage-based pricing without the drawback of stunting usage. Rather than charging for each unit of usage, in a three-part tariff you would have a base platform fee (which includes a set amount of usage) plus a separate fee for additional usage. HubSpot smartly employs this structure in their pricing with a fixed monthly fee and an additional usage fee for more marketing contacts. Their three packages include different pre-set amounts of usage (100 contacts; 1,000 contacts; 10,000 contacts) as well as different overage fees ($100/mo., $50/mo., and $10/mo. per 1k extra contacts) as a way to steer customers into the best-fit package.
- Sell overage protection: Many developer tools, such as Logz.io in the log analytics space, incorporate daily usage volume into their pricing structures. However, for some customers, usage will fluctuate significantly from day to day or from month to month, which could lead to pesky overages. To solve that customer problem, Logz.io offers overage protection as a feature in their paid plans.
For companies still charging by use, I hope you’ll think about creative ways to introduce membership and flat rates into your offerings. These models could not only help you make more money, but might actually make your customers happier. What’s not to like about that?