Hi All, I’d appreciate the brilliant PricingSaaS community input on switching to a subscription model from a variable price model. Client currently pays a % of revenue. I’d like to propose switching to the subscription model. Is a tiered model the best way to set up the deal structure inorder to ensure that the client is paying more than they did last year while also ensuring to the client that if the % of revenue falls they won’t be paying more?
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Love this question Chris. I think Tiers would help address the balance you’re talking about here. I’d think a combo of base fee with included usage + variable usage would create an equitable model for both sides. Tom Tungusz calls this a 3-Part Tariff model. Great breakdown here:
Would also love to hear Ulrik’s perspective on this.
cc: @Ulrik 
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Chris - why shift? Rev share models tend to be fantastic at monetization?
I would say: keep the model, but consider one or more of these tweaks:
A) Add a minimum - eg. 5% of revenue, but minimum $50K a year.
B) Force prepaid: e.g. 80% of the estimated rev share is paid upfront - so if 5% rev share on an estimated $10M revenue, you charge $10M0.050.80 = $400K upfront.
C) Add non-rev share add-ons: e.g. charge flat $3K per integration per year, charge license for the premium support, IT infrastructure spend etc.
… and you can of course Tier the functionality. That has nothing to do with the rev share pricing model:
Tier 1: Basic functionality, 4% rev share and $10K minimum
Tier 2: Medium functionality, 6% rev share and $20K minimum
Tier 3: Pro functionality, 8% rev share and $50K minimum
OR - only tier based on the minimum:
Tier 1: Basic functionality, 6% rev share and $10K minimum
Tier 2: Medium functionality, 6% rev share and $20K minimum
Tier 3: Pro functionality, 6% rev share and $50K minimum
Good luck!
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Thanks, Urik and Rob for the feedback. I agree some sort of rev share needs to be maintained. There is a strong push for subscription pricing, so my goal is to figure out a structure that comprises both. There isn’t a clear usage parameter that aligns with add-ons i.e. no recurring integrations, no licenses for support, etc. So, the struggle is how to quantify the variable usage other than rev share. IF I do the base $400k upfront. Is the other $100k left as a variable each month?
You would have to charge a flat fee plus some sort of usage based fee. In such scenarios, it is best to model out the next 12-26 months with low/med/high cases to understand what the total bill would look like. You would then have to put caps and floors and/or a tiered table for both flat fees and usage fees (that is maybe dependent on revenue tiers).
Sounds like a negotiated/large deal? Happy to brainstorm over a quick call.
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I was thinking the rev-share would be the “usage component” similar to Ulrik’s suggestion.
Though I wonder if having the rev-share % decrease with each tier could make sense? You could use the base fee/minimum to account for the drop in rev-share revenue, and decrease the rev-share fee to make it more appealing to companies with more revenue.
Probably an oversimplification, but thinking about how Shopify offers decreasing transaction fees to incentivize customers with bigger GMV to upgrade to higher tiers.
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Thank again to all the suggestions. We are going to work with product to define a quantifiable usage variable and then model out some scenarios. The early consensus is for simplification and use a flat overage price, but we will see. I very much appreciate this community. TY
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