Subscriptions have taken over every industry, whether digital content or eCommerce. However, within subscriptions, Shopify stores can implement different revenue models.
Prepaid, pay-as-you-go, and some stores also employ hybrid models.
In this blog, we explore the critical question: prepaid vs. pay-as-you go Shopify subscriptions: which model works best for Shopify
Let’s get started!
TL; DR
- With prepaid subscriptions, customers pay upfront. This model works best for established and high-value product brands, offering predictable cash flow and lower churn rate. However, it requires higher customer commitment.
- With pay-as-you-go subscriptions, customers pay for the products and services they use, over time. This model works well for new brands offering experimental products. It makes customer acquisition easier. However, it has higher churn and less predictable revenue.
- Choose the prepaid subscription structure if you have established products, price-sensitive customers, or B2B customers, and if you need a predictable cash flow.
- Choose pay-as-you-go if your brand is new, has seasonal products, a younger target audience, and if your priority is customer acquisition.
- Consider hybrid revenue models by offering both tiered discounts and loyalty incentives to maximize benefits of each approach. By taking a hybrid approach, you can transition customers from pay-as-you-go to prepaid, over time.
Understanding prepaid vs pay-as-you-go subscription models
Before we dive into the pros and cons of these two Shopify subscription models and which one works best for various industries, we’ll first understand the two models in detail.
What are prepaid subscriptions?
In prepaid subscriptions, customers pay in advance, upfront, for the entire subscription period. For example, pay the annual fee for newspaper subscription for the whole year. Prepaid subscriptions provide customers access to products or services they subscribed for, for the subscription period. Subscribers do not need to pay any extra charges.
Prepaid subscription benefits to customers include discounts, free shipping, freebies, etc. For Shopify merchants, prepaid subscriptions mean immediate revenue, increased cash flow, and long-term commitment by subscribers.
Example:
What are pay-as-you-go subscriptions?
In pay-as-you-go subscriptions, customers pay on a recurring basis, for example, weekly, monthly, or annually. Customers have to pay only for the products or services they use. For instance, monthly internet subscription, where customers pay for what they use.
This subscription model offers flexibility as customers do not have to pay a fixed amount. Moreover, they can stop their subscriptions based on their needs. For customers, pay-as-you-go subscriptions offer the benefits of flexibility. For Shopify merchants, this model makes it easy to attract new subscribers due to the lower commitment expectations. Brands can cater to a wider customer base and continuously engage with customers.
Example:
Industries for prepaid and pay-as-you-go subscriptions
| Prepaid | Pay-as-you-go |
| Education and online courses | SaaS |
| Telecommunication | APIs |
| Digital content (video, music, entertainment) | Professional services |
| Ecommerce (customers pay a subscription fee for a set period) | Cloud computing |
| Fitness and wellness | Food and beverage |
| Home services | Beauty and personal care |
Benefits of prepaid subscriptions
Here are some of the benefits of prepaid subscriptions for Shopify merchants:
1. Predictable revenue
In prepaid subscriptions, Shopify stores receive an upfront payment. This provides revenue predictability and cash flow, which can be helpful for budgeting and planning future expenses and investments.
2. Inventory planning
Predictable revenue and long-term commitment from subscribers helps with inventory planning. You can get a better sense of product or service requirements by clients and can fulfil them with better planning and management.
3. Higher upfront revenue
Customers pay the entire subscription amount upfront at the start of the tenure. This means Shopify brands can collect higher upfront revenue and plan how to use the cash for various business needs.
4. Customer commitment
Since subscribers pay upfront for a specific period (week, month, year), you have committed customers. Once they pay, customers might not leave you mid way, leading to less churn. This also provides you more opportunities to engage them and encourage them to renew their subscriptions.
5. Reduced operational cost
Frequent billing cycles means more operational work. But in prepaid subscriptions, customers pay once. This requires fewer billing cycles and processes, simplifying Shopify merchants’ work. This can also help you plan your subscription pricing strategy.
6. Lower churn rate
Customers have a better cost predictability and can budget for the next billing cycle to renew their subscription. This reduces churn rate for Shopify stores. Moreover, incentives such as freebies and other perks also influence subscription renewal decisions.
Benefits of pay-as-you-go subscriptions
Here are some benefits of pay-as-you-go for Shopify merchants:
1. Lower barrier to entry for customers
As customers have the option of paying in parts over the course of their subscription period, they feel more comfortable about signing up for the subscription. If the subscription fee is high in the beginning, customers tend to hesitate to commit.
2. Charge more for high consumption subscribers
Some subscribers might use more than the others. In this case, you can charge subscribers according to their usage. In the prepaid method this may not be possible. You can also collect usage-based data and insights from your subscription platform.
3. More flexible and customer-friendly
Pay-as-you-go subscription structure is more customer-friendly. Customers feel more comfortable as they have to pay for only what they use. Moreover, they are not bound or tied to a long-term commitment and can choose to unsubscribe based on their preference.
4. Scalability
Another factor that Shopify brands consider between prepaid vs pay-as-you-go subscriptions is the benefit of scaling in the pay-as-you-go model. Brands can increase revenue by scaling services as per customer demand and usage. Moreover, brands can also scale down if needed, saving costs.
Prepaid vs pay-as-you-go subscription: Drawbacks of each model
While both the Shopify subscription models have benefits, they do have some drawbacks, too.
Drawbacks of prepaid subscriptions
- When dissatisfied customers raise refund requests, it can disrupt cash flow and operational processes
- Dissatisfied subscribers may share negative reviews about your brand, damaging reputation
- If your products or services are seasonal, subscribers might want to pause or stop in between
- As prepaid subscription requires long-term commitment, it can get hard to get customers to sign up
- Lower initial subscription conversions can lead to longer sales cycles for the business
Drawbacks of pay-as-you-go subscriptions
- This structure tends to see a higher churn rate, which makes revenue forecasting challenging
- Cancellation is easy and hence Shopify brands have to constantly be on their toes, prove value, invest in marketing, and engaging customers
- Less working capital for operations and other business expenses compared to the prepaid structure
- The payment processing fees can compound with frequent transactions, leading to lower profits
- This model can lead to involuntary churn, which requires advanced retention tools and planning
Example:
Which subscription revenue model is best for your Shopify store?
Both these revenue structures have pros and cons. So which one is most suitable for Shopify stores? Let’s determine that for your Shopify store:
1. Product-related considerations
The type of products you offer can influence the success rate of the revenue structure. For instance, if your products are high-value and established, customers may be more willing to pay upfront and commit for the long-term.
However, if your product line is new and experimental that customers haven’t used, the pay-as-you-go model will help reduce risk for customers and work better for you. Also, for seasonal products, the pay-as-you-go model is more suitable as you can avoid untimely churn and disruptions.
Prepaid: High-value and established products and services, essential consumables
Pay-as-you-go: New product line, experimental products, seasonal products, essential consumables
Example:
2. Customer behavior
Another key factor when deciding prepaid vs pay-as-you-go subscriptions is related to your customers’ behavior. If your customers are conscious about price and on a budget and prefer lower monthly commitments, the prepaid model is more suitable.
Also, for customers who prioritize convenience, the prepaid model works better, as you can reduce recurring billing cycles. The B2B industry is known to prefer the prepaid model as it eases budgeting and taxation processes.
However, if you have younger customers who have limited spending capacity and prefer more flexibility, the pay-as-you-go subscription structure is more suitable.
Prepaid: Price-sensitive customers, convenience-focused, B2B
Pay-as-you-go: Younger demographic with limited budget
3. Industry considerations
Your Shopify store’s position in the market and in your niche can also help you decide which pricing model would be best for your business. For instance, if your brand is established and known and can leverage trust, it would be easy for you to sell prepaid subscriptions.
However, if your brand is new, the pay-as-you-go subscription structure would be more beneficial to you. Depending on your industry, if your focus is more on offering value, the pay-as-you-go model would work better.
Conversely, if your brand positions itself as a premium name in your niche, it is better to go for a prepaid structure as it also enables you to offer discounts based on tiers.
Prepaid: Established, premium positioning
Pay-as-you-go: New brands, value-focused brands
4. Hybrid models
Many Shopify merchants take the hybrid approach, combining the benefits of both the models. For instance, merchants offer flexible prepaid options by allowing customers to pause subscriptions, offer refunds with a processing fee, offer credit systems for unused portions, and allow customers to make changes to their subscription mid-way.
Shopify merchants also use the tiered subscription approach, offering progressive discounts. For instance, 10% on quarterly payment, 20% on annual payment, and offer premium features to customers who pay the entire amount upfront.
You can also offer loyalty-driven prepaid incentives. Offer prepaid discounts once subscribers successfully pay a few monthly cycles. This helps to retain them. Additionally, you can offer prepaid rewards to long-term pay-as-you-go customers.
Prepaid vs. pay-as-you-go Shopify subscriptions: What will you choose?
Choose the subscription revenue model best suited to your business based on the pros and cons, your industry, and customer preference.
However, once you choose, you have to integrate the revenue system within your Shopify store with the help of a smart subscription app.
Appstle Subscriptions App is the most-preferred tool by Shopify merchants.
Install Appstle Subscription App on your Shopify store today!
