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Defining your pricing model when you have a subscription business can be difficult.
Lots of subscription businesses struggle with pricing. How much to charge? or Which pricing model will work best for my subscription business?. The right model can make the difference between capturing customers or losing them. Setting your subscription pricing model helps you to structure how you’ll be charging your customers.
Let's start by understanding what a subscription pricing strategy is in the first place?
The subscription pricing strategy will help you set the pricing model to charge your customers while subscribed for your product. Products can be anything you sell on a recurring basis, such as coffee, software, a washing machine, or even furniture that customers pay monthly. Pricing your product may vary depending on various factors.
In this blog, we'll look at some the most common subscription pricing models, metrics to consider when setting your pricing strategy and how to keep your pricing table looking great.
These are some of the questions you need to consider before looking into the subscription pricing models:
- What is my business model?
Think of; What is our customer segment?; Our competitors?; What makes our business unique?. This is important when it comes to selecting your price range as you'll be making sure you are offering the value you are promising to customers.
If you are working on a highly competitive market, you should differentiate on other factors than pricing alone, while niche markets have fewer customers and tend to have higher subscription prices with stronger customer relationships.
- How to differentiate our company?
What is our unfair advantage? What is our value proposition? Why would customers care for our product or service? Having a clear understanding of these questions is crucial before setting your pricing strategy as you can differentiate better from other competitors.
- Who are our customers?
Most of the time, companies tend to set benefits with price ranges that don't match their customer segment. Put your customers at the center and understand what they need; this will allow your company to better serve your customers.
- What are our fixed and variable costs?
How much is our company incurring every month? All costs should be taken into consideration. We have a business calculator totally free to use, that can help you when defining your cost structure.
Fixed costs: Office rent, payroll, software and tools, services, taxes, etc.
Variable costs: Travel, business expenses, etc.
5 Most Common Subscription Pricing Models
Now, let's take a look into the 5 popular subscription pricing models such as; flat-rate pricing, tiered pricing, volume pricing, pay per user and pay per feature.
1. Flat-rate pricing
This is the traditional pricing option, especially for SaaS companies. It's a straightforward option, with a single product offering, fixed price per month, and a set of features.
Regardless of how many units are purchased, the unitary costs remain the same.
Pros of flat-rate pricing:
- Build your customer base. Subscription pricing models can be complicated, and establishing your customer base is crucial, especially if you are just getting started. Flat-rate pricing allows you to narrow your product offering and to focus on growing and retaining new customers.
- Easier to communicate and to sell. Flat-rate pricing is offered to one type of customer, making it easy to focus your marketing and sales efforts on selling to a clearly-defined customer.
Cons of flat-rate pricing:
- Limits the potential future gains. If you are targeting small businesses where they are more price-sensitive, you'll miss out on the opportunity to charge any other potential revenues from different customer segments.
- Just one shot to acquiring customers. Customers either love your product and decide to buy it, or they don't. There's little space for you to convince them about buying your product. Also, there’s no room for you to customise your offering.
Basecamp is a great example of flat-rate pricing.
2. Tiered pricing
With a tiered pricing model, you will have different pricing levels. These are products within a particular price range. With the tiered pricing model, you can offer multiple packages with various features, product combinations, and different pricing.
Your product price will go up accordingly to the number of users, purchases, or features needed. Let's say; your customer would pay the same price for the first tier, say, 1 to 100 units, then the price would be lower for the second tier and even lower if they reach a third tier.
Once customers fill up a tier, they move to the next level. Customers will be charged accordingly to the number of purchases they make in each tier.
Let's dive a little deeper.
The average number of packages can vary, but companies in the subscription space usually have three tiers to differentiate the price points while some others have even more options.
The idea behind a tiered pricing strategy is that your prices and features are tailored according to your customers' needs and use cases.
Pros of Tiered pricing:
- Tailored packages to suit multiple customers: While the flat-tire option only resonates to one target customer, tiered pricing can be set to tailor your packages to suit different customer segments.
- It gives you more space to grow. The tiered pricing strategy gives you a direct route to your customers' next price point so they can buy it when they are ready.
- It gives your company more flexibility: You can offer a combination of features to various customer segments with different price points. Tiered pricing gives your company flexibility to charge customers in a fast-paced market.
Cons of Tiered pricing:
- Attract to too many different customer segments. While this is not something completely wrong, customers can get overwhelmed with so many different choices. It's attractive to create several packages to appeal to every need of your customer, but remember that you can't be everything to everyone. Remember who your customers are and what they value the most.
- It can get messy. When customers face too many choices, it might lead to indecision on which one to buy. It is also hard to communicate well when a company has outgrown their ‘tier’ and has to move onto a higher ‘tier’. This is why it is also essential to make them aware that your sales or customer team is always there to help them decide which option is best for them.
Tier pricing Structure:
- Basic tier: Required features customers need to get started using your product.
- Standard tier: A combination of basic and premium tiers. This tier allows you to show more of your product benefits with an accessible price range and is an ideal source of potential revenue for your company.
- Premium tier: Usually, for large enterprises and companies that recognise the direct benefit of buying your products over the long run. In a premium tier mostly there are possibilities for specialisations, customisations or additional services.
3. Volume pricing
Similar to tiered pricing, there are different pricing levels to encourage larger (volume) orders. ALL product(s) have the same price when a customer purchases. The price of all the units you're selling is within the set price range.
If your companies' key differentiator is volume, then this is the right option for you.
4. Pay Per User Pricing
Pay per User is a popular volume measurement, especially when it comes to corporate or enterprise licensed software. Prices scales along with the number of users.
Pros of Pay per User Pricing:
- It's straightforward. Per user pricing is simple to understand and simple to sell. Customers can calculate monthly costs based on the number of users they have.
- Opportunity to scale along with the adoption. Your revenue scales directly with the adoption, making it easier to predict and calculate your forecast each month. The more users you add; generally the cheaper it gets.
Cons of Per per User Pricing:
- It limits the adoption of your product. If customers don't perceive more value for buying your product for more users, they could use the same user account for different employees which could incentivise sharing a single login between different team members.
- It can increase your churn rate and it doesn't really reflect the value of your product. If it doesn't make a difference for a company that has 10 or 100, by limiting the adoption, you make it easier for customers to abandon your service.
5. Pay Per Feature Pricing
As typically seen in SaaS companies pricing strategies, pay per feature allows customers to pay for the features they consider important or those that they need the most.
Often we see three tiers because it creates a reference for the pricing. The goal is to optimize the pricing for the middle levels, and leave the edges to capture prospects slightly deviated from your customer segment.
People perceive value in different ways. Many of your customers will buy the tier higher than the one they actually need because it's perceived to be a better deal for them.
Pros of Per Feature Pricing:
- Motivation to upgrade the package. With each different package, your customers will be unlocking different features and functionalities that work accordingly to their needs.
- Show the value they will get with each package. Some of the features you are offering may require an additional amount of resources to deliver, per feature pricing allows you to show the extra benefits by putting these features into your top-tiers.
Cons of Per Feature Pricing:
- It's hard to get it right. Unless you know your customer really well, it is hard to set up your price based on the features you think they'll like.
Spend some time understanding which features are more important to which customers and set the packages based on that and also based on your costs.
Metrics to focus when defining your subscription pricing model
Until now, we have explained what is; flat-rate pricing, tiered pricing, volume pricing, pay per use and pay per feature. Now, lets take a look into which metrics you should have in mind when deciding your pricing model.
If you are just getting started, you should make an in-depth analysis of what is your customer lifecycle value. If your business is already up and running, you can examine historical data to determine what factors come into value for your customers when setting your pricing.
Either way, these metrics will help you determine the most suitable pricing strategy for your subscription businesses over its lifetime:
- Customer Acquisition Cost (CAC): How much does it currently cost you to acquire a new customer. You can determine this number with the total sales and marketing expenses and dividing it into the number of new customers you acquire each month.
- Customer Lifecycle/Lifetime Value (LTV): The amount of money that a customer will spend on your products from the time they sign up to the time they cancel the subscription.
- Churn Rate: Measured by the dollar value or the percentage of people cancelling / discontinuing their product-as-a-service subscription over a period of time.
What good pricing tables should have
- Show relevant information. Customers are busy, with no time, they tend to look at concrete features where they can compare against the different pricing options and make a conscious decision. Stay focused on what information you want to share.
- Keep it simple and concrete, so it doesn’t distract people from the main message.
- Analyze your competitors. If necessary, show your analysis to customers as they are looking to compare different brands, and they can easily realise how you provide extra value for them.
- Ensure that the pricing option you want your customers to buy is highlighted.
- Do some A/B testing. Test different price points and see which one will have higher conversion rates.
Your pricing strategy should help you to increase the win-rate and/or shorten your acquisition cycle. You should make sure you offer value for your product and the extra service it comes with.
- Before setting your pricing strategy, understand your business model, your competitors and what possible costs you might have.
- Stick to what you offer and deliver on that.
- Keep testing and learning what works and adapt based on that.
Setting the right pricing strategy model can be difficult. We know that. Every day we help companies to set out their price strategy model. Our sales experts are ready to help you if you have any questions regarding how to set your product-as-a-service subscription pricing strategy.