Senior Writer: Sindhu Bharathi
If you rank all the complex decisions you have taken as a freelancer, solopreneur, or entrepreneur, pricing the products and services stands at the top. Irrespective of the scale and scope of the business, pricing remains the hardest among the 4Ps of marketing.
If you set a low price, you may find it difficult to cover the costs; on the other hand, if you set a high price, you may lose customers. There are several strategies to determine an optimal pricing strategy for your product or service.
In this article, we present the details of one such pricing method called the subscription pricing model.
What is Subscription Pricing?
The subscription pricing framework lets customers purchase a product or subscribe to a service for a specific duration, say a month, 6-months, or a year. It works on a recurring basis at a predetermined price point. This differs from other conventional pricing options as the price is mostly determined based on the length of the subscription. The longer the subscription period is, the cheaper it is in terms of prices.
Several businesses, from SaaS startups and cloud computing service providers to app developers and lifestyle service providers, function on subscription-based pricing models. A Gartner study shows that more than 80% of vendors are offering subscription-based business models.
These models benefit both the customers and the businesses. Customers enjoy the convenience of repurchasing the product or service they desire to use in the future. On the other hand, businesses can increase buyer retention without re-engaging them frequently. The business secures a periodic recurring revenue business which could help them navigate hard times.
When done right, the subscription pricing models offer opportunities for growth while also ensuring sustainability and stability.
4 Types of Subscription Models
There are four types of subscription models, and selecting the right model for your business influences the success of your strategy.
1. Fixed or flat-rate pricing
In fixed or flat-rate pricing, subscribers are offered unlimited access to all the content on the platform. The fee is fixed for a particular period, say a month or a year, and is recurring. Flat-rate pricing is one of the simplest means of pricing, and it is easy for the customers to perceive and interpret the prices.
One of the well-known businesses, Netflix, follows a flat-rate pricing model. Customers can access the entire Netflix content for a monthly recurring price.
In flat-rate pricing, businesses have different price points based on the payment method that the customer opts to use. Mostly it is monthly, quarterly, bi-annual, and annual packages. The longer the duration is, the cheaper it is priced. All of them are sold at a flat price.
The flat-pricing subscription model is appropriate for businesses that sell products and services to solve a common problem or a single buyer persona.
- Easier to communicate, market and sell.
- Option to serve customers based on their commitment.
- Increases customer retention, businesses can increase customers’ lifetime value with long-term packages.
- Offers up-front revenue to the business.
- A one-size-fits-all approach may not be effective when customers expect a personalized approach.
- Flat-rate pricing may not always be cost-effective as there are chances that you may be over-delivering in an endeavor to meet all the requirements of your potential customers.
- It may not reflect all the demands of the target customers. Some people may need only a part of your service offering, and they might not be willing to pay an umbrella price.
2. Tiered pricing model
In tiered membership pricing, businesses can sell access to different services in packages priced in tiers. The costlier the plan is, the greater the access.
A tiered pricing strategy offers more flexibility than flat-rate pricing, as packages are priced based on the service offerings. This is more accommodating and appropriate for businesses with different levels in their service offerings.
CRM platforms, Cloud storage service providers, streaming services, mobile games, etc., prefer a tiered pricing strategy. Most businesses that follow tiered pricing offer three tiers – low, medium, and high-priced packages.
As this strategy allows people to choose the level of access and price for them, it attracts cost-conscious customers. It increases up-selling opportunities as businesses can offer additional services at an increased price. Businesses must ensure that there is a clear demarcation between each package in terms of pricing and value offerings.
- Broadens the reach of a business as this lets customers choose the level of access.
- Ability to penetrate and reach a larger market.
- Scalable as customers can upgrade their access whenever there is a need. This is an opportunity for businesses can upsell and increase customers’ lifetime value.
- Sometimes, businesses tend to offer too many choices when it comes to subscription packages. This may confuse the customer, unlike fixed pricing, where the rate is fixed for access to all services.
3. Per-user pricing
As the name suggests, the per-user pricing strategy works based on the number of users buying the product or accessing a service. It charges a subscriber based on the number of users they add to the subscription. This is similar to the per-license pricing model commonly followed in software subscriptions.
Slack and Salesforce are well-known businesses that rely on per-user pricing strategies. They cap the number of users in the subscription packages.
The higher the number of users, the costlier it gets for the subscriber. As it offers businesses an opportunity to upgrade their plans when they scale and grow, this is mostly preferred in B2B models and SaaS companies.
- When businesses grow, they can upgrade their plans at an advantageous price.
- The price is fixed and avoids confusion.
- People sometimes share login credentials with other users to avoid paying for the extra user. This is a loss to the business.
- Adoption rates are limited, and churn rates are high.
4. Usage-based model
In usage-based pricing, businesses charge customers for the usage and consumption of a product or service. This is one of the commonly used pricing strategies in the SaaS industry. It is also called a pay-as-you-go model, pay-per-transaction, unit-based pricing, etc. The businesses track how much a user has consumed and only charge for the usage. This allows customers to start at a low-cost package and then extend the usage later as and when the need arises.
This strategy aims to deliver real value for the price the customers pay. Because customers are paying only for what they use, they tend to be more satisfied and contented.
A lot of email marketing platforms adopt a usage-based pricing model. Twilio offers communication tools for making and receiving phone calls, messages, and other functions using its APIs. It charges users based on their API call volume. High API calls mean the business is delivering more. When there is growth in the business, they will naturally be happy to pay more for the usage. You get an opportunity to share your customer’s success as you can grow along with them.
Because there is no upfront cost, consumers can start low, and once they become comfortable, they can scale the usage. This reduces the barriers to entry and widens the market.
- The usage-based subscription marketing model is simple and straightforward.
- You share the customer’s growth as you get to scale along with the business.
- There are no upfront costs and financial commitments when users sign up. As the adoption barriers are low, it is easy for the business to sell, shortening the purchasing cycles.
- Enhances customer satisfaction as they pay only for the value they consume.
- Because there is no recurring revenue stream, it could be harder to predict the revenue flow.
- As the switching costs are very low, a bad experience is all it takes to lose a customer.
- Monitoring the usage may happen at the back end. This may lead to confusion and mistrust in the business.
Subscription Pricing Examples
These are best examples of Subscription Pricing:
1. Amazon Prime
Amazon Prime is one of the well-known subscription-based service offerings. With just $139 per year, subscribers are provided access to video, music and games and a free 30-day trial period.
Netflix has monthly plans, providing access to thousands of TV shows, movies, and documentaries. It also presents recommendations based on your recent history.
3. HP Instant Ink
With the help of HP Instant Ink now, you can receive ink and cartridges at your doorstep. The subscription-based model lets you estimate the amount of printing you will require every month and get it delivered to your home.
Barkbox is a subscription-based business model targeted at pet owners. Based on a monthly subscription, subscribers receive useful toys and yummy treats every month.
What to consider when choosing a subscription pricing model?
Before deciding on a subscription pricing model, you should find answers to the following questions.
1. Who are your current customers?
The first step in choosing a subscription pricing model is understanding the customer’s needs and perceiving the value from the lens of the customer. You should figure out your target customers and their purchasing behaviors. If your customers are small business owners and solopreneurs, their revenue flow may be low, so they may prefer a model where the payments are spread over time. You should check if your customers prefer simplicity or they seek customization. You should study if some customers have more usage than others.
Analyzing these will help you design a subscription pricing model capable of attracting more customers to your business.
2. Does it suit the product you provide?
The next step is to check the alignment between your subscription pricing model and the attributes of the product or service you deliver. You should check how complex your offering is. If your product/ service has several features, then a tiered pricing model may work the best. You should also build strategies to scale the revenue flow in the long run. You should think about how you would want to expand and grow alongside the evolution of your customers. This could be through introducing new features, adding more users, or promoting increased usage of services. Ensure that you align the pricing strategy to your product features and functionalities.
3. What pricing model does your competition use?
Make a detailed assessment of your competitors. When you do so, you will get an understanding of the models that the competitors are using. You will also understand what works and what doesn’t. By analyzing competitors, you shall also learn what they are missing out on, and you can target the same.
If your competitors are targeting large businesses and enterprises, you may align your pricing model to also cater to small businesses. This way, you can capture the revenue you may miss out on otherwise.
4. Is it in alignment with your operating costs?
Operating costs play a key role in determining an optimal subscription-based pricing model. You should estimate the fixed, variable, and operating costs and add sales margins to determine the pricing strategy that works best for you. This way, you can optimize your revenue while designing an appropriate plan that is capable of meeting your customer’s needs.
5 Tips to Subscription Pricing Strategy
Enhancing your pricing strategy with other packages like freemium, tiered packages, and upselling and down selling adds to the benefits of a subscription pricing model.
Following are some tips that you may try out to optimize your pricing strategy.
1. Go freemium
Freemium is about giving your customer an opportunity to try the product or service before they subscribe. It serves as a two-tier customer acquisition model where it divides the entire offering into free and premium services. By allowing users to access certain features of the service for free, the chances of conversion and rate of subscription can be increased.
2. Give users multiple tiers.
A lot of times, businesses decide to offer only two tiers in their subscription pricing model. One of them is always cheap and does not deliver any value. The other is always expensive and has too many features and functionalities that the customer may not use. So, while designing subscription pricing models, always do so from the lens of the customer. Make sure to include more tiers so the customer can pick what aligns with his/her needs.
3. If your resources are being drained, try a usage model.
When you follow flat-pricing or tiered pricing strategies, there are chances that your resources may be strained. In that case, try adopting a usage-based pricing model. If you notice that your resources are being demanded more than your expectations, allow the customers to decide what they consume and pay only for that instead of increasing the prices for all.
4. Upsell and cross-sell when needed.
Offering an opportunity to upgrade their accounts as they evolve helps retain customers for a long time. This improves your customer’s lifetime value. You should also invest your time in identifying your customer’s needs so you can deliver add-ons along with your main value offering.
5. Always choose value-based pricing.
Value-based pricing is the best pricing model when it comes to subscription-based pricing. Many times, businesses decide prices based on the competitor’s pricing strategy or the company’s operating costs. Value-based pricing helps identify an optimal pricing strategy based on the value of your product or service.
It would be a costly mistake to overlook pricing strategies in today’s competitive world. With the right subscription-based strategy devised in alignment with your customer’s expectations and product features, you can attract a wider customer base as well as generate sustainable profits. Though more than 70% of businesses today use subscription-based pricing, only 20% of them use SaaS Subscription management software. To unlock the real benefits of subscription-based pricing models, it is important to automate the process of renewals and explore opportunities for cross-selling and up-selling using subscription management software.
Subscription Pricing FAQ's
Subscription-based pricing is a methodological framework that allows customers to purchase and access a product or service for an agreed-upon price and specific duration.
The subscription price is the agreed-upon price at which a business allows its customer to access full or part of its offering for a specific period of time.
There are several ways you can charge your customer for subscriptions. It has to be decided based on the attributes of the customer and the functionalities of the product. Usage-based pricing, per-use pricing, value-based pricing, tiered pricing, and flat-rate pricing are commonly used pricing strategies.
Subscription plans are calculated and fixed based on several attributes, some of which include the business model, operating costs, competitor’s pricing strategy, value delivered, features and functionalities of the service and behavior and interest of the customer.
The subscription pricing strategy is about deriving an optimal pricing model for businesses while considering the internal costs, competitor’s strategy and value delivered to the customer.