You’ve started a subscription business because you want to satisfy a need in the marketplace—and of course, you want to make money doing it. To be successful, you’re sure of two things: You need to provide high-quality products and services, and you need to be priced right.
Finding your optimal pricing strategy requires some assessment of both the industry and your market.
When determining your subscription price, you need to find a balance between covering the costs of running your business and maximizing what customers will pay for your offerings. If your pricing is too low, you may not be able to cover your costs. If you charge too much, customers will compare price to value and decide to cancel their subscription—that is, if you were able to sign them up to begin with.
And of course, determining the ideal pricing strategy for your subscription offerings is something you’ll need to revisit continually throughout the lifetime of your business.
Consider the following in your analysis.
TL;DR
- Subscription pricing is a business model where customers pay a recurring fee (weekly, monthly, yearly, etc.) to access a product or service.
- In general subscription companies will offer tier-based pricing of some form. There are 3 popular ways to divide tiers for types of subscription pricing models.
- Determining the right pricing requires a combination of market analysis, understanding customer value, and testing.
What is Subscription Pricing?
Subscription pricing is a business model where customers pay a recurring fee (weekly, monthly, yearly, etc.) to access a product or service. This pricing structure is popular with software companies (SaaS companies) as software-as-a-service has boomed, streaming services, and e-commerce. Instead of a one-time fixed price, subscribers continuously pay to retain access to the service, which provides a lot of predictability in forecasting and a stable, predictable revenue stream for the business.
Subscription Pricing Examples
There are many, many subscription companies on the market these days to provide examples for subscription-based pricing models. They demonstrate a variety of products and how nearly any type of product can be turned into a subscription.
- Netflix (a video streaming service) charges a monthly fee for access to its library of movies and TV shows. Different pricing tiers offer different levels of video quality.
- Adobe Creative Cloud (a software service) switched from selling one-time licenses for software like Photoshop to a subscription-based model where users pay a monthly or yearly fee for access to their suite of tools.
- Amazon Prime (an eCommerce and video/music streaming service) offers a subscription that includes free shipping on orders, access to Amazon Prime Video, and other perks for an annual or monthly fee.
- Dollar Shave Club (a physical goods subscription) sends customers a monthly shipment of razors and grooming products, with different subscription tiers based on the frequency of delivery and product type.
In general subscription companies will offer tier-based pricing of some form. There are 3 popular ways to divide tiers for types of subscription pricing models:
- Tiered Pricing Model: Develop multiple pricing plans (e.g., basic, premium, enterprise) to offer flexibility. Basic plans can offer the core features at a lower price, while premium plans can provide additional features or higher usage limits at a higher price. Enterprise or custom plans can be tailored for larger customers or companies with more specialized needs.
- Feature-Based Tiers (AKA Value-Based Pricing): Differentiate pricing tiers based on feature access. For example, Adobe Creative Cloud offers tiers where higher-paying customers get access to more software tools or advanced functionality.
- Usage-Based Pricing Model (AKA Per-User Pricing): Charge based on usage levels, such as the number of users, amount of data stored, or hours of service used. This allows small customers to pay less while offering scalable pricing for larger customers.
How Do You Determine What Your Subscription Pricing Should Be?
1. Your business model
If your product is an essential service with a monthly subscription price, you can expect to have hundreds or even thousands of customers at any one time. A large market involves more players which means your pricing will need to stay in line with the competition.
If you’re serving a niche market, you’ll have fewer customers and can command a higher subscription price. This type of customer-base will likely require greater attention and more of your operations will be dedicated to managing customer relationships.
2. Your business costs
A standard method of pricing is to determine the cost of delivering the service to your market. What you need to keep in mind is this must include both fixed costs and variable costs. The fixed costs should be spread out over the number of customers you’re looking to attract and manage in your subscription business. All your business’s bottom-line operating costs and overhead should be included in this calculation.
You should also consider your customer acquisition cost (CAC)—the amount it costs to turn a potential customer into a paying customer. This important metric can change over time and should be monitored and factored into your pricing.
3. Your competition
As a business in the race to win over customers, it’s wise to educate yourself on your competition. Find out the strengths and weaknesses in their products. What do your competitors look like from a consumer perspective? And how do you and your product compare?
All of this information will help you position yourself within the industry—and help you to define your pricing sweet spot.
Customer perception
Assess what your competitor’s customers are saying about them by scanning online review sites like G2 Crowd and Capterra.
- What do customers say is positive about your competitors?
- What do customers dislike about your competitors?
- How often are reviews being left? For every single customer review, there are at least 26 customers who haven’t left one.
What are your competitors’ reputations in the industry? In terms of pricing, are they considered expensive or affordable?
Marketing and branding
What are your competitors’ marketing positions? Look at who they’re marketing their products to. Large businesses? High-income professionals? Small firms? Budget conscious individuals? Also, look at how they market their services. Are they a luxury brand or an essential tool for the user? How does this compare to your target market?
Use this information to develop and redevelop your own product positioning.
Product features
A good pricing table is a perfect way for a subscription business to enable potential customers to easily compare the plans it offers. How do you create a good pricing table?
Limit the information: If potential customers can’t scan the information easily, they aren’t going to be able to compare subscription options.
Demonstrate differences: Communicate how each plan is different from the others. If there are similar elements to your various plans and pricing points, include those at the bottom of the pricing table while leaving distinctly different elements toward the top.
Ensure your pricing stands out: You should place the price at the top of the table so the customer knows what it is prior to reading the plan features.
Limit visual aids and color: The most common mistake is placing red crosses and green ticks upon the page. Although this design makes the product elements stick out, they also make the pricing table too crowded and distract from the main message.
Use illustrations to demonstrate differences: Some of the best subscription pricing tables have images to demonstrate the differences between plans. For instance, different size boxes to represent the various levels of service offered.
Consistent design: Your entire website should have a consistent overall design. The same should apply for your pricing tables.
Highlighting: You want to highlight your best subscription plan for your customers. The highlighted plan could be in a different color, bolded or ‘pop out’ when the cursor hovers over the plan.
You should also analyze your competitors’ offerings. How do their products differ from yours? How have they differentiated themselves in the industry? What features do you have that they don’t? What are those features worth to your customers? If you estimate how much it would cost you to provide the same service as your competitors do, how far off is your pricing?
Terms of service
What are your competitors’ terms of service? How do your terms differ? If your terms are flexible, they’ll be more appealing to customers and they may be willing to pay more.
However, you shouldn’t base your prices solely on your competitors’ price points. Your product may have greater value and you could have different costs.
4. Your value to the customer
Your customers aren’t going to pay for a service they don’t think is worth their money. Therefore, you should ask your customers what they believe is the value for your subscription service. It’s likely they’ll slightly underestimate what you could charge, but it can be a good starting point.
- Determine how essential your product is to customers’ needs.
- You can survey customers to understand their willingness to pay for various features or service levels.
- Analyze customer behavior to understand which features are most used and most valuable.
- Identify the key value metric for your service (e.g., number of users, storage space, bandwidth) and price according to the value customers derive from this metric. For example, Dropbox charges based on storage capacity, as that is its core value offering.
5. Experiment and Iterate
Setting the perfect subscription price often requires experimentation and fine-tuning:
- A/B test different pricing plans to different segments of your audience and measure the response.
- Offering a free tier with limited features (the “freemium” model) can help attract customers, and later encourage them to upgrade to a paid plan for more advanced features.
- Regularly assess subscription data (churn rates, customer acquisition, conversion rates) to evaluate how your pricing strategy impacts customer behavior. Adjust pricing based on these learnings.
Experimenting and iterating allows you to find a balance between attracting new customers and maximizing revenue from existing subscribers.
6. Pricing Psychology
How a price is presented can have a big impact on how customers perceive it. When determining a pricing strategy, be sure to keep key psychological tricks in mind:
Highlight how much a customer can save by subscribing annually instead of monthly, which frames the yearly plan as a better deal and encourages longer-term commitment.
Prices ending in “.99” (e.g., $9.99 instead of $10.00) are psychologically perceived as significantly cheaper, even though the difference is minimal.
Show a more expensive pricing option first (the “anchor”) to make subsequent options seem like better deals. For example, displaying the most expensive plan first will make mid-tier options appear more affordable.
The optimal subscription pricing strategy
The optimal pricing strategy for your subscription offerings is critical to the success of your business. When establishing and re-establishing the best price points for your business, take into consideration factors such as your:
- business model
- costs
- competition, and
- value to the customer.
For more on this topic read the Tips and Tricks for Solving the Subscription Pricing Puzzle, or download 7 Killer B2B Pricing Strategies for Your Business. The guide walks through the many different pricing strategies available to subscription businesses. It also includes real-world examples of these strategies in action, tips and guidance for selecting and implementing the right strategy for your business, and signs its time to switch up your strategy.
Quick FAQs about Subscription Pricing
Q: What factors should be considered when determining subscription pricing?
When determining subscription pricing, consider factors such as your business model, costs (both fixed and variable), customer acquisition cost (CAC), competition, and the value provided to customers. Balancing these elements helps ensure pricing that covers costs and meets customer expectations.
Q: How do industry standards influence subscription pricing?
Industry standards influence subscription pricing by setting benchmarks that customers are familiar with and expect. Analyzing competitors’ pricing helps position your subscription offerings competitively while identifying areas for differentiation.
Q: Why is it important to revisit your subscription pricing strategy?
It’s essential to revisit your subscription pricing strategy regularly to adapt to market changes, evolving customer expectations, and cost variations. Continuous assessment ensures that pricing remains optimal for profitability and customer retention.
Q: How can customer feedback impact subscription pricing decisions?
Customer feedback provides insights into perceived value and acceptable price points. Engaging with customers helps refine pricing strategies to meet their expectations, potentially through surveys or direct interactions.
Q: What is the role of a pricing table in subscription businesses?
A pricing table helps potential customers easily compare subscription plans. Effective pricing tables limit information overload, highlight key differences, and ensure prices are prominently displayed to facilitate decision-making.
Q: How can competitor analysis aid in setting subscription prices?
Competitor analysis helps identify strengths and weaknesses in their offerings, assess their market positioning, and understand their pricing strategies. This information guides your pricing decisions to ensure competitive and attractive subscription options.
Q: What are the benefits of A/B testing different subscription price points?
A/B testing different subscription price points allows you to evaluate which price yields higher conversion rates and customer lifetime value (LTV). This data-driven approach helps identify the optimal price for maximizing revenue and customer satisfaction.
Q: How can serving a niche market affect subscription pricing?
Serving a niche market often allows for higher subscription prices due to fewer customers requiring more personalized attention and resources. This specialized approach justifies premium pricing for tailored offerings.
Q: Why should both fixed and variable costs be included in subscription pricing?
Including both fixed and variable costs in subscription pricing ensures comprehensive coverage of all expenses involved in delivering the service. This approach helps maintain profitability while offering competitive prices.
Q: What are common subscription pricing models, and how do they differ?
Common subscription pricing models include flat rate, tiered, per-user, and usage-based pricing. Each model has distinct characteristics, such as fixed fees, varying levels of service, or charges based on usage, catering to different business needs and customer preferences.
