Understanding the different subscription pricing models is the first step to choosing the right one for your business. Here are examples and best practices.
Before the internet came into our lives, companies used subscription pricing strategies as part of their sales processes to increase customer lifetime value. Now, ecommerce businesses have adopted and improved the model to fit the online shopping experience.
In an interview with Forbes in 2021, Alex Craciun, CEO of Prive, a subscription management platform, stated:
"Subscriptions are a lever brands can implement that achieves the goal of establishing a long-term relationship with their customers while also having the ability to understand their order patterns, better predict demand, and have an open channel of communication with their customers."
This article will discuss the different subscription pricing models, how to choose the right one for your business, and the best practices for success.
The subscription business model is basically ecommerce, but the subscription-based pricing model refers to the specific way you charge users for your product or service while using a subscription model.
Selecting the right type of pricing for your business will allow you to have a somewhat predictable revenue stream and secure customer loyalty. The type of subscription pricing model will also depend on your growth and profitability strategies.
Every subscription pricing model works by providing your consumers with a continuous delivery of products and services in exchange for a recurring fee. While a similar process may apply to other pricing models where the business offers a wide range of subscription plans that the consumer gets to choose from, there are differences depending on the type of revenue strategy you are using and the financial needs of your operations.
Flat-rate pricing is the most simple and common subscription-based pricing model, and it works by establishing both a fixed price and a time period for customers to use your product or service, usually an annual or monthly fee.
With flat-rate pricing, you can offer consumers an easy way to understand your pricing and give your business a predictable and continuous revenue to work with.
Companies like Netflix use a fixed price model, which also helps them know what to expect regarding operational costs and expenses.
The tiered pricing model offers consumers different 'levels' of service with the possibility of adding more features as long as they are willing to pay extra for them.
With this subscription pricing model, customers have the option to purchase the services they require according to their needs. This is good for scalability as some consumers may increase the level of the hired plan as their needs evolve over time.
Cloud storing services use this pricing model as they offer extra cloud space the more you're willing to pay for it.
In a per-user pricing model, the subscription cost increases as each individual account increases the number of users.
This subscription pricing model is popular amongst software-as-a-service companies (SaaS) that offer their services to businesses with a potentially high number of users, like Customer Relationship Managers (CRMs), which can be used by the entire sales department.
Usage-based pricing focuses on how many features are used or how much time the consumer uses the service they subscribed to. It is a kind of pay-as-you-go pricing.
This pricing model has benefits for both the user and the business, which only requires considering gains and variable costs based on their needs.
If, after a period, the individual or company didn't use the service as much as expected, they can pay less next time. For the business, it also means fewer expenses derived from providing such services.
Zapier is an example of this pricing model, as customers will be charged an overage rate per task if they go over the task limit.
A business offers a limited or basic version of the service or product for the consumers to try out, with the option to upgrade to a premium version with plus features.
This gives the business the possibility to build engagement and loyalty. Most businesses with a freemium pricing model also rely on advertising to sustain the operational costs and give users the option to remove publicity if they opt for an upgrade.
Companies like Spotify use this subscription based pricing model as they allow consumers to use their streaming platform for free if they're willing to sacrifice certain commodities.
Understanding how your value proposition interacts with your customer's needs is essential. Creating a value-based pricing model that matches your target audience will help attract and retain new customers.
Every target audience has defined preferences regarding how much they are willing to pay according to the value they assign to different features.
Analyzing the type of service or product you offer and understanding how your competition approaches pricing can give you a clue on which subscription pricing model fits your business.
Are you looking to maximize revenue in the long or short term? Do you want to create a large consumer base for low prices? Whether your revenue plan considers a significant upfront investment or a recurring investment placed over the income generated will help you define the subscription pricing model that best fits.
One good thing about subscription pricing models is that they are easy to test and change in early business stages.
Do tryouts with different pricing models and variable costs and track any relevant metric.
According to McKinsey & Company:
"An option software companies can consider for differentiating their pricing strategies is to employ sophisticated, data-driven approaches that align pricing options more closely to customer preferences. Higher-growth companies lead the pack in pricing analytics capabilities: they are 1.7 times more likely than lower-growth organizations to integrate advanced analytics into their provision of pricing guidance to frontline sellers."
Do not apply changes based on instinct but as a natural result of the customer data gathered. Look at what competitors have done, check out case studies, and learn from them. This will save you trouble along the way and drive your business into sustained growth over time.
Although data should be your primary source for decision-making, you should also think as a consumer when defining your pricing model and how it will impact your business regarding user acquisition, satisfaction, loyalty, and retention.
You can also implement more than one pricing model simultaneously. Just remember that your subscribers need to know what they're paying for, and a good experience is a great way to engage customers and increase lifetime value.
Define a simple pricing strategy so that your existing customers understand how much they are paying and what they're paying for. This will also make it easier for new customers to engage.
Some customers prefer to spread out payments, while others choose an annual rate if they get a discount. Provide different options in your subscription offering to appeal to a wider range of customers.
Cancellations are part of the business and play an important role in the user experience. Make your cancellation processes as pleasant as possible.
4. Provide excellent customer support
Acquiring customers is not enough. Once they are here, you need to retain them through a delightful experience, and efficient customer support is part of that process.
Subscription pricing models aim to increase customer acquisition to build a successful business with recurring revenue. Remember to simplify the subscription offering, offer consumers flexible billing options, and match your value proposition to your target expectations.
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