Thursday, August 14, 2014

How To Price Your Subscription Product


Establishing a sustainable pricing strategy for a subscription product is challenging. Whether you’re shifting from a one-time pricing model or refining your existing recurrent price structure, determining how much to charge depends on value perception, market factors and the type of pricing options you’d like to offer. 
If you price your product right though, subscription models can offer advantages to both merchants and consumers. To find these elusive optimal price points of a product, the trick is to do your research, determine how your customers value your solution and, finally, test again and again to see what works and what doesn’t.

Step 1: Research The Market

Market research is key to find out where your product sits compared to your competitors, including what kind of pricing models others offer. Look for opportunities to implement a more competitive pricing structure to incentivize customers to buy your product instead.

Step 2: Find the Right Value

Your direct costs per user should indicate an absolute price floor for your product. To maximize revenue, prices above this floor will be based on your competitive research and how much your customers value your product.
It’s important to keep in mind each consumer is going to value your product differently. In order to attract the largest possible customer base, you need to price your product accordingly. Here are two approaches to consider based on value pricing:

Tiered pricing

This approach combines different prices for each tiered version of your solution. This allows your product to appeal to a larger customer base, including price sensitive consumers, by segmenting them into tiers based on how much they may be willing to pay (if you’re unsure about customer segments, read this article). By allowing customers to choose which solution they believe would give them the most value, you’ll be able to generate more sales. Break down this information on your price page so it’s simple for customers to compare options.
As an example, you could offer three levels of your product at different price points. The first level could be a free trial for a limited time or a continuous low price on a basic version of your product. This strategy will allow users to try out your product before making a larger commitment, which increases adoption and product usage.
The second level should be a mid-grade version of your product that offers additional value to your customers. The price point for this level should be a significant jump from the first level to reflect all of the additional add-ons and benefits that are included. 
The third and top-end version of your product should an incremental price increase from the second level. Additional benefits must be clearly communicated to show the added value offered.
If you decide to go with a tiered strategy to sell your subscription product, your next challenge will be upselling first or second tiered customers to the third tier. In order to maximize the sales volume for each level, positioning your product based on its value drivers is crucial. Since consumers perceive the value of goods and services differently, this strategy will attract a larger volume of interested buyers over the long term.

Unlimited Usage

Another option to offer is a single price for your subscription product that offers buyers unlimited usage. In this strategy, it’s important to advocate the benefits of this buying option to your customers (i.e. no extra charges per user, customer service support, etc.). This pricing strategy can be more appealing to some customers if you communicate that the product is “all-in”.

Pricing Psychology
Don’t discount the psychological aspects that influence buyers’ decisions as this article illustrates. One crucial takeaway is the impact that prices ending in nine have on conversions. For example, a product that is priced at $159 is more appealing than if the same product were priced at $160. This type of pricing analogy is fluid across all industries and holds true in the software space.

Step 3: Start Selling and Test, Test, Test

All the blog posts and advice in the world can’t definitively tell you how to price your product until you test your offers. This requires some degree of trial and error, so ensure you’re gathering data on each sale that occurs (i.e. customer segmentation, churn rate, AOV, etc.). 
After measuring sales for a few months, you may suspect your product is undervalued or priced too high. Try raising or lowering your prices while monitoring your conversion rates and then reassess the metrics against your revenue per customer. 
You must constantly gauge your product’s value proposition from the customer’s point of view to understand why they are purchasing at each level. From there, you can refine your prices.

Always Keep Your Customers in Mind

Simplification is key. Even if you determine the “perfect price point” for your products, your customers may be deterred from buying if you present too many options on your price page. Also, be sure to position your product on its advantages compared to competitors because this will give you more control over your pricing strategy.
Researching your competitors, estimating how prices interact with conversion rates and avoiding over and underpricing your product is a challenging but essential process for to all companies selling subscription products. But those that get it right will reap the benefits of subscription revenue that’s sustainable in the long-term.

– Jason

Jason Kiwaluk
Director of Ideation

Jason Kiwaluk

Mower & Shoveller,

Ecommerce | Adtech | Innovation | Strategy

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