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
RevenueWire is a global eCommerce platform for companies
looking to sell digital products online. Combined with world-leading services
like AffiliateWire and CallStream, we optimize every phase of the transaction
lifecycle to empower companies to grow their business.
Our flexible RevenueWire Commence platform supports
one-time sales and recurring payments in over 120 countries with 33 currencies
in 24 languages. Our dedicated and experienced team actively connects our
clients with more ways to make money whether it’s boosting sales, optimizing
subscriptions or offering upsells and cross-sells.
