Over the past few months, we have written a series of articles on seven of the most common pricing strategies for subscription-based businesses. The following summary will make it easier for you to compare the 7 most common recurring billing pricing strategies.
1. Freemium + Upsell
In this strategy, a company offers their customers a free service in addition to a paid version which includes more features, or removes advertising.
LinkedIn is a good example of the freemium + upsell strategy. Anyone can sign up for a LinkedIn account. It’s free and all you need is an email address to get started.
But, if you want to see a full list of people who have viewed your profile, use the InMail feature, or gain better access to job posts, you’ll need a premium account which comes with a price tag.
2. Multiple Editions
With this pricing strategy, you create different packages for various groups of customers, and let them choose the one that is right for them.
The price of the different packages can be based on many factors such as a number of customers, usage, etc. They are usually dictated by the type of service the business is offering. Cell phone companies are a great example of multiple edition pricing.
3. Pay As You Go
Also called usage-based or network based pricing, customers only pay for what they use on a transaction basis.
In this strategy, customers either pay in advance or pay in arrears.
Pay as you go has been shown to lower consumption, as opposed to when a flat rate is charged. Since saving money can be a powerful motivator and in some cases, having a pay as you go option may be the reason someone chooses your business over a competitor.
4. Base + Overage
Online, this is the pricing strategy of choice for communications and data storage, but depending on how pricing is set up, it has the potential to be very confusing for the consumer.
An example would be a wireless company that charges $25 a month for up to 2GB. This is a flat rate unless you exceed 2G and then you’re charged extra based on how much data you use over the allotment.
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This is a very popular pricing model in the SaaS and a subscription-based world.
Basically, a company offers different price packages where volume is the key differentiator. What constitutes volume varies, of course.
There is a minor but significant difference between tiered and volume pricing.
With this strategy, you’ll often see three tiers because it creates a frame of reference for the pricing. The goal is usually to sell the middle tier and the extremities are included to make the pricing seem reasonable.
If you using or are thinking of implementing a tiered/volume based pricing strategy, it’s very important that you do a market analysis where your goal is to adequately address each segment. Read the full article about tier pricing strategy here.
Sometimes called price bundling, product bundling, a compilation, or a package deal, this is when a customer buys two or more products or services together for one price instead of buying items separately for individual prices.
To successfully use this pricing strategy, you have to create bundles where the perceived value exceeds the asking price.
If you get the right value in front of the right customer at the appropriate price, you’re more than likely going to make a sale.
With pricing segmentation, you offer the same product or services but at different (or unique) prices to different types of customers.
This pricing strategy has proven to increase overall profit and revenues especially in industries with high fixed cost structures.
Segmentation can be based on volume, attribute or feature, service offering, time of purchase, time used, to name a few. While segmentation can be powerful there are difficulties with this pricing strategy that can reduce the impact.
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