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.
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 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 obviously 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.
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.
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.
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.
An alternative way of achieving this is to A/B test several price points and see which has the higher conversion rate. At the same time you should look at the customer lifespan. If you find that a higher price has a lower customer conversion rate but higher customer lifetime value (LTV), it's obviously the better choice.
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
- competition, and
- value to the customer.
For more on this topic read the Tips and Tricks for Solving the Subscription Pricing Puzzle, or download The Definitive Guide to Subscription Pricing Strategy. 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.
To read more on our pricing strategies series, check out: