Earlier this year, video-streaming service Hulu announced it would be dropping the price of its most popular subscription plan. The change, which took effect at the end of February, saw the price of Hulu’s ad-supported plan decrease from $7.99 to $5.99.
The drop was part of an overall shift in Hulu’s pricing strategy. The business also increased the price of its live-TV option from $39.99 to $44.99.
New video-streaming options are poised to emerge in the market, including recently announced services from Apple, AT&T, Disney, and NBCUniversal. However, Hulu’s recent price decrease positions the business as the cheapest option among competitors.
Prior to the announcement, Hulu boasted more than 25 million subscribers, an increase of 48% from the previous year. With the most recent change to the business’ pricing strategy, it’s likely Hulu’s subscriber base will continue to grow.
Competition for subscription-based businesses is on the rise. According to a Mckinsey & Company report from 2018, the subscription e-commerce market has grown by more than 100% a year over the past five years. The same report indicates that half of all consumers subscribe to a video-streaming service. And a release from Gartner predicts the software as a service (SaaS) market will increase by more than 18% in 2021 to $304.9 billion, up from $257.5 billion in 2020.
In this increasingly competitive market, it’s important for businesses to regularly reevaluate their pricing strategy. Ask yourself if your approach is really working. Are there adjustments you can make to be more competitive? If you’re not sure, here are three signs it’s time to rethink your pricing strategy.
1. Your subscriber rates are declining
Many businesses are afraid to lower their prices because they don’t want to become known as the ‘cheap’ option in the marketplace. Consumers often associate price with quality, and being the cheaper option might steer potential customers away. However, keeping your prices in line with industry standards can also be a hindrance to acquisition.
When all businesses in a marketplace are charging similar rates, it’s difficult to set yourself apart from the competition. This can be especially true for a smaller business.
If you don’t have as many resources as larger competitors, it might be difficult to outspend them to acquire customers. Lowering your prices will make you attractive to those consumers looking for a more affordable product without all the bells and whistles that come with products at higher price points.
Meal-kit delivery service Blue Apron is a good example of a business experimenting with different pricing strategies in an effort to increase its subscriber base. In August 2018, the business disclosed it only had 717,000 customers at the end of June. The figure represents a 24% decrease from the previous year.
In an effort to combat the decline, in May 2018 Blue Apron began selling discounted meal kits in Costco stores. This was a new angle on a previous tactic, where the business sold gift cards at a 30% in-store discount. In October that year, Blue Apron also started selling its New York subscriptions on e-commerce site Jet.com at lower prices.
However, a large portion of Blue Apron’s issues have had to do with its supply chain. The business has struggled to reduce unit costs. To this end, in February 2019 Blue Apron announced it would be selling stripped down versions of its meal kits on Jet at drastically reduced prices. These new kits don’t include costly ingredients that were hurting Blue Apron’s bottom line.
Only time will tell if Blue Apron’s new pricing strategy will succeed, but for businesses hoping to stay afloat, it’s important to explore your options.
2. You’re not hitting profit goals
In March, beauty subscription business Birchbox announced it was raising its prices for the first time since its launch in 2009.
The business’ new pricing strategy raises Birchbox’s $10 monthly fee for new subscribers to $13/month for a yearly subscription, $14/month for a six-month subscription, and $15/month for a monthly subscription. For current subscribers, the price increases to $12/month for a yearly subscription, $12.50/month for a six-month subscription, and $13/month for a monthly subscription. Additionally, prices won’t go up for Birchbox VIP members who spend at least $300 a year on the site.
As part of the new move, Birchbox promises subscribers will receive improved service and a better customer experience. In exchange, Birchbox gets to pump up their bottom line.
Increasing profits is one of the main reasons a subscription company should consider switching up their pricing strategy. Starting in 2016, Birchbox reduced its staff by 15% after two rounds of layoffs in an attempt to make the business more profitable and attractive to potential buyers. The recently announced price increase continues to build on that effort.
Under its original model, Birchbox has struggled to make profits. At only $10 each, Birchbox barely breaks even on its monthly deliveries after the cost of shipping is taken into consideration. The business’ goal, to get subscribers to purchase the products they receive in these boxes through Birchbox’s website, is hampered by the plethora of other beauty stores selling those same products.
The new pricing strategy raises the cost of each box to improve Birchbox’s profit margin, refocusing the source of revenue more onto the subscription itself and less on website sales. It also rewards customers who do make purchases directly through the business’ site.
Many subscription businesses fear a price increase’s impact on subscriber and retention rates. If your profits aren’t where you want them to be, however, raising prices is a viable solution to keeping revenue high enough to ensure success.
3. Your retention rates are low
When your retention rates are low, it’s important to consider a new pricing strategy. In this case, the focus is less on lowering or raising your prices, and more about offering your customers a diverse array of pricing options designed to meet their unique needs.
Salesforce has steadily risen as a leader in the SaaS market since it was founded in 1999. In March, the business reported a 26% rise in quarterly revenue. Salesforce also saw its net income increase to $362 million for 2018, a substantial rise from $206 million the year before.
However, success was never guaranteed for Salesforce. In 2005, the business was struggling with customer retention. At the time, Salesforce was losing 8% of its customers every month, an incredibly high churn rate.
Part of the business’ success since 2005 can be attributed to its flexible pricing strategy.
When Salesforce launched, it offered minimal pricing options which included two tiers with a per-user, per-month fee. Today, the company offers four tiers designed to cater to different kinds of customers. These tiers range in price from $25 to $300 per user. The cheapest plan, created specifically with small businesses in mind, was added just last year to grow and maintain Salesforce’s customer base.
These changes to Salesforce’s pricing strategy over the years demonstrate the business’ desire to give customers what they want. While low prices and free trials can help draw customers in, a business that is willing to adapt its pricing strategy to meet customer needs will be more likely to keep them around, providing an appreciated boost to retention.