In early 2019, 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 that 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 at the same time from $39.99 to $44.99—though its prices have since been raised again.
In the last few years, many other streaming options have emerged in the market, including services from Apple, AT&T, Disney, and NBCUniversal. However, Hulu’s price decrease positioned the business as the cheapest option among competitors at the time.
Prior to 2019, Hulu boasted more than 25 million subscribers—an increase of 48% from the previous year. Since this change to its pricing strategy, Hulu’s subscriber base has continued to grow steadily, reaching nearly 43 million subscribers before the end of 2021.
Clearly, competition for subscription-based businesses is on the rise. UBS Financial Services predicts the subscription market will grow by 18% year over year in the next four years to be worth $1.5 trillion by 2025.
In this ever-growing market, it’s important for your subscription business to regularly re-evaluate its 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 subscription 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 your competitors 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.
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 was struggling 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 didn’t include costly ingredients that were hurting Blue Apron’s bottom line.
While supply chain issues continued to plague the business until early 2020, when its stock went up by a whopping 98% thanks to a pandemic-fueled boom, taking pricing strategy risks is imperative for struggling subscription businesses hoping to stay afloat.
2. You’re not hitting profit goals.
In March 2019, beauty subscription business Birchbox announced it was raising its prices for the first time since its launch in 2009.
Previously charging all customers $10 monthly, the business’ new pricing strategy raised Birchbox’s 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 increased to:
- $12/month for a yearly subscription,
- $12.50/month for a six-month subscription, and
- $13/month for a monthly subscription.
Additionally, prices wouldn’t go up for Birchbox VIP members who spend at least $300 a year on the site.
As part of the move, Birchbox promised subscribers improved service and a better customer experience. In exchange, Birchbox gets to pump up its bottom line.
Increasing profits is one of the main reasons a subscription company should consider switching up its 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 2019 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 2019 pricing strategy change raised 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 rewarded 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 the effect your pricing strategy has. 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.
Consider Salesforce, which has steadily risen as a leader in the SaaS market since it was founded in 1999.
- In March of 2019, the business reported a 26% rise in quarterly revenue.
- Salesforce also saw its net income increase to $362 million for 2018.
- This was 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 business offers its sales cloud product with four pricing tiers designed to cater to different types 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 in 2018 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.
Working with the right tools for pricing strategy flexibility
While low prices and free trials can help draw customers in, a subscription business that’s willing to adapt its pricing strategy to meet customer needs will be more likely to keep them around, providing an appreciated boost to retention.
To easily update your pricing strategy, though, you must have the right tools in your arsenal. If your process is largely manual or you use a clunky legacy software solution, catalog inflexibility and risk of human error will make the process a real headache for your team.
Instead, a modern automated billing software facilitates easy pricing and plan adjustments that can be made in just a few clicks, saving precious time and leaving little room for human error.
And when you’re looking to hit profit goals, every dollar saved in efficiency counts.
FAQs about Changing Pricing Strategy
Q: What are the signs that indicate it’s time to change my business’ pricing strategy?
– If you face challenges in acquiring customers due to high competition or lack of resources compared to larger competitors, it may be time to consider lowering your prices.
– See if your approach aligns with your business goals and market competitiveness. Re-evaluate your pricing strategy to make necessary adjustments.
– A significant increase or decrease in demand for your product due to changing economic conditions could be a sign.
– Consider how every change in price impacts new customer acquisitions and revenues. If profits aren’t where you want them to be, raising prices may be a solution to maintaining high revenue.
Q: How did Hulu benefit from altering its pricing strategy?
– Hulu, the video-streaming service, dropped the price of its popular subscription plan and increased the price of its live-TV option in 2019. This shift differentiated Hulu from other emerging services in the market, positioning it as a cost-effective choice.
– Post-change, Hulu witnessed a consistent growth in its subscriber base.
Q: What can we learn from Blue Apron’s pricing strategy experiments?
– Blue Apron experimented with different strategies, such as selling discounted meal kits in Costco stores and reduced-priced subscriptions on Jet.com.
– One key step was selling stripped-down versions of meal kits at significantly reduced prices, which helped tackle the problem of high unit costs.
– These examples illustrate that addressing supply chain issues while experimenting with pricing can be beneficial for struggling businesses.
Q: How can having a diverse pricing strategy help businesses like Salesforce?
– Salesforce overcame the challenge of customer retention by offering a dynamic pricing strategy. Initially, Salesforce offered only limited pricing options.
– Over time, Salesforce updated its sales cloud offerings with four pricing tiers catering to distinct customer categories, ranging from $25 to $300 per user.
– Thus, willingness to adapt to customers’ needs by enhancing pricing strategy can enhance customer retention.
Q: What were the implications of Birchbox’s pricing transformation?
– Birchbox adjusted its pricing strategy to amplify its profits and become more appealing to potential buyers.
– By increasing its monthly subscription fee, Birchbox was not only able to improve its bottom line but also offer better customer service and experiences.
– Birchbox’s strategy expands the revenue source from the subscription itself rather than depending solely on website sales.
Q: Why is having a flexible pricing structure important in subscription-based businesses?
– A flexible pricing structure allows a business to adapt according to the needs of different customer segments, ultimately increasing customer retention.
– Low prices and free trials might attract customers initially, but adapting the pricing strategy in accordance with customer preferences keeps them around.
Q: What are some efficient ways to update pricing strategies in a business?
– Modern automated billing software can make pricing and plan adjustments in just a few clicks, saving time and reducing the risk of human error.
– This not only facilitates easy changes to your pricing strategy but also contributes to efficiency, thus saving costs.
