CFO

Creating an Integrated Subscription Pricing Approach

By Megan O’Brien, Brainyard Finance & Business Editor
May 19, 2021
Subscription Pricing

In short:

  • Pricing, particularly in the subscription world, can be a complex process consisting of different models, strategies, tactics and methods.
  • Pulling all the different components together cohesively requires research and a willingness to experiment to find the optimal approach.
  • Even after the initial process is completed, plan to monitor and change pricing to ensure that the approach still meets the needs of the business and customer demand.

You’re reading part VI of a series.

Part I: Subscription Pricing Models

Part II: Pricing Strategies

Part III: Subscription Model Q&A

Part IV: Psychological Pricing Tactics

Part V: Pricing Methods

All great sagas come to an end. Frodo completes his quest to Mordor. Dante enters Paradiso. Odysseus makes it home. This piece marks the conclusion of our subscription pricing series.

So far, we’ve demystified subscription pricing models, strategies, psychological tactics and methods. Now, we’ll cover how all of those components work together to build a comprehensive pricing approach.

Assembling Your Pricing Approach

Let’s analogize the construction of your pricing approach to constructing a house:

  • The pricing method, which is the process a company uses to ascertain the price of its product or service, is the foundation of the house. Like a house is built on a foundation, a pricing approach is built on the pricing method’s results.
  • The subscription pricing model, which is the structure created for the pricing, serves as the framework for the house.
  • The pricing strategies and psychological tactics are the finishes, the parts that draw in the prospective homebuyer. The siding, the trim, the paint and the windows are those external-facing components that convince them to look into the home further.

Pricing Method

In the foundational first step, we are determining what the price needs to be in order to:

  1. Cover our fixed and variable costs
  2. Compete with other players in the market
  3. Garner a profit

Those are the minimum requirements that need to be addressed to ascertain that base price. However, particularly if pursuing a value-based pricing method, setting the foundation will likely require additional steps like market research, surveys and buyer personas to make sure it is the optimal price to meet business needs and customer demands.

Now, in your second stage, you are building upon that foundation and determining the framework. While the price has been ascertained, its structure has not. For instance, an online video editing subscription business quantifies its buyer personas and reaches $25 per user a month.

Pricing Model

But we don’t stop there. That would be like setting up the skeleton for the house’s exterior walls and calling it done. Even in this structural stage, there are more steps — you build out the framework of the interior walls, roof and floors as well. So, once the $25 price point has been determined as a starting point, you delve into the model portion of the equation. For example, could you appeal to more users by instituting a tiered model with $25 being the cost of a standard plan, $15 being the cost of the basic and $35 being the deluxe? Or, the $25 could be the starting point for one user with standard features and then additional pricing options for more users and capabilities to increase adoption as a part of a user-based model. Essentially, this step is making sure that your product and its pricing meets as much of your customer base as possible.

Pricing Strategies & Psychological Tactics

When you’re scrolling through Zillow for dream houses, it’s not necessarily a house’s framework that draws you in. That will be integral down the line when you inspect the house in-person, but some of the more superficial details — the paint, the trim, the finishes — make you set up a showing. The same is true for pricing.

While an effective model is crucial, it might not be enough to draw customers in — which is where the third stage of pricing strategies and psychological tactics come in. Perhaps that same video editing platform adopted a tiered model. It can then add a free trial strategy to that pricing approach to encourage customers to try their product. Or, perhaps instead of charging $25, the company opts to use the charm pricing tactic and set it at $24.99. Gild the prices through strategies and tactics to attract customers to the product — and then retain them through an optimal pricing method and model.

Common Pricing Issues and Solutions

KPI: Profit

Issue: Perhaps customers are flocking to your subscription offering; attraction and retention are not an issue. However, profits are stagnant or low. In this scenario, the culprit is likely bad unit economics.

Solution: First, ensure that you have a full understanding of your company’s current fixed and variable costs. In particular, are your customer acquisition costs (CAC) lower than your customer lifetime value (LTV) numbers?

Solutions to bad unit economics or a product that isn’t priced for growth include: raising the price, getting rid of a freemium option, eliminating an “unlimited features” tier and increasing upselling efforts. Companies can also consider changing their subscription model to increase profits. For instance, if a company is charging a flat rate for access to all features, perhaps it will switch to a per-added-module model. Unbundling features into separate, add-on services can produce more profits without changing the value of the core product and thus deterring customers.

KPI: Churn rate or renewal rate

Issue: A high churn rate or a low renewal rate can indicate that customers have an issue with the product: perhaps it’s lacking in some area or doesn’t fit their needs. It could also indicate that they’re finding a better offer with a competitor.

Solution: Understand how customers are using your subscription and what is causing them to leave. The high churn might not be solely pricing-related, but tweaks in how the value is presented, which features are included at each price point and ensuring pricing sensitivity isn’t the culprit can help reduce churn.

KPI: Conversion rate

Issue: Your website has the visits; your sales team has the leads; yet your conversion rate remains low. It could be a product issue, or even an issue with your website design or the effectiveness of your sales team. It could also very well come down to the formatting of or numbers behind your pricing options.

For instance, the freemium and free-trial pricing strategies are great for attracting new customers. But if not followed by conversion to the paid version of the product, there’s a problem. While a “good” freemium and free-trial conversion rate varies by product and target customer, it’s generally in the low single-digits. Rates of free-trial-to-paid conversion (which doesn’t require customers to put a credit card on file initially) vary from low single-digits to over 25%. Rates of trial-to-paid conversion (which does require customers to put a card on file) are significantly higher, ranging from 30–50%.

Solution: In solving conversion rate issues, the goal is to find out why your users are interested but not committing. Pop-up surveys on your site or having the sales team follow up with leads can illuminate these reasons. It may be that a competitor is undercutting your prices or that your pricing sensitivity analysis was off, giving users sticker shock.

In the case of free trials and freemium versions, reevaluate your pricing tiers. For instance, you may need to tweak your freemium version to include fewer free features or more restrictions to encourage upgrades to the paid plan. Other options include offering freemium users a trial of the paid plan so they can see its value for themselves and limiting use of the freemium version by users, not features, so customers can fully experience the offering. Particularly with low conversion rates of free trials, conduct research to understand the obstacle to upgrades. Is it pricing sensitivity? Are free-trial customers equipped with the information needed to get the full value out of the product?

Monitoring and Optimizing Pricing

Like we’ve said before, pricing isn’t a “one-and-done” journey. Perhaps the pricing approach has gone swimmingly. While it may be tempting to take the “if it ain’t broke, don’t fix it” mantra to heart, revisiting and making changes to pricing can further optimize and help promote growth. The market, customer demand and your competitors will be shifting, which means your pricing needs to be evolving in turn.

You should evaluate your current pricing approach every three months, and pricing changes should happen every six months for new companies and every 6-12 months for mature ones, according to research by Price Intelligently. If it's been over a year since changes were made to the pricing approach, it’s likely outdated and you’re missing out on possible monetization opportunities. While small tweaks that only impact subsets or prospective customers can happen in between the six month cadence, bigger changes that impact the majority of customers should not be implemented more frequently than that.

Pricing Shifts and Ideal Cadence

Significant Pricing Changes (can make every 6-12 months) Interim Pricing Tweaks (can make more frequently)
Raising or lowering prices Moving or adding features to tiers
Adding or removing pricing tiers Implementing deals, discounts and offers
Shifting to a different pricing model Lowering the thresholds for discounts (i.e. in volume and tiered pricing strategy scenarios).
Reducing or increasing the value metric (i.e. increasing the amount of users allowed in each pricing tier).

You should always be testing new combinations of prices, offers, deals and models to determine the optimal pricing approach for your product at that current time. After making a change or even just a minor tweak, monitor the aftermath. Watch the sales volume immediately after a shift to gauge whether it has a positive or negative impact.

The Bottom Line

Pricing is a dynamic and never-ending process. There will always be room for further optimization to better meet the needs of your customer and grow your business. It may be time-consuming, but crafting a comprehensive, well-thought-out pricing approach will pay dividends — and can be the difference between success and failure of the business.

  

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