I probably get more questions on pricing than on anything else relating to building subscription models.
So I thought I’d dedicate today’s article to some best practices for pricing subscriptions.
- Keep it simple. There are so many terrific subscription billing platforms and digital tools these days. When it comes to pricing, anything is (from a technical perspective) possible. You can create multiple pricing tiers, but then you can also layer in micropayments, onboarding fees, usage charges, extra services and one-off purchases, just to name a few. But in subscription pricing, restraint is key. When I was a kid, I got a Crayola 64 pack. It became my goal to use every color in every picture. One day, I was drawing with my school art teacher. I noticed that she deliberately pulled a small number of colors from the box, and used that tight palette to great effect. Remember, if your pricing is complex, your customers need to become experts on your pricing in order to ensure they’re buying what’s best for them. And if they have to become experts to get what’s best, they’re going to worry that if they don’t have their wits about them, they might NOT get what’s best for them. And that makes it harder for them to relax and trust that you will take care of them, anticipate their needs and give them the best that you have to deliver on your forever promise.
- Subscriptions can serve many functions. Price accordingly. Disney, Apple, Amazon and Netflix all have streaming content subscriptions. On the surface, they might all look similar, but if you understand the business models of these companies, you’ll see that their streaming content subscriptions serve different roles. For Netflix, their subscription is their core product, and primary source of revenue. For Apple, it’s a way of deepening the customer’s engagement with Apple hardware, AppStore and other software offerings. For Disney, it’s a way to stay connected with fans across many channels, including TV, movies and theme parks. And Amazon pretty much gives away their streaming content with their Prime subscriptions, as one more benefit, beyond the headliner of “free shipping”. If your subscription is a marketing tool, make sure you consider its value as a marketing tool as well as the value of the direct revenue it drives.
- Price not just for acquisition. Also price for engagement, expansion and retention. Most of the time, when you’re coming up with a price for a product or a service, your primary goal is to get the customer to buy. But the moment of the transaction is the starting line, not the finish line, for revenue. You want to price in such a way that people want to stay and maybe even expand the relationship by upgrading or buying additional services, or bringing in their network. It doesn’t matter if you attract new subscribers with your low introductory pricing if you can’t keep them for the long term. This is especially true if new subscribers are unprofitable–for example, if the acquisition costs or onboarding expanses are higher than the first period payments.
- When it comes to value proposition, cost savings is just the starting point. When you’re thinking about pricing, remember that cost savings is expected in any subscription–anyone committing to paying on an ongoing basis expects at least a small discount for their loyalty. Cost savings might attract early subscribers, but it is an easily replicable strategy and not differentiated. It’s also not an emotional benefit. If your subscription was started as a “cost savings in exchange for commitment” kind of value proposition, use that as your starting point, and explore other, more emotional and more differentiated sources of value to layer in over time.
- Market research can only take you so far. My roots are in marketing and I love market research. But market research alone won’t tell you how your subscription is going to do. Market research can tell you which offer someone might find more attractive, or what offer they’re likely to click on, but it doesn’t provide insight on how frequently they’ll actually use the subscription or how long they’ll stay. Engagement and churn are key metrics that go into understanding the success of the subscription. Many organizations focus too much on the offer that will get a buyer to buy, and not on what will get the right buyer to buy, and stay and recruit their friends and colleagues.
- Tiers come later. I just saw some interesting data from Zuora and McKinsey that indicated that the most successful companies have one product or less per million dollars of revenue. In other words, when you’re just getting started, one subscription offer is enough. Many organizations come to me before they launch, with complex pricing grids indicating multiple offerings optimized by usage, features, service level and other elements to have something for everyone. You are much better off launching with a single subscription offer, optimized for a very specific group. Then as you learn, you can layer in more benefits to attract and serve additional segments, and maybe to refine your pricing to include multiple tiers, or another layer of pricing complexity, such as usage. If you start with multiple offerings, that risks confusing the market, and distracting the team.
- Usage could add a layer of value, but only in certain circumstances. Early in my career, I advised a company that provided tools for market researchers. They had a single offering and a fixed price–something around $50/month. Pretty quickly the subscription started being used by sophisticated teams in Fortune 50 companies, who could afford to pay a lot more than $600 a year, and who were using the subscription to reach millions of people. The organization quickly realized that they weren’t capturing their fair share of the value they were creating, and adjusted their pricing to charge more based on usage. They actually eventually optimized pricing by number of seats in the organization that were using the subscription, as well as number of people being touched by the subscription and even by the features being used. And then they added a whole layer of features around a corporate dashboard to track and manage the usage of the subscription across the enterprise. They learned quickly, but it would have been hard for them to anticipate from the start exactly how the product would be (mis) used and how to price to manage the value. For larger companies and especially those in the B2B space, it can be useful to charge more to companies that are using the subscription more heavily, but maybe it’s not the most important thing to focus on on day one.
- Hiding the cancel button will cost you in the long term. Many CFOs have bragged to me how they have expanded customer lifetime value (CLV, a key metric in subscription businesses) by adding complexity to the cancel sequence. By making it harder for customers to cancel their subscription, requiring a phone call to cancel for example, or not letting subscribers keep their data, companies can indeed enjoy additional short term revenue. However, “hiding the cancel button” reduces trust, causes customers to share their “horror stories” with friends and on social media, and makes it much less likely that a lapsed subscriber will ever return. Netflix, one of the most successful of all subscription businesses, has gone in the opposite direction.
Not only do they encourage subscribers to “cancel anytime”, they don’t offer annual subscriptions because it would be too binding. They recently introduced a new policy of automatically cancelling any subscription that hadn’t been accessed in a year or more–that is, if someone wasn’t getting value from their subscription for 12 months, Netflix doesn’t want to take their money. More generally, we’re seeing an increase in the “pause” button feature, which allows subscribers to take a break from a subscription without losing their data or having to go through a complex set up process again.
- Evaluate the ROI of free. Some subscriptions offer a free trial. Other subscriptions offer a free subscription alongside a paid premium subscription for a “freemium” model. Sometimes offering a free trial or freemium membership makes sense, and sometimes it doesn’t. It’s a useful tool often enough that I advise every organization to devote at least one brainstorming session to exploring the ways they might strengthen their business model through the use of “free”. This doesn’t mean every organization should have a free trial or free subscription option. Just consider whether there’s a role for free, and if so, what the return on the investment of free might be. For example, if your biggest challenge is that people don’t understand the value you provide, or don’t believe your offering is as good as you say, a small taste might dramatically increase conversion (a free trial). Or if the value to your paid subscribers increases with every new free subscriber, maybe because of content generated by the free subscribers, or access to them, you might have a network effect which justifies that free offering. Especially with digital subscriptions, there is often a place for free in your pricing model. Don’t overlook it.
- Don’t just copy someone else’s playbook–pricing should be unique to your organization! You can get great insights by studying how other organizations have incorporated subscription pricing into their business models. Amazon, Salesforce, Dollar Shave Club, and Peloton are just a few of the many organizations that benefit from recurring revenue. But each model is unique in terms of what you get with your subscription and what costs extra. Depending on the value you offer, the customers you serve, the other organizations trying to solve the same problem for your audience and many other variables, you will come up with a unique structure to capture your fair share of the value your organization has created. There are very few metrics that work across companies, let alone across industries–and yet I am still asked “what’s a good price for a consumer subscription” or “how much should we charge to onboard a new b2b subscriber”? The answer is nearly always “it depends”. Be especially wary of advisors who have worked with just one subscription business and want to apply the same processes to your organization. Over time, you’ll start to see patterns and be able to make some educated assumptions about appropriate benchmarks, but not just from a single company.
Subscription pricing should be easy for the buyer. They should be able to relax into a subscription, trusting that the organization is going to continue to evolve the offering to help the subscriber achieve their ongoing goals and solve their ongoing problems.
But that doesn’t mean that it’s easy to develop a subscription pricing model. So be thoughtful and experimental. Label your early offerings “beta” and limit their usage, in case you need to change things as you learn. And above all, always focus on aligning the goals of the organization with the goals of the subscriber. If you do that, you’ll develop both the recurring revenue that makes your organization valuable, and the insights that will help you deepen those trusted customer relationships.