“Is it worth the price?”
It doesn’t matter if your prices are $10 a month or $100, customers will always be on the hunt for the best deal.
That’s why pricing is such a critical factor when it comes to membership and subscription businesses.
It’s not a one-time purchase that can be refunded, it’s an ongoing expense, and members will always be looking for the best ROI at the lowest price.
But you still have to make a profit and run your business, right?
There’s a fine line between giving members the lowest competitive deal and keeping profit margins in the black.
So what’s the best pricing strategy to keep your business thriving while still enticing customer to convert? Here are a few things to consider.
How Pricing Impacts Lead Generation
Pricing strategies can play a significant role in lead generation and retention.
Even when customers are faced with a relatively simple choice, there may be a hundred reasons why they choose one option over the other or no option at all.
If you had a gym membership, for instance, would you go more often if you already paid the full membership fee when you signed up ($600) or if you were just paying $50 per month?
You might think it doesn’t matter — you’re paying the same price either way — but in this case, research shows that monthly subscribers tend to be more vigilant about gym attendance than annual subscribers.
So what gives?
Pricing has a lot to do with psychology and the way that customers value your business. It’s not just about a set price, it’s about who that price models your brand’s values and meets customer needs.
The success of a pricing strategy can also be impacted by a variety of other factors.
Studies show that bargain hunters tend to go for the middle tier in tiered pricing structures, for example, and that “luxury” products tend to sell better when they’re more expensive.
So when it comes to setting a price for your membership or subscription business, you have to think about more than just cost-per-unit. You have to think about your offer and your audience (read more about that here).
There are several strategies for pricing that might fit your product or service, audience, and ultimate financial goals, ranging from fixed fees like an annual subscription all the way to tiered pricing and every combination in between.
Keep in mind that it’s possible to go through what Zuora calls a “pricing journey.”
In other words, whatever price you initially set may change over time, and that’s okay.
At the end of the day, it’s about choosing the right pricing strategy for your business. Not someone else’s business.
Here are a few of the basic pricing strategies you can use based on your membership (note that multiple pricing strategies can be combined at once).
1. One-Time, Fixed
The one-time fixed (flat rate) pricing strategy is simple: sell a product or service one time for a set fee.
While it’s not a subscription pricing strategy in and of itself, it’s typically used in conjunction with other types of subscription services in order to give customers a foot in the door.
Udemy, an online training platform, allows you to purchase single courses for a flat rate, for example.
A single purchase will give you lifetime access to that course. But if you want to train a team of people, they also offer an annual subscription priced per user.
Even though their basic service is one-time fixed, they have subscription options that cater to larger teams and enterprise-level businesses.
Amazon has also taken this approach by offering Subscribe & Save for select products that meet subscription requirements.
The benefits of a one-time fixed subscription strategy is that it’s often easier to sell. Offering a single product at a single price can get users in the door with a defined offer (that makes you money) while still giving you room to upsell later.
However, you still have some of the same pitfalls as traditional retailers. You only have one shot at securing a purchase and customers may or may not turn into subscribing members.
If your business model is reliant on regular monthly income, this may not be the best option for you.
2. Recurring, Fixed
The most common subscription pricing strategy is the fixed recurring strategy, where a single product is offered for a flat price charged on a recurring basis.
For example, Basecamp sells their services for a flat rate of $99 per month.
The recurring subscription strategy can also be used with tiered pricing, where you offer a flat monthly rate based on access to certain features (see #3).
A benefit of fixed recurring pricing is that it can be easy to sell, especially for customers that need to use a product or service regularly. With a simple flat rate, customers (members) can easily determine whether or not the subscription is right for them.
The downside is that if you price too high, it’s not always easy to sell that subscription.
Customers have to see that there’s value in what you offer in order to pay a price every single month.
Another thing you have to consider with fixed recurring pricing is billing frequency. Is it more appealing to sell your product at $10 per month or $99 per year (with a discount)?
For some members, it might make sense to buy an annual subscription, while others may prefer the flexibility of a monthly fee instead.
You have to assess your audience and their ability to pay when setting billing frequencies for fixed recurring subscriptions.
3. Tiered Pricing (Recurring, Fixed or Non-Fixed)
Tiered pricing is one way to structure your recurring fees in order to cast as wide of a net as possible.
This subscription pricing format typically offers several pricing models, each of which is associated with a different level of features or services.
ClassPass, for instance, offers different levels of class credits based on tiered flat monthly rates.
The first tier is typically something more cost-effective, like a free trial or low-cost basic version of a product or service.
The second and third tiers increase value, with one being a “preferred” tier for the majority of your target audience.
Tiered pricing adds the most value if you have the ability to upsell customers to the highest tier.
If you liked the tiered subscription model but have a diverse set of users, for example, you could do what Microsoft Office does and offer a tiered version of your product based on a one-time purchase or recurring subscription (with yearly and monthly options).
Combining pricing strategies can cast a wider net for the biggest lead generation depending on your product or service.
The benefit of the tiered strategy is that it appeals to multiple personas and there’s a clear upselling route to take when members want more access to specific features.
But you have to be careful how you price your tiers, as you might risk alienating users who are on the fence about signing up if your first tier (the cheapest one) is too expensive or doesn’t provide enough benefit.
You can solve that problem by using the “freemium” pricing strategy as your first tier, though.
4. Freemium (Recurring, Fixed)
The freemium strategy is a good option for membership businesses that want to build up their subscriber base quickly.
It works by giving members the option to sign up for free, usually with access to limited features or a stripped-down version of the product.
Evernote is one example of a company that successfully uses the freemium model. Their product is completely free to use and includes a lot of features.
But their premium version (Evernote Business) includes additional features for teams, like a dedicated space for communication and idea generation.
By presenting most of the product functionality for free, you can quickly grow a large customer base and build hype around your product while still upselling your ideal customer (i.e. higher paying customer) on a subscription.
The freemium model is great for driving new users, but you may run into the challenge of convincing free subscribers to upgrade to the paid version.
There needs to be enough value in your paid subscription service to warrant the upgrade.
5. Per User (Recurring, Non-Fixed)
This pricing strategy is also a recurring model but uses a flexible rate instead.
You charge based on either the number of units you sell or the number of users with access to your product or service.
GitHub, for example, offers both a fixed option (for Developers) as well as three per-user options in their tiered pricing for larger teams and businesses.
The per-user model is popular among SaaS subscriptions, as you can easily charge subscribers for their use of your application rather than a flat rate for unlimited usage.
You can also use it alongside one-time fixed products.
Perforce offers two different pricing structures, for instance. One is a fixed recurring annual fee and the other is a per-user price for companies with 25+ users.
Per-user pricing is worthwhile if you have a mix of individual users and large companies.
In fact, studies show that aside from fixed recurring, per user is the second most popular option for subscription pricing.
Just be cautious of your target audience when going with a per-user pricing strategy.
Individual subscribers will come in with a low price, and you’ll still make money for larger organizations that have multiple users, but small businesses with limited budgets may suffer under this model.
If you primarily target small businesses that would have high user numbers, they may not appreciate per user pricing.
6. Consumption or “Usage” Pricing (Recurring, Non-Fixed)
A common alternative to the per-user pricing strategy is the consumption (or per usage) pricing model.
Sometimes called “pay-as-you-go,” usage or consumption-based pricing is popular for membership businesses that are made up of small businesses with a limited starting budget.
Autodesk has a freemium option and a paid subscription option for those that want access to all of their APIs, but also allows users to purchase credits for only the specific APIs they want.
This allows subscribers to scale their API usage based on what they need.
Whereas Twilio uses the consumption model in a slightly different way by offering a pay-as-you-go option along with a volume discount and committed-use discount
The usage strategy is typically used by SaaS, IT and Cloud Services that suffer from high churn rates.
Customers stay happy by paying what they can while still getting access to the features they want while companies are still driving revenue and engagement.
The only downside is that the value of the product or service can sometimes get lost in the mix.
When people are paying “what they want” for your services, it may be harder to upsell them later on if what they have is working for them.
But on the opposite side of the coin, it’s a better alternative to fixed pricing for businesses that experience heavy user costs that eat into profits.
7. Custom Pricing (Recurring, Non-Fixed)
Another method you can use it to price based on the unique needs of your members by creating a custom quote for every user based on the value of your services.
For example, Carbonite offers both personal and small business plans as well as data protection plans, but within those options, the pricing strategy breaks down even further.
Their personal and small business plans are broken down by need, like protecting a single computer versus multiple computers.
This allows Carbonite to provide value to almost any customer while still taking advantage of the subscription model for revenue and retention.
While not the most popular option out there, the custom pricing strategy can be good for SaaS or IT subscriptions that have customers with diverse needs and support.
Final Thoughts
There is no one-size-fits-all solution for pricing your subscription business.
Pricing can be influenced by demand, pricing psychology, user need, revenue need, and any number of other factors.
Your best bet when determining the price for your membership business is to spend some time researching what others in your space are doing and what’s working for them.
You also want to look at your membership to see what value you can provide for members.
Remember, it’s not all about the bottom line. Your prices should provide benefit to your subscribers, too.
