
How to Price Subscription Services to Attract and Retain Customers 👩🏼💻
Digital subscription businesses pour their heart into creating a product that solves real problems. But when it comes to pricing, some are unsure if they’re getting it right. Many professionals find themselves struggling with pricing optimisation, often underestimating its importance. Yet, surprisingly, most companies spend less than 10 hours a year on pricing. It’s time to change that. Here’s a clear five-step approach on how to price subscription services and your pricing strategy when necessary.
>Download Now: Free PDF How to Drive Pricing Strategy to Accelerate Sales & EBIT Growth
How to Price Subscription Services Step 1: Find Your Sweet Spot
Let’s start with the first step: identifying the right price point for your product. You might be tempted to set prices based on what your competitors charge or how much it costs to produce your product. However, the most effective approach is value-based pricing. This method focuses on how much value your product brings to your customers.
One effective strategy is the Van Westendorp Price Sensitivity Model, which helps identify the price range that potential customers are comfortable with. This approach begins with a simple survey that poses four key questions:
First, you ask at what price customers would start to doubt the quality of your product. Next, you inquire about the price point that feels like a good deal. Then, you seek to understand when the product begins to feel expensive, and finally, you want to know at what price the product becomes too expensive.
After collecting these responses, you can visualise the results on a line graph, with price on the x-axis and the number of responses on the y-axis, resulting in four intersecting lines.
These intersections provide valuable insights. The Point of Marginal Cheapness represents the lower limit, where customers feel the product is “too cheap” and “not a good deal.” Conversely, the Point of Marginal Expensiveness indicates the upper limit, where the product is perceived as “too expensive” and “not quite expensive yet.” The Optimum Price Point (OPP), found where the “too cheap” and “too expensive” lines intersect, represents the ideal price that keeps the most customers satisfied.
You can learn more about this method by visiting this link. While there are various methods for establishing value-based pricing, the main takeaway is to focus on your customers’ perceptions when determining prices.
How to Price Subscription Services Step 2: Segment Your Audience
Once you know your price point, it’s time to look at your customers more closely. Not everyone is willing to pay the same price. This is when customer segmentation becomes handy.
Start by gathering data on your customers through surveys, purchase history, and demographic information. Next, identify common characteristics among your customers, such as age, location, or buying behaviour. Then, group them into segments based on these traits. Finally, analyse each segment to understand their specific needs and price sensitivities.
By tailoring your pricing strategy based on these segments, you can meet diverse customer needs without losing potential revenue. Offering different tiers or packages can ensure that everyone finds a suitable option.
Step 3: Get Creative with Tiers
Speaking of tiers, let’s talk about how to design them effectively. A great model to consider is the Good-Better-Best (G-B-B) approach. Think of General Motors, which created distinct car brands at different price points. This strategy ensured that there was something for everyone, from budget-conscious buyers to those seeking luxury.
In the subscription space, companies like Spotify and Netflix have successfully implemented tiered pricing. They offer various plans, each catering to specific customer needs and budgets. This method not only maximises your audience reach but also minimises the risk of cannibalising your offerings.
How to Price Subscription Services Step 4: Use Smart Discounting
Discounts can be a powerful tool for attracting customers, but they can also be a double-edged sword. You want to ensure that discounts drive long-term value rather than short-term gains.
One effective approach is to offer discounts for annual plans compared to monthly ones. For instance, if you sell an annual subscription at a 30% discount, you’re not just getting immediate revenue; you’re also reducing churn by locking customers in for a longer period.
How to Price Subscription Services Step 5: Personalise the Customer Journey
Finally, once customers have signed up at a discounted rate, don’t leave them there. It might seem easy to keep them at that price, but you risk missing out on revenue. Instead, develop a personalised journey to bring them closer to your standard pricing.
For example, you could gradually increase their price while keeping them engaged with your product. Offer additional features or premium services to loyal customers, while incentivising less engaged users with discounts or downgrades. This way, you cater to individual customer needs while maximising your overall revenue.
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Subscription-Based Pricing Model for Customer Growth and Retention
Pricing optimisation isn’t just about numbers; it’s about understanding your customers and creating value. As you move forward, take a moment to assess your current pricing model. Are you truly understanding your customers’ needs? Are you offering the right products at the right prices? The answers might surprise you. It’s time to rethink your approach to pricing and unleash the full potential of your subscription service.
You now have a clear path forward with practical steps to follow. Remember, every business is unique, so take the time to consider how these strategies apply to your specific situation. Feel free to reach out if you have questions or want to discuss your pricing needs further. We are here to help you navigate this journey.
For a comprehensive view of maximising growth in your company, Download a complimentary whitepaper on How to Drive Pricing Strategy to Accelerate Sales & EBIT Growth.
Are you a business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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