The Power of Subscription Pricing

By Moira McCormick on March 9, 2016

A subscription-based pricing model is a payment structure that allows a customer or organization to purchase or subscribe to a service for a specific period of time for a set price. Subscribers typically commit to the services on a monthly, annual or seasonal basis.

Rather than selling products individually, a subscription sells periodic use or access to a product or service, or, in the case of non-profit organizations such as opera companies or symphony orchestras, it sells tickets to all of the scheduled performances for the whole season. Thus, a one-off sale of a product can become a recurring sale and can build brand loyalty.

The model was of course pioneered by magazines and newspapers, but is now used by many businesses, websites and software providers. Industries that use this model include book and music sales clubs, cable television, satellite television providers with pay-to-view TV channels, telephone companies, mobile phone companies, internet providers, business solutions providers, financial services firms and fitness/health clubs. Customers sign up and and carry on subscribing until they decide to cancel. Membership fees to some types of organizations, such as trade unions, are also known as subscriptions.

 

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Renewal of a subscription may be periodic and activated automatically, so that the cost of a new period is automatically paid for by a pre-authorised charge to a credit card or a bank account. A common model on websites, colloquially becoming known as the freemium model, is to provide one tier of content for free, but restrict access to premium features (e.g. archives) to paying subscribers. A video game website might allow gamers to play certain levels of the game for free, but to access additional levels or special features, a subscription is required. With some online games, the free version has pop-up advertisements but the subscription version is ad free; the subscription access may also include additional features.

Some newspapers and magazines include access to the digital edition with a subscription to the print edition, while others charge a higher rate for subscription access to both the print and digital editions. Economists have studied the economic rationale behind the different pricing models used by different companies. The monthly cost of subscription to Netflix is often lower than the monthly cost of subscription to the digital version of a major newspaper.

Subscription-based pricing is increasingly being used for cloud computing. In a subscription-based model, cloud customers typically pay upfront, prior to receiving access to cloud services. Prices are often based on the subscription's length and a longer subscription often means a lower cost.

Cloud customers that use significant resources can benefit from a subscription-based model, but if a customer only uses a small amount of computing resources, a subscription-based pricing model may not be ideal. Some cloud providers offer a subscription-based model that can adjust to reflect actual usage.

 

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Why Should I Offer Subscriptions?

An annual plan guarantees the customer will be around for at least 12 months. That’s a huge step up in customer lifetime value, and you’ll have more time to engage with the customer and ensure implementation of the product was successful. Annual contracts will improve your cash flow and help you recover customer acquisition costs. If a customer needs further persuasion, some form of discount could be offered.

If you have a wide range of customers, providing both annual and monthly options might be your best option – and offering different levels of service (at different prices) can be attractive to different types of customers with differing budgets.

 

Advantages of Subscription Pricing

for Vendors

  • a built-in base for up-selling 

  • more users will mean more profits because they are assured a predictable and constant revenue stream from subscribed individuals for the duration of the subscriber's agreement. Not only does this greatly reduce uncertainty and risk, but it often provides payment in advance (as with magazines, concert tickets etc.).

  • in integrated software solutions the subscription pricing structure is designed so that the revenue stream from the recurring subscriptions is considerably greater than the revenue from a simple one-off purchase. In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any specific issue. . However, a requirement of the system is that the business must have in place an accurate, reliable and timely way to manage and track subscriptions.

  • in the case of software, it's a way to attract a new and different type of customer that would want immediate access without having sufficient funds for a full license fee.

  • customer loyalty: it allows customers to become greatly attached to using the service and, therefore, more likely to extend by signing an agreement for the next period close to when the current agreement expires.

  • from a marketing analysis perspective, it has the added benefit that the vendor knows the number of currently active members, since a subscription typically involves a contractual agreement. This so-called 'contractual' setting facilitates customer relationship management to a large extent because the analyst knows who is an active customer.

  • additional benefits include a higher average customer lifetime value (ACLV) than that of non-recurring business models.

 

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for the Customer

  • flexibility: an ability to discontinue the service with no initial investment loss - or the customer can add users as their company expands.

  • no upfront payments: it makes enterprise software accessible to smaller or growing companies, or simply ones that have smaller capital budgets to work with.

  • better service from provider: as the provider no longer collects payment upfront, it becomes crucial that the customer stays with the provider for a certain length of time. This could lead to better service as providers have a lot to lose if clients discontinue subscriptions too quickly.

  • simplified pricing: enterprise software pricing can sometimes seem complicated and depend on too many factors, whereas subscription pricing solves that by organizing price in terms of only scalability and users.

  • convenience: consumers may find subscriptions convenient if they believe that they will buy/need a product on a regular basis and that they might save money. For repeated delivery of the product or service, the customer also saves time.

  • subscriptions which exist to support clubs and organisations call their subscribers "members" and they are given access to a group with similar interests.

  • more affordable: subscription pricing can make it easier to pay for expensive items, since it can often be paid for over a period of time.

  • an unlimited use subscription to a service for a fixed price is an advantage for consumers using those services frequently.

  • improvement of product/service: a psychological phenomenon may occur when a customer renews a subscription, that may not occur during a one-off transaction: if the buyer is not satisfied with the service, he/she can simply not renew the subscription – or find an alternative supplier. A one-off purchase model does not give vendors the incentive to maintain good relations with their customers.

 

Disadvantages of Subscription Pricing

for Vendors 

  • use of a per-shipment billing process offers more cancellation opportunities and the business has to deal with a lag time to reduce production after a cancellation.

  • most newspaper and magazine-type subscriptions are paid upfront, and this might actually prevent some customers from signing up.

  • it gives customers power they already had: the idea that customers need to be given permission to disable a service is not entirely true. The choice always belongs to the customer, and they can choose when to get their service no matter how they pay.

  • the price sensitive customer will notice that the cost rises steeply over time with the subscription model. It becomes a question of the value the customer sees in making payments upfront or at regular intervals. Subscription pricing affects the Operating Expenses budget, whilst licensing fee pricing comes out of the Capital Expenses budget – skewing customer perception of value.

 

for the Customer

  • it could be a disadvantage to a customer who plans to use the service frequently, but later does not. The commitment to paying for a whole package may have been more expensive than a single purchase would have been.

  • subscription models increase the possibility of vendor lock-in, and consumers may find repeated payments to be onerous.

  • subscription models often require or allow the vendor to gather substantial amounts of information from the customer (such as magazine mailing lists) and this raises issues of privacy.

  • in the case of subscription software, pretty soon the total cost becomes larger than that of a license fee. While there are still variable costs when you purchase the software, such as maintenance and support, those are lower than the monthly payment for subscriptions to enterprise software.

  • price is part of the vendor's marketing, and it may be that marketing subscription pricing will be easier to attract reluctant customers, but not necessarily better for them.

 

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Conclusion

Your business can generate revenue, produce new products and find new customers in several different ways. The traditional model involves developing a product or service and attracting customers who purchase directly from you. Subscription pricing can augment - or even replace - this traditional model. The best revenue model for your business will depend on the product or service you provide, what others in your industry are doing and the method your customers are most likely to use to search for your products.

As long as the pricing structure isn’t too complex (and make sure it's transparent), a company can use both monthly and annual subscription plans to boost revenue. Monthly payments may become the lifeblood of your business, but annual subscriptions secure you more business upfront, increase cash flow, and reduce losing customers (churn). The flexibility will ensure you can cater to different buyers at different stages in their business life cycles.

Subscription pricing is not meant to replace traditional licenses (which are still available). It is simply an extension of a traditional pricing plan – and currently a hot topic.

The subscription model should align customer and vendor toward common goals, as both stand to benefit if the customer receives value from the subscription. The customer that receives value is more likely to renew the subscription and possibly at an increased rate. The customer that does not receive value will simply bail out.

 

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