The Pros and Cons of Subscription Pricing

By Moira McCormick / May 30, 2018
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The Pros and Cons of Subscription Pricing

Subscription pricing is a business model where a customer must pay a subscription to have access to a product or service. The strategy was initially developed by magazines and newspapers, but the number of companies and websites using this model for their products and services is increasing exponentially. 

Netflix, Spotify and Amazon Web Services are all subscription and recurring revenue business models.  Subscription pricing models can be found with software providers, financial services, club membership fees, mobile phone companies, cable television, gardening services as well as newspapers, magazines and academic journals.

A subscription model is an option for products and services sold both online and offline and is beneficial in industries where customers use the product continually, such as the music sector where subscription plans from companies like Spotify and Pandora have taken off.

When implementing a subscription-based pricing strategy it is important to consider the needs and preferences of your target audience as well as the budget for your business. If your prices are too low you may not be able to cover your costs and if you charge too much, customers will compare price to value and decide not to subscribe.

 

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Your Value to The Customer

A good starting point would be to ask your customers what they believe the value of your product or service is.  An alternative method is to A/B test several price points and see which has the higher conversion rate.

Also consider the customer lifespan - if you find that a higher price has a lower customer conversion rate but higher customer lifetime value this is obviously the better choice.

 

Why Choose Subscription Pricing?

  1. Businesses benefit because they are assured a predictable revenue stream from subscribers for the duration of an agreement. This greatly reduces uncertainty, often provides payment in advance while allowing customers to become attached to using the service and more likely to remain loyal.
  1. The subscription pricing structure in integrated software solutions is designed so that the revenue stream from the recurring subscriptions is greater than the revenue from one-off purchases.
  1. With subscriptions to magazines it increases sales by not giving subscribers the option to reject any specific issue. This reduces customer acquisition costs and allows for personalised marketing, upselling and cross-selling using the data collected on subscribers.
  1. Renewal of a subscription may be activated automatically and paid for by a pre-authorised charge to a credit card or a bank account. A one-time sale of a product can therefore become a recurring sale, building a more committed customer base and a higher average customer lifetime value (ACLV) than that of nonrecurring business models.
  1. Consumers often find subscriptions convenient, time and money saving. As subscription pricing is paid for over a period of time it can make a product seem more affordable.
  1. A subscription model forces the supplier to improve its product and add value for customers so they want to renew their subscription.

 

Reasons Not to Choose Subscription Pricing

  • On some occasions the commitment to paying for a subscription may be more expensive than a single purchase would have been.
  • Subscription models increase the possibility of vendor lock-in, which can have business-critical implications for a customer if its business depends on the availability of, say, some particular software.
  • Subscription models often require or allow a business to gather substantial amounts of information from the customer, raising issues of privacy.

 

Subscription Pricing Models You Can Use

Freemium

Providing one tier of content for free but restricting access to premium features to paying subscribers only.

 

Promotional Strategy

Consider offering a free trial or providing the option to try one or two months of a paid service for free. Promotional incentives can be a great method for convincing wavering customers to renew a subscription.

 

Pay as you go

For certain types of business models, it can be practical to send a bill to customers at the end of the month for the services that they used instead of billing for a single fee up front.  Cloud computing services such as Amazon Web Services use this model.

 

Overage

In the offline world, this type of pricing is most common in car leasing or rentals where there is a base price to a certain mileage and then a price per extra mile.

 Online, overage is used for communications and data storage:

  • When you want to create a 'teaser' package with a relatively low included usage, to encourage an upgrade.
  • When flat rate or unlimited plans cause customers to become unprofitable.
  • When you wish to establish a minimum spend with customers: clients might negotiate a lower rate based on a committed level of volumes – the 'base rate' includes the commitment and the usage is as negotiated.

 

Mix and Match

In order to be successful you can mix and match pricing components for your particular subscription business, as well as creating your own customised pricing.

If your competitors are only selling their goods or services on a one-off transactional basis it might be worth your while to consider selling via a subscription model. Subscriptions can make products and services seem more affordable.

Optimal pricing for your subscription offerings is critical to your success so when establishing the best price point take into consideration such factors as your business model, your costs, your competition and your value to the customer.

 

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What are the Most Popular Pricing Strategies by Industry Sector?

7 Out of the Ordinary eCommerce Pricing Strategies

 

Sources

https://www.chargebee.com/blog/subscription-pricing-strategies/

https://blog.fusebill.com/4-ways-to-determine-subscription-pricing

https://hbswk.hbs.edu/item/whats-the-future-of-the-subscription-model https://www.zuora.com/guides/innovative-subscription-pricing-strategies/

https://en.wikipedia.org/wiki/Subscription_business_model

https://blog.fusebill.com/2012/11/05/pricing-strategy-base-overage-pricing

https://www.mckinsey.com/industries/high-tech/our-insights/subscription-myth-busters

https://searchcloudcomputing.techtarget.com/definition/subscription-based-pricing-model

Monetizing Innovation by Madhavan Ramanujam and Georg Tacke 2016

Topics: Subscription Pricing

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