5 Subscription Based Pricing Models, and How to Choose the Right One
So, your company has decided to pursue a subscription offering, but which pricing model should you use? Subscription pricing models range from a simple fixed rate to more complex options, including ones that charge by usage and establish tiers. As a business, it is vital that you examine your produce, market, competition, revenue drivers, and more when choosing the best pricing model to optimally monetize your offering.
As tempting as it may be to ‘go with your gut’ or ‘go with the cheapest’, this approach can often prove a less-than-optimal strategy for monetization, as well as for customer acquisition and retention.
When choosing the correct pricing model, ask yourself the following.
- Which pricing model should we use?
- Which pricing strategies can we implement to attract and retain customers?
- Which pricing method should we use to calculate the price of our product or service?
5 Subscription Based Pricing Models
1. Flat Rate.
Definition
Flat rate pricing is a subscription model that offers a single price per month or year for all features and all levels of access. Customers are charged the same amount each billing cycle.
Best For
Companies with a product that has limited features and a single buyer persona. Flat-rate does not work well for companies in which resource costs might vary significantly from user to user, which is why flat-rate pricing does not generally work well for B2B SaaS companies, for example.
Benefits
· Simple to understand, communicate and sell to potential customers.
· Easier and more predictable billing process, simplifying accounts receivable and other accounting features.
· Frees up time.
2. Tiered
Definition
Tiered pricing is a strategy employed to define a price per unit within a range. Tiered pricing works so that the price per unit decreases once each quantity within a ‘Tier’ has been sold. The lower price tiers will draw in customers, who may eventually move to higher priced packages.
Tiered pricing as a model is used to sell products within a particular price range. Once you fill up a tier, you move to the next tier, and will be billed according to the number of purchases you make in those respective tiers.
Best For
Tiered pricing is best used by companies that may have many product features and a diverse customer base with varying needs, budgets, and usage norms. Tiered pricing is extremely popular among SaaS companies.
Benefits
· Boosts sales by encouraging upgrades to higher ties
· Brings in more revenue with higher volume sales
· Attracts a broader range of customers
3. Usage-Based.
Definition
Usage-based pricing is a consumption-based pricing model in which customers are only charged when they use a product or service. The customer is typically billed at the end of each billing cycle for the amount used, as opposed to a flat or subscription pricing model where the user is charged a fee regardless of how often they use the service.
Best For
This pricing model is best for products or services of which customers usage is likely to vary widely. This offers customers the most flexibility, attracts new customers with low upfront costs associated with low usage and heavy users that may require more resources from the business are charged more than less-frequent ones.
Benefits
· Offers customers the most flexibility
· Attracts new customers with the low upfront costs associated with low usage
· Heavy users that may require more resources from the business are charged more than less frequent ones
4. Per-Added-Module.
Definition
With the Pre-Added-Module model, you’ll price the product based on the functionality offered to your customers. There is a ‘base product’ and the possibility to add modules for more functionality – at a higher cost.
Best For
Companies with modular functionality that is easily added to their core product – and a customer base that values the ability to choose the functionality it needs.
Benefits
· Product scales with the customer
· Compensates for features that require more resources from the business to offer
· Strong upgrade incentive
5. Per-User
Definition
Per user pricing is a SaaS pricing model that charges a subscriber for each user of its product. For example, some subscription businesses charge £9.99 per user, per month, while others will charge a flat fee for unlimited monthly usage.
Best For
Companies with smaller numbers of staff
Benefits
- Simple to understand, communicate and sell.
- Revenue scales directly with user adoption
- More predictable revenue generation than something like a usage-based model.
What do companies get wrong about subscription pricing?
· Basing pricing on instinct or ‘gut feel’ over data
Often in new companies, it may seem logical to base your pricing on competitors' strategies – or you may even be tempted to guess where your subscription pricing should start. But as you begin quantifying your ideal customers, you’ll understand what they truly value in your product, and what they’re willing to pay for it. Data needs to be at the heart of every pricing decision you make. Failing to base your subscription pricing on hard data could lead you to overprice or under-price your product or services.
· Updating pricing infrequently
Price points that work well in the early days of your subscription business often end up under-pricing your product over time. As your product or service improves over time, you should vary your pricing to reflect these changes. Not revisiting your pricing regularly can have a negative impact on your bottom line.
· Overlooking a core revenue driver
Companies spend countless hours looking at how they can improve their product and acquiring new customers, however rarely enough time is spent on pricing. These discussions can often be overshadowed by acquisition; however, pricing is one of the most important levers for revenue growth.
So, to summarise, what are the main points to consider when selecting your pricing model?
1. Costs – Be Financially Informed. Work out the costs involved with running your business.
2. Customers – Know what your customers want from your products and services, and are they driven by the cheapest price or by value that they receive
3. Positioning - Once you understand your customer, you need to look at your positioning, where do you want to be in the marketplace? Do you want to be in the marketplace? Do you want to be the most expensive, luxurious, high-end brand in your industry, the cheapest, beat it by 10% brand or somewhere in the middle? Once you have decided, you will start to get an idea of your ideal pricing?
4. Competitors – This is one of the key times you can give yourself permission to do some customer snooping. What are they charging for various products and services? What inclusions and level of service are they offering for those prices? What customers are they attracting with their pricing? And how are they positioned in the marketplace? The answers to these questions will give you an industry benchmark for your pricing
5. Profit – One of the most important questions business owners neglect to ask themselves is, ‘How much profit do I want to make?’ - they tend to look at what others charge and then pull a figure out of the air to be competitive without considering how much profit they want and need.
Once you have decided to move forward with a pricing model that best suits your business, you need to ensure that you business has the right tools to put the plan into action. NetSuite, a best-in-class ERP system, gives businesses the ability to offer their customers many shapes and sizes of pricing models, and automate and track these within their system in a holistic way, allowing businesses to leverage the power of flexibility in their financial and product strategy.
How do you set your pricing model? Comment below!