As more businesses turn to subscription pricing models, it’s important to understand the different types of pricing structures available!
Pricing models are life-changing for subscription brands because they enable companies to maximize subscription customer lifetime value (LTV) and, in turn, increase their revenue. Also, the pricing model you use for your subscription products is a major factor in a customer’s decision to choose you over your competitors.
These models enable brands to adjust their prices in response to changes in the market, such as shifts in customer demand and the arrival of new competitors.
So…isn’t it time to look into the subscription pricing models that work the best for you and your customers? Let’s take a closer look at subscription pricing advantages and disadvantages, as well as strategies, real-life examples, and more.
What Makes a Subscription Pricing Model Work?
An effective subscription pricing model should provide customers with value while still being profitable for the company. To achieve this goal, there are three key features that make up an efficient subscription pricing model:
1. Scalability
A subscription pricing model should have the ability to scale up and down depending on the needs of the customer. This means that customers should be able to easily adjust their pricing plans as their business needs grow and change. Additionally, the subscription model should provide customers with the ability to add or remove features as their needs change.
2. Flexibility
A subscription pricing model should be flexible enough to be adjusted as the market changes. For example, if a customer’s needs change, they should be able to easily switch plans without incurring additional fees or having to start from scratch.
3. Transparency
Subscription pricing models should be transparent. This means that customers should be able to easily understand and compare different plans, as well as know exactly what they are paying for. Additionally, customers should be able to easily cancel their subscriptions if they no longer need the services that they are paying for. Transparency also provides customers with peace of mind that they are getting the most value for their money.
Choosing The Best Pricing Model For your Business
In today’s competitive market, understanding how to create a successful subscription pricing model and implement effective strategies is essential for sustained business success. This comprehensive guide will equip you with the knowledge and insights to craft a winning subscription pricing approach that drives revenue, customer loyalty, and market dominance.
Types of Subscription Pricing Models
Let’s take a closer look at some of the different types of subscription pricing models:
1. Freemium Model
The freemium model allows your customers to explore your products. It is a subscription pricing model that offers basic features of a product or service for free and then charges a fee for premium features. The customers get access to the basic features without having to pay anything, but they can upgrade to the premium version of the service for a fee.
Pros and Cons:
The main pro of the Freemium pricing model is that it allows users to try out the product or service before making a commitment to purchase. This can be a great way to attract users who may not have otherwise been willing to pay for the product or service. Additionally, it can also help to create brand loyalty and encourage users to upgrade to a paid subscription.
The main con of the Freemium model however is that users may not be willing to pay for the product or service after trying out the free version. Therefore, before/while obtaining these subscription pricing models, businesses need to ensure that the free version offers enough value so that users will feel compelled to upgrade.
Which brands should use this?
This model works best for businesses that have a low cost of customer acquisition and a high margin of revenue per customer. It also works best for businesses that offer services or products with a wide range of features so that customers have the option to upgrade to the premium version. Companies such as software, media, and gaming businesses can benefit from this model the most.
2. Tiered Pricing Model
This model offers customers different tiers of services or products, with each tier offering different features. It provides customers with the ability to choose between different subscription plans with different features at different price points.
Pros and Cons:
The advantages of this model include the ability to appeal to a wider range of customers, offering customers different levels of access to a product or service depending on their budget and needs, and providing customers with a better value proposition. On the other hand, the main disadvantage of these subscription pricing models is that it can be difficult to properly define the tiers and assign prices that accurately reflect the value of each tier.
Which brands should use this?
The Tiered Pricing Model is a great way to incentivize customers to purchase higher quantities of your products. As such, it is well-suited for Shopify brands selling items like apparel, accessories, cosmetics, health and wellness products, and household items. It is also a great way to encourage loyalty among customers who are likely to purchase multiple items from your store.
Remember Barkbox from our article about the pet subscription box business?
They have a perfect example of this model. They’ve got three different tiers with different features and pricing:
- The basic tier
- The BarkBox Super Chewer
- The BarkBox Ultimate
3. Pay-as-you-go Model
The Pay-as-you-go pricing model is a common subscription-based pricing model used by many Shopify brands. It allows customers to purchase a subscription to a product or service with a fee paid upfront. This fee is typically much lower than the overall cost of the product, and customers can choose to pay the remainder in regular intervals, usually monthly.
Pros and Cons:
For these types of subscription pricing models, the biggest advantage is that it allows customers to pay only for what they use, so they can control their costs and only pay for the services they need. The biggest disadvantage is that businesses may not be able to predict their costs because the amount of usage can fluctuate. Additionally, businesses may have to do more work to monitor usage and charge customers accordingly.
Which brands should use this?
The Pay-as-you-go pricing model is most commonly used by Shopify brands in the software and technology industries, though other product categories can also use this model.
This includes services such as web hosting, online courses, and streaming services, as well as physical products such as furniture or clothing. The Pay-as-you-go model is a great way for Shopify brands to offer more affordable options to their customers and encourage more purchases.
4. Discounted Model
The Discounted Upfront pricing model is used by Shopify brands to offer customers discounted subscriptions when they pay for the entire subscription upfront. This allows the customer to make a one-time payment for the entire subscription period instead of having to pay for the subscription on a monthly basis. This model is particularly attractive to customers who are looking to save money on the subscription fee over time.
Pros and Cons:
This model can be beneficial for businesses, as it offers them a more predictable income stream and a larger upfront payment. By paying a lower cost for their subscription over the long term, customers are more likely to engage with these subscription pricing models as well.
The main downside of this model for merchants is the inability to suspend or cancel the subscription, as they are locked into the commitment for the entire term. Additionally, shop owners may not be able to take advantage of any price raise or special offers that may be available over the course of their subscription term.
Which brands should use this?
Examples of Shopify brands that could benefit from this pricing model include health and beauty brands, clothing and accessories brands, pet stores, grocery stores, and any other type of physical goods that are consumed on a regular basis and may face a cost raise in the long run. By offering customers the convenience of regularly replenishing their items at a discounted price, Shopify brands can easily increase customer loyalty and boost their sales.
5. Subscription Box Model
The Subscription Box Pricing Model for Shopify Subscription Brands is a pricing strategy where customers purchase a subscription plan that provides them with recurring deliveries of a product or service over a specified period of time. These types of subscription pricing models are often used for items that are consumed regularly, such as food, beverages, and health and beauty products. The subscription box business plan may include a set number of items, with the customer being able to choose the frequency of their shipments. The customer is then billed on a recurring basis – typically monthly or annually – and the subscription plan can be canceled at any time.
Pros and Cons:
The subscription box pricing model has many benefits for store owners. In simple words, it provides them with a steady stream of income, as customers pay a recurring fee for the box and its contents. Additionally, it eliminates the need for them to constantly update their inventory and pricing to attract customers. On the other hand, the subscription box model may require more detailed upfront planning, as store owners need to have the right product and pricing in place before launching the subscription service. Additionally, store owners must be prepared to handle customer service issues that may arise and maintain a high level of customer satisfaction.
Which brands should use this?
Basically…everyone!
This pricing model is ideal for any brand or product category that benefits from customers buying frequently and/or in bulk, such as pet food, cleaning supplies, razor blades, and makeup. It is also a great way for customers who are looking for convenience to get their items delivered to their door on a regular basis.
While most Subify users currently use Subify for these types of subscription pricing models, the Subify features are compatible with any pricing model you choose.
Just choose your favorite, and Subify will make it work!
6. Membership-based pricing models
Membership pricing models entail customers paying a fee to join a specific organization or community. By becoming members, individuals gain access to exclusive perks, discounts, or services. Examples of such app pricing models include LinkedIn or Patreon. Typically, the membership business model is paid on a recurring basis, such as monthly or annually.
This subscription pricing model fosters a sense of belonging and community, encourages customer loyalty, generates additional revenue streams, and strengthens brand allegiance.
However, sustaining customer retention marketing necessitates continuous value addition; the membership fees may deter potential customers, and attracting new members can be challenging.
7. Marketplace Pricing Model
In a marketplace pricing model, a platform acts as an intermediary, connecting individuals who wish to buy and sell goods or services. This platform facilitates transactions between the buyers and sellers and, in return, charges a fee or commission based on the transaction’s value. This particular subscription pricing model is commonly utilized in various platforms such as Amazon or eBay. This model offers a diverse array of products and services, attracting a large audience.
Furthermore, managing disputes between parties and ensuring quality control may pose potential challenges, which can be this model’s disadvantage.
Effective Ways to Choose the Best Subscription Pricing Model
When deciding on the most suitable subscription pricing model for your business, there are several important factors to take into account.
Here are some effective strategies to help you make the right choice:
- Understand your target audience by conducting thorough market research to determine their willingness to pay, budget limitations, and expectations from a subscription service.
- Analyze your product/service offering, evaluate your product or service, and identify its unique value proposition.
- Assess your cost structure to comprehend the expenses associated with delivering your product or service.
- Evaluate each model based on your target audience, product/service offering, and cost structure.
- Implement a pricing model and closely monitor its performance. Based on the gathered data, make necessary adjustments to optimize your pricing strategy.
- Take into account the possibility of offering various subscription plans to cater to different customer segments.
- To attract and retain customers, consider providing additional benefits or incentives with your subscription plans.
How To Choose Subscription Pricing Models Strategies
Your primary approach to the subscription pricing model depends on the nature of your product. Once you have determined this, you can proceed to select a pricing method that outlines the specific way in which you will set your prices. We will explore four commonly used types of subscription plans, along with guidance on when and how to employ them.
1. Value-based pricing strategy
Value-based pricing is a commonly used strategy for determining the price of a product or service. It involves finding the price that customers are willing to pay, which is known as the willingness to pay (WTP) price. The goal is to set the price somewhere between the production cost and the WTP price.
2. Competition-based Pricing Strategy
In a competitive pricing strategy, a business determines its prices based on the rates set by competitors for similar products. If your product offers unique features that competitors lack, it may not always be necessary to adopt competitive pricing. However, if you are selling a budget-friendly product, it is crucial to outperform the competition.
3. Dynamic Pricing Strategy
A flexible subscription pricing strategy known as dynamic pricing involves adjusting prices in response to availability and demand. To implement true dynamic pricing, an algorithm capable of automatically adapting prices based on purchasing patterns is required.
4. Psychological pricing
Psychological pricing is another type of subscription pricing strategy. Consider a book priced at $20. It may not be very appealing. However, if the price is set at $19.99, suddenly, it becomes much more enticing, and you might even purchase ten copies! This psychological pricing technique, also known as charm pricing, takes advantage of consumers’ perceptions and emotions to create the illusion of a better deal.
Implement an Effective Subscription Pricing Model
To effectively implement new subscription pricing models and achieve success, decision-makers can follow these four steps, as indicated by the latest research findings.
1. Develop a Comprehensive Analytical Database
To ensure that decision-making about subscription based pricing model is not solely based on intuition, businesses should prioritize the creation of a comprehensive analytical database that contains relevant data. This data may include transactional records, key supplier contracts, historical decisions regarding cost pass-through and their outcomes, as well as current cost pass-through policies. It is also crucial to gather data on product costs and future cost projections.
2. Determine the Pricing Strategy
A successful pricing strategy aims to protect profit margins, increase product revenue, or expand market share. However, when product costs are subject to volatility, it becomes necessary to customize a subscription price formula based on different scenarios.
For organizations heavily affected by price-sensitive commodities, it is crucial to adopt a secure pricing approach that allows for the transfer of rising commodity costs to the buyer.
On the other hand, organizations primarily focused on selling complex products may find greater success by embracing a customer value-based pricing strategy.
3. Integrating the Salesforce into the Process
Implementing a fresh subscription pricing model is one thing, but effectively communicating it to your clients is an entirely different challenge. Once the pricing strategy has been established, it is crucial to adequately train and inform the sales force about the new pricing structure.
4. Monitoring the Impact of the Pricing Strategy
During times of significant change, such as the current surge in commodity and shipping prices, it is essential to assess the outcomes of your pricing adjustments regularly. How can you determine the effectiveness of your decisions if you do not measure their impact?
Maximize Success with Subscription Pricing
To optimize the benefits of pricing models and enhance the success of your business, it is crucial to adopt several strategic approaches:
- Get a deep understanding of your target audience and their specific requirements and consider subscription tiers according to their needs.
- Focus on consistently delivering value and ensuring sustained customer engagement throughout their subscription journey.
- Consider providing exclusive content, personalized experiences, or additional perks to incentivize customers to maintain their subscriptions.
- Actively seek feedback from your subscribers and utilize it to refine your offerings, ensuring that you continuously meet their evolving needs.
- Strike a balance when determining the price of your subscription.
Lastly, maximize your revenue by adjusting your pricing strategy in real-time, taking into account factors such as demand, competition, and market conditions.
Examples of Real-world Pricing Models
Subscription pricing models play a vital role in determining the success or failure of a business. Below are instances of both effective and ineffective real-life subscription pricing examples:
Successful Examples
- One successful subscription pricing strategy is Apple’s pricing strategy for its iPhones, which is an example of value-based pricing. Despite being relatively expensive, customers are willing to pay a premium due to the perceived value and brand reputation.
- Another successful model is freemium, where a basic version of a product or service is offered for free, while additional features or premium versions are charged for. Companies like Dropbox and Spotify have effectively implemented this model.
Unsuccessful Examples
- In the 1950s, Ford’s Edsel car used a cost-plus pricing strategy, which turned out to be a disaster. Despite high production costs, the pricing was set based on those costs, resulting in poor sales and eventual discontinuation.
- Another example of an unsuccessful pricing model is the Amazon Fire Phone, which employed a penetration pricing strategy. Despite its competitive pricing at launch, it failed to gain significant market share due to strong competition and limited differentiation.
Conclusion
In conclusion, the pricing model you choose for your subscription brand can have a huge impact on its success. It is important to do your research and select a pricing model that fits your business’s needs and goals. You should also consider how your customers will react to the different pricing models and what will be the most effective for them. This will help you maximize customer satisfaction and loyalty, which can be beneficial for your business in the long run.
Are you ready to make the big changes? With Subify, you’re never alone!
