You have started a subscription business because you want to meet your ideal customer needs and make money doing it. To be successful, you need to provide two things: high-quality products or services and an affordable price. It will keep them coming back for more.
To determine your optimal subscription pricing strategy, you need to assess both the industry and the market.
Be very careful while considering your pricing strategy to avoid the risk of losing customers. If your pricing is too high, then your customers will compare the price with other vendors, and if they don’t get value for the price, then they may choose to cancel their subscription. If you charge too low, you may not be able to cover your expenses.
Pricing can be a very tricky thing to do. It’s something that always needs revisiting. What works for one customer may not work for another.
If you’re the one with this confusion, this article is for you. We’ll explore what a subscription pricing strategy is, and the most effective ways to implement a revenue generating pricing system for your business.
What is a subscription pricing strategy?
An optimal pricing strategy for subscription services aims to maximize revenue during the customer’s lifecycle.
In a subscription pricing strategy, vendors set a pricing structure that allows customers or organizations to purchase or subscribe to IT services for a specific period. Members usually agree to services on a monthly or annual basis.
Subscription pricing models are generally used for cloud computing services where the customers are charged upfront for cloud services before they receive access. The price often depends on the length of time you subscribe to it, and this can result in lower costs if compared with other models.
The subscription pricing strategies for SaaS (Software as a Service)
Subscription pricing can be tricky. To adequately price your product, you need to understand who you’re selling to and how much they will pay. There is no right answer when it comes down to pricing, but there are some guidelines that can help steer enterprises in the right direction. Let’s take a look:
The penetration pricing strategy
Penetration pricing is a strategy where businesses introduce new products at high discounts in order to attract customers and win market share.
For example, Netflix has mastered penetration pricing. Despite the prices going up or free subscriptions ending, people are completely fine with paying higher subscription fees for an unending flow of good media content.
This approach typically builds brand loyalty, which increases the likelihood that people will love your product and buy it again – providing you with more opportunities for revenue growth.
The captive pricing strategy
Captive product pricing is the strategy of selling multiple products together as one package. This can be done with physical or digital items and is especially popular in industries that rely on high volumes for success – such as printers and inks! SaaS companies use this approach by focusing exclusively on add-ons that customers can purchase after first purchasing the main service.
The skim pricing strategy
Skim pricing is a strategy that sets new product prices high and subsequently lowers them as competitors enter the market. Skim prices can be used for different purposes including generating a high short-term profit and attracting early adopters while also segmenting customers into low-priced categories.
This pricing model has been utilized by companies such as Apple and Nike who provide excellent price skimming examples.
The prestige pricing strategy
Prestige pricing is a clever way to grab the attention of customers with higher prices. This practice is usually seen among luxury brands, for example, M.A.C, where higher prices are used to suggest quality and exclusivity.
Similarly, SaaS pricing is set. Some companies have big budgets, and they just want the best solution, whatever it takes!
The free trial pricing strategy
Offering free trials has been used for many years now as a means of evaluating popularity and success rates when introducing new items. By giving people free access, you can get feedback from your key audience before investing heavily in the product.
Netflix, for example, has had a 14-day free trial for many years, offering users the opportunity to sample their service and see if it’s right for them. Most SaaS companies often provide a free demo to their customers or put time limits on product usage.
Many companies offer free trials with auto-renewals, which makes the signup process easy and keep their customers hooked.
See how RackNap can fast-track your cloud business growth, book a demo today!
The markup pricing strategy
The markup pricing strategy, or cost-plus pricing strategy, is a simple way to set prices where the desired profit margin is added on top of the production cost for one unit of product (unit cost). This type of pricing strategy focuses on internal factors such as production cost rather than external factors, i.e., competitor prices. This type of pricing method is generally used by retail stores.
In the SaaS industry, the profit margins are very high and hence, using a markup pricing strategy may appear pricey to the customers.
The value-based pricing strategy
The idea of value-based pricing is to charge products and services at a rate that the business believes consumers are willing to pay. This contrasts with other types like markup which would base prices on production costs along with standard markup.
Amusement parks, artists, and car dealers often use value-based pricing to sell their products.
Factors to consider while choosing value-based pricing:
- Market influences the price that a customer will pay for something
- The quality and features of a product influence its price
- The pricing of competitors can influence how valuable consumers perceive a product
How to set a pricing strategy for your business?
Pricing a product is a science. It’s important to gather information and form your own hypothesis before testing anything in the open market because every business has its own needs when it comes down to pricing strategies – what might work well for one company may completely fail for another.
1. Analyze your competitors
If you are launching a new product in the market and you do not have enough resources to do market research, then you need to check whether your competitors are selling similar products and what they charge.
To get a sense of how much your potential customers value the product you’re offering, try pricing it at or near what competitors are charging. If sales come up short compared to expectations, then maybe there’s something stronger about their branding that makes them more desirable than yours, which may force you to adopt a different pricing model.
2. Understand your customers
You’ll need to know what your customers are willing and able to spend before you set a price. This way, when it comes time for pricing each product or service offered by your business, there’ll be no guessing required.
One way to do so is by contacting existing customers who are familiar with what products or services you offer and learning their current spending habits based on these items when compared with other options available.
3. Choose your subscription pricing model
You’ve come to the end of your journey! At this point, you need to choose a pricing strategy that will best suit both – yourself and the potential customers. Consider survey feedback as well as internal and external factors before making any changes.
Choose a successful pricing strategy
Implementing your pricing strategy is an important first step in establishing the foundation for the success of your SaaS business. But once you know what it should look like, can implementing this strategy be easy?
Of course, yes.
RackNap can help your business in implementing any subscription pricing model, from free, one-time, and recurring to the complex usage-based pricing model.
Want to know how?
Get a free billing demo and find out if RackNap is the right solution for your business.