Subscription pricing provides predictable revenue for businesses, while for consumers, they are a convenient way to pay for access to products or services.
Choosing a suitable subscription pricing model can make or break your business. But how do you create a subscription-based pricing model? What factors should you consider to ensure you strike a balance between user and revenue growth?
As subscription models have taken over the business world in recent years, let's explore the topic further and see how to create a subscription pricing strategy for your business.
What is subscription pricing?
Subscription pricing is a revenue model where users pay for a product or service on a weekly, monthly, or annual basis. This pricing model is widespread among SaaS (software as a service) companies but has grown across many business sectors because it offers predictable revenue generation.
The equipment rental industry has embraced subscription pricing. Product as a Service (PaaS) businesses have grown across fashion, electronics, baby goods, transport, and other industries because they offer consumers flexibility, choice, and sustainability.
While many people associate the subscription model with software companies, they've been around for a long time. For example, newspapers and milk deliveries have used subscription pricing models for decades.
Almost any goods or service can adopt the subscription pricing model. As consumer habits shift to more sustainable, personalized, and socially conscious brands and products, rent not own models have thrived.
What are the benefits of subscription pricing?
Subscriptions have grown as a pricing model for a few different reasons.
More predictable revenue generation
Recurring billing means businesses have regular, predictable revenue streams. Companies can count on certain monthly income levels, leading to better predictions, forecasting, planning, inventory management, and more.
Better ROI on advertising
As customer acquisition costs keep rising, one-off transactions look less appealing. Selling one-off purchases means you need to attract and convert new business consistently.
Brands are starting to look at customer lifetime value (CLV) when justifying marketing and advertising spending.
Reach new customer groups
Subscription businesses lower the barrier to entry for goods. As a result, businesses can reach a more diverse customer base thanks to low upfront costs.
A better understanding of customers
More interactions with customers drive greater understanding and trust. By levering customer data, brands can offer a more personalized service. Longer relationships offer cross-selling and upselling opportunities, which are great additional revenue streams.
Meet customer expectations
Modern consumers demand a more sustainable and circular approach to retail. A subscription-based pricing model helps you offer products or services more aligned with their sensibilities.
Different subscription pricing models
There are a few different types of subscription pricing strategies out there. Choosing the best pricing model is an important decision. Each model has pros and cons, and optimizing your subscription pricing model around your customers and niche is crucial if you want to maximize recurring revenues.
Flat rate pricing model
Flat rate pricing, also known as fixed pricing, uses a fixed price for your subscription product or service.
The benefit of fixed subscription pricing is that it's simple. A flat-rate pricing model can grant users unlimited access to your products. This strategy is great if you have a limited range of products that appeal to a single buyer persona. Setting a fixed price for your subscription services gives you a predictable billing process and makes it easy to market.
While it's straightforward for consumers to understand, it's not always an optimal pricing strategy. For example, if your prices are too high, you can alienate more price-sensitive customers. At the same time, if you price too competitively, your risk leaving money on the table.
Tiered pricing model
A tiered pricing model offers customers flexibility. It recognizes that you have multiple buyer personas and that each will appreciate different price points for the right service.
Tiered pricing is excellent if you have a diverse customer base. While some users will enjoy limited, low-cost access, others want more choices. Pricing tiers allow you to meet expectations while maximizing your appeal to broader audiences. When you offer multiple price points, you open your business to both casual and power users.
The benefits of pricing tiers are that they scale easily. Additionally, customer lifetime value can be increased because users upgrade or downgrade as their needs change.
While a tiered pricing option offers your customers more options, too much choice can become confusing and lead to decision paralysis, which hurts sales.
Per unit model
Per unit or user pricing is a popular B2B subscription model. One of the significant advantages of the per-unit model is that pricing scales evenly. As businesses add more users, the price per user decreases at fixed intervals. You can apply the same logic to rental companies — the more units customers subscribe to, the lower the monthly fee per unit.
The per-unit model is very straightforward. It's easy to sell and communicate to customers, making revenue forecasts more predictable.
The usage-based model charges customers based on how much they use during a month.
A usage-based pricing model — frequently referred to as a pay-as-you-go model — is most popular among IT or telecommunications service providers. However, there is scope to use it in the product rental market.
Some problems with usage-based pricing are that it is unpredictable. Additionally, it is challenging to implement and will only be the optimal revenue-generating model in particular scenarios. A successful example of usage-based pricing from product rental space is the e-scooter rental companies such as Tier, Lime, and Voi.
What to think about when figuring out the best subscription pricing model
Pricing is about far more than just numbers. It's about understanding your market, your customers, and the overall value of your product. The interplay between these three factors determines your subscription business's prices.
Subscription service pricing should:
Align with your brand positioning
Reflect on your industry or niche
Speak to your target market
Finding the right balance between these three principles will help you determine the right subscription-based model for your business.
How to define your price points
Finding the right monthly subscription model price depends on a bunch of different factors. People's ideas about what a fair monthly subscription price can differ greatly.
In another article, we're taking a closer look at price positioning.
Cost plus pricing: Define your fixed and variable costs
Cost plus pricing, also called markup pricing, essentially calculates your operating costs and adds a percentage on top. This is a fairly standard model in production and manufacturing, but it can be used with the subscription models to good effect.
Arriving at costs involves a good understanding of your finances. You need to calculate inventory costs, staff overheads, sales, marketing, etc., and adjust your prices so that you can always make a profit.
You are guaranteed profits on each sale
It's not a customer-centric model
It fails to account for your competitors' pricing models
Value-based pricing: Know your customers
Value-based pricing requires lots of customer research. You need to develop an idea of how much value your products or services will bring to your customer base — and how much they are willing to pay for it.
This pricing model is suitable for premium goods and services. Customers are willing to pay more for the best.
Higher prices can increase your brand perception
Pricing by value can lead to larger profits
Charging higher prices shrinks your accessible market
You are competing for a smaller audience of consumers
Competitor-based pricing: Know your competition
A competitor-based pricing model uses knowledge and research about what rival businesses charge and uses that as a benchmark for your pricing. It's a good strategy for new companies that don't have enough data to understand the value they are offering to consumers.
Looking at your competitor's pricing can give you an idea of what the market is prepared to pay for a product or service. Armed with this knowledge, you can go one of three ways:
Price above the market: Compare your service, and if you are offering more value, options, or quality, then you can adjust your prices above your competitors.
Price below the market: Pricing below the market is an excellent strategy if you need to win new customers aggressively. If you offer a similar service at a lower price, you can win market share from your rivals.
Price at market rate: Also known as price matching, this strategy means competing on value or service rather than price. To win customers, you need to offer better value for money.
Less risk because you are basing your prices on established models
Quick and straightforward to implement with minimal research
It's not connected to your business fundamentals, so it might not be sustainable long-term
Understanding the price your rivals set isn't the same as understanding why they arrived at that number.
Tips for creating a subscription pricing strategy
Creating the right pricing strategy is one of the hardest parts of running a subscription service.
Don't trust your gut feeling
Don't use gut feeling to create a subscription pricing strategy. While your instincts about your sector and your customers are valuable, they can't match cold, hard data when it comes to deciding on the right pricing models for your business.
Do plenty of research on your industry, your customers, and your competition. Figure out which subscription-based pricing models work and which don't. For example, certain models will attract fewer customers but drive more revenue because some customer segments are more profitable than others.
Use analytics and data to drive your decisions. Pricing isn't an art, it's a science. So use customer data and business intelligence to power smarter, more impactful decision-making.
One size doesn't fit all
Tiered pricing models make your subscription business more attractive to a broader target market. While a flat rate pricing model works in some scenarios, it doesn't account for different types of customers and what they want from a service.
Adopting tiered pricing helps you appeal to different buyer personas. People use subscription rental services in different ways.
So, don't limit your number of users or revenue by being too inflexible with your price. While tiered pricing is a little less predictable, it allows you to extract maximum value from each customer. Additionally, as mentioned earlier, it can help customer retention because users can adjust their tiers based on changing personal circumstances.
There are many ways to implement a tiered-pricing model in your product catalog and sales channels. For example, you can create a category for products that belong to tier A and another category for products that belong to tier B, and so on. This approach makes it easier for customers to browse products in their price range.
Leave room for upselling and cross-selling
Your existing customers are a great source of new revenue growth. A tiered pricing model will allow them to upgrade their subscription as their financial circumstances change. However, that's not the only way to extract more revenue from your customer base.
Upselling and cross-selling are vital sources of revenue. Attracting new customers is expensive. However, your existing customer base is far easier to convert. So leave some room for upselling and cross-selling to customers whose preferences you can understand and predict. These little extras can add up over the course of a customer's relationship with your brand.
Update pricing frequently
The prices you set when you begin your subscription business can soon become unsustainable. If the inflation crisis has taught us anything, it's that when costs and expenses rise, it needs to be reflected in your prices.
Of course, it's not just about gradually increasing prices in line with inflation. As your products or services become better, you have a reason to adjust your prices. Failure to do so will hit your bottom line.
Know that there is a fine line here. If you raise your prices too aggressively, you risk churning customers. However, the data suggests that businesses that revise their prices every six months gain revenue at twice the speed of businesses that only think about these matters once a year.
A step-by-step guide to determining how to price your service
While there are a lot of factors for you to consider, you can break down your subscription price into simple steps.
1. Do your research
Before you think about prices, make sure to conduct some research. Look into the broader market and your competitors.
Answer questions like:
What services are my competitors offering?
What prices are my competitors charging?
How do their customers feel about the price and service?
The answers to these questions will give you some ballpark figures for what it will cost to be competitive and perhaps even show you some gaps in the market.
2. Outline your objectives
Next up, you need to understand your revenue goals and other business KPIs. Benchmarking against your competitors will give you a rough idea of what you can make, but a proper pricing model determines what you need to make.
Draw up your costs and think about the market you want to serve. If you have a large market, you can drive revenues through volume. However, niche markets allow you to charge higher prices by providing value.
Run the numbers and see how different price points affected your revenue goals and financial plans.
3. Consider your costs
You need to understand the minimum it costs your business to keep the lights on. Business premises, staff overheads, inventory costs, and everything else should be rolled together so you can figure out what revenue you need to bring in each month.
4. Research your audience
Setting the right price depends on your target audience. Some customers are price sensitive, while others only care about value. Do the research on the target audience you want to serve and find out essential details, such as:
Age and demographics
Do they subscribe to other subscription services?
How do they feel about these services?
What is important to them about your service?
What features or products are they prepared to pay more for?
Understanding what your customers want, besides just renting products from you, can help you determine and adjust services, inventory, subscription marketing strategies, and the little extras that add value and drive loyalty.
5. Consolidate everything and set your price
You are ready to set your pricing once you understand the following:
What are your competitors charging
What revenues do you need to stay in business
What are your costs
What are your potential customers willing to pay
So, set your price but remember that it's got to be open to adjustment as you react to market changes and factor in improvements in your products and services.
Subscription-based pricing models attract customers because they have low upfront costs, are flexible, and are an easy way to consume durable goods more sustainably.
Finding a suitable pricing model and a competitive positioning for your subscription offerings is essential to survival. While low prices might attract more customers, you'll go out of business if you can't turn a profit. Similarly, pricing in huge margins will make you less competitive and give your rivals a significant advantage.
Not every subscription pricing model will suit your business. Depending on the goods you sell on a subscription basis, your target audience, your niche, and your competitors, one type of subscription pricing is likely to make more sense than another.