How to decide on pricing tiers for subscriptions
by Niclas Lilja, on Jan 16, 2018
When in the midst of building any kind of business, we can struggle with prioritization and what tasks are important to focus on. With the mountain of to-dos that often come with adopting a new subscription business model, it can feel that pricing and packages are the least of your worries. But getting the tiers right for your subscriptions can actually have a big impact on your business' performance, and should be carefully considered when setting up your platform. Don't take a wild guess at what your customers might want, use these strategies for accurately creating pricing tiers for successful subscriptions.
Why subscription tiers are important
Tier pricing is a great solution for subscription based businesses who feel unsure about setting one locked-in price for their offerings. But subscription tiers also serve a couple different purposes: First, they allow customers to try your products or services without making the largest initial investment, and secondly, you can attract a wider range of customers with varying needs and budgets.
When it comes to subscriptions, there are also three methodologies in displaying tiers. The first is to clearly and explicitly outline the features and price per month or year directly on a subscriptions page. The second is to list the features for each tier, but require a consult for price. Lastly, some subscription based companies choose not to display their packages and pricing at all without having a conversation with a prospective customer.
Whichever method you choose for your business should depend on the values you want to display through your website content, and the types of customers and industries you operate with. The important thing to consider about subscription tier pricing, is that it presents opportunities for upsells and recurring revenue. Just make sure you have proper subscription management put in place to ensure you can capture those opportunities and make the most of them.
How to think about pricing your subscription tiers
Typically, when creating transparent or public tiers you should think about what is the minimum baseline that a customer would value and is still enough to get them hooked. Triangulate your price based on a sweet spot of being competitive with the market, having a satisfactory ROI, and alternatives. While it may be tempting to start pricing very low to entice new customers while you're building brand awareness, it's much easier to lower prices after a period of time with analysis and feedback, than it is to raise a price on existing customers who were sold by the low fee.
On the opposite end of the spectrum, think about the full scope of what you can offer, and what that might be worth to someone. If you are a B2B SaaS company that has a tool that helps businesses generate leads and gain more of their own customers, a company may be willing to shell out a hefty sum for something that can greatly influence their own profitability. If you're a physical product box subscription service, then you might want to think about the quality and variety of the products that customers would look for at a higher price point.
Once you've established your low and high end, think about the reasonable number of tiers in between. Typically, around four tiers total is a good amount, but when in doubt, start simple. Having too many tiers can be confusing for prospects, and too few makes it feel like there is a lack of choice. The good thing with the subscription model is that you can always test, iterate, and release new options as you get data and feedback from your customers.
The factors for pricing tiers
When deciding what should be included in your tiers and how to price them, think of the aspects of the subscription that should warrant an upgrade. This comes down to roughly five categories: quantity, quality, service, experience, and commitment.
Quantity refers to the amount of products or features that are included.
Quality is fairly self-explanatory: is it the cheap version, or is it luxurious/deluxe?
Service is a big component to tier pricing, with bigger packages and higher pricing going hand-in-hand with more personalized service or even a designated consultant or representative.
Experience relates to the actual experience that your customers will have. Are they paying the "one star hotel" experience with few amenities, or are they paying for the "five star hotel" experience with many extras that make them feel taken care of and appreciated.
Then there is the consideration of commitment. There are a few methodologies for pricing based on commitment, or basically the subscription length of time: the first is that customers receive discounts for agreeing to a long term subscription plan. For example, many subscription based companies may offer a monthly fee with anytime cancellation, or they offer a discounted price when signing on for a year. Secondly, you may reward bigger commitments in the form of unlocked features, access to events or user groups, or "loyalty" benefits such as early access to new products and the like.
Many companies have one month and one year commitments, but maybe this doesn't make sense for your subscription business. Depending on the industry you're serving and what service you're providing, a 12 month or even a 36 month initial term might be your default commitment. You can then essentially have a penalty for shorter periods and a discount for longer, but it doesn't have to be from baseline one month. How you articulate this pricing may also be different depending on who you're serving.
A bonus sixth consideration factor is billing period. Similar to commitment, you can give customers options or incentives for recurring billing, even when signing up for a one year, or longer, commitment. Billing period is important to think about when understanding the cash flow and liquidity for your business.
You should take each of these five factors into consideration when creating and pricing your tiers. With each incremental increase in price, the quantity, quality, service, and experience should increase as well. Finalize your price by thinking about commitment level, and how to reward loyal customers.
Don't push your subscription pricing aside. When you're developing your business model, it should be a priority in deciding how you plan to attract and motivate purchases, how you plan to set up your infrastructure to support the tier levels, and how you can best optimize upsells and recurring revenue.
Want to learn more about how to successfully build a subscription model business? Have a look at our Checklist that can help you through the steps.