Deciding on the right subscription pricing strategy for your company is a process that takes time and thorough research. It’s not enough to rely on the billing models your closest competitors are using, as they may not be profitable for your business.
Pricing a product is a tricky process that companies have struggled with since the beginning of commerce. Subscription billing only adds to the task’s complexity as customer acquisition costs can be high and forecasting future profits may not be possible.
Although it can be hard to land on a strategy, the pros of recurring billing make it an inevitable avenue for many companies. Subscription billing encourages customers to build a relationship with your brand that will span years. If your billing strategy is successful, you can rely on a steady stream of predictable recurring revenue.
So, how do you choose the right pricing model? In this blog, we’re going to breakdown the information you need to enable you to price your services in an increasingly competitive market.
Comprehensive market research for the competitive edge
Research is the only way to establish your competitive advantage and properly position your company in the market. A thorough competitor analysis should encompass not just the most apparent competition but also a comprehensive look at the market as a whole, including growth opportunities.
As many people find things through the internet these days, it may be wise to hire an SEO consultant to pull new competitors from your industry’s online footprint. Keyword research is one of the best ways to establish who your competition is from a search engine’s perspective.
Once you’ve established who your competitors are, make sure you look at websites and socials, where they are listed, linking to, and what their customers are saying in online reviews. Often reviews can give you some marketing language that will help you better sell your features, e.g. customers might often mention the cost or convenience, or they may highlight things like the ease of use.
How do they charge their customers? How often do they charge their customers? (i.e. a monthly or annual subscription pricing strategy) Do they offer a bundled approach where customers can pick and mix how they use the service? Or do they have a more defined plan with fewer options?
There are probably good reasons for all the decisions they’ve made, so don’t dismiss any approach. Keep an eye out for where other companies are looking to expand and grow (this can often be clear from their blogs, social posts or content).
What to pay attention to in your competitor analysis:
– Customer perception
– Marketing and collateral
– Market position
– Product features
– Product cost and billing strategies
– Any mentions of growth or expansion
– Competitor’s terms of service
Pay close attention to the metrics
No matter what subscription billing strategy you choose, you will need to base the pricing on substantial numbers. Copying and pasting from competitors won’t cut it. Once you understand the value you bring, it’s time to crunch some numbers to develop some viable numbers.
Here are the numbers you should pay close attention to when researching subscription billing strategy:
- The customer acquisition cost (CAC)—a figure which calculates what acquiring a new customer will cost your business. You will need to factor in both the cost of sales personnel, outreach programs and, of course, your marketing efforts, then divide these by the number of new customers in a month.If you’re a start-up, you will need to do some market research and figure out how similar companies get their name out there and make an educated estimate of what that will cost. Don’t be conservative with these numbers. Often it costs more to acquire new customers than initially presumed.
- Churn rate—the number of subscriptions cancelled. If you know approximately how many customers will jump ship, you can work out how many new ones need to be acquired.
- Average customer lifecycle value—the amount you stand to make from the average customer from their sign up to cancellation. One of the most significant opportunities that subscription billing presents is recurring revenue. Think about how customers can upgrade and pay more as they build a relationship with your company (e.g. higher usage, more features, or more users).
Deep dive into these metrics (and more) with our blog on SaaS acquisition and retention metrics.
Get a solid understanding of all your costs
Balancing your cost of operations and making a profit while remaining competitive can be a daunting task, especially when technology has made markets more competitive than ever before. Nowadays, customers get what they want at the click of a button and are savvy about refunds. Add to that the fact that credit cards expire, get stolen, or reach their limit, and you can see that building in all your operational costs will be quite the feat.
Familiarize yourself with the pros and cons of all 8 pricing models
The eight most common subscription billing models have become popular for a reason. They facilitate the way customers prefer to pay. Don’t dismiss them until you’ve thoroughly interrogated the pros and cons of each. You might be surprised about which strategies you find yourself choosing.
In conclusion: the secret to a successful subscription pricing strategy
There’s no shortcut to landing on the right pricing strategy. Without a comprehensive competitor analysis and a firm understanding of the billing models available to you, it’s easy to present your customers with pricing that won’t appeal to them. Subscription billing has become almost ubiquitous in the SaaS industry, and those that take full advantage of it are reaping the benefits of recurring revenue and loyal customer bases.