Pricing strategy · Small business

How to decide on subscription pricing?

Sunit Randhawa Entrepreneur, CEO, CTO at PunchPie

June 23rd, 2015

We have 200+ retail merchants using our monthly or yearly subscription service for around 1 year and we recently increased the pricing by 30% and we did not see any cancellations. The question is how to figure out whats the right number so that we do not undersell. Competitors at times tell their customers who are switching that our service is "cheap" for a reason, not sure how that impacts someone who never heard about us. 

Karl Schulmeisters Founder ExStreamVR

June 24th, 2015

There are a variety of ways to set price

  1. Value based - if you save your customers 1 FTE week every 2 weeks they use your product, and an average FTE salary of $18/hr  then your monthly subscription rate can be up to $1,440/mo
  2. Cost based - if you have a cost basis of $2/hr of usage,  and you want a 100% margin, then you should charge $670/mo
  3. ROI based - if you have $1,000,000 of VC money that needs to see a 10x ROI in 3 years and they own 25% of the company, then you need to have $1,000,000 x 4 x 10 in annual revenue to not lose by dilution.  So you need $3,400,000 in monthly revenues.  Project your current rate of user growth forward 3 years and divide through
  4. Competition based - your competitors charge $40/hr of usage but are more established - you can charge anywhere up to $40/hr of usage
  5. Strategic pricing - you want to reduce churn - so you offer a discounted rate for an annual subscription over your monthly subscription, basing the annual subscription on your target revenues
  6. Experimental based pricing - set a price, see how many buy, up the price, see what happens to your churn rate, drop the price see what happens to your churn rate.
  7. Psychological - do some studies to see what the perceived value proposition and PEoD is

There is no one set way to do this.  That  you increased your price by 30% and saw no drop off suggests there is more to be taken, but to some extend by making a 30% price increase, you have limited how big a price increase you can make without affecting some perceptual bits

Part of why this is complicated is that we have a lot of cognitive biases involved in how we perceive value in this world.  And how you signal value is also very subconscious - enough so that Nobel Prizes have been handed out over it

John Petrone CTO at LaunchPad Central

June 23rd, 2015

Pricing tends to part art, part science, but if you fear that you are underpricing (and a 30% bump with no cancels suggests you are) I'd start with a deep dive on the value you are providing. How much money are they saving/value are they creating in using your product? Do you have data that proves it? Starting with value created as opposed to your costs tends to avoid the "underpricing" fear, at the risk of losing some customers. If you data supports it I'd test out some higher pricing based on the value created and see how that goes for you - in the end though there is no perfect answer. Sometimes you price lower than you can for a number of reasons - box out the competition, show high renewal rates as you go into a funding round, save higher pricing for new product launches, etc.

Mathieu Guerville Director, UL Ventures (Corporate VC)

June 23rd, 2015

Pricing is just a lever of your strategy, how you price should depend as much on how customers will perceive it as it should on how you want to run your business

You may have a close-ended offering with no extensions or professional services, in which case you probably want to price to LTV > 3x CAC

You may have a current service that will become your entry level tier when you grow your  offering, in which case you can afford a lower entry point to have a larger section at the top of your upselling funnel

Or you may be competing with somebody with deep pockets and an aggressive land grab plan, in which case you may have to either price artificially low to stop bleeding prospects or position yourself as a premium player and develop differentiated features that will support a higher price point

Mikhail Gorelkin Principal AI Architect & Developer

June 23rd, 2015

Testing, preferably adaptive testing.

Jeff Greenberg Owner, J.G. COMMUNICATIONS, INC. and Publishing Consultant

June 24th, 2015

Introductory subscription pricing doesn't usually reflect the quality of the newsletter.   It's usually based on subscribers past subscription buying behavior. 

What does matter is how many subscribers continue.  The higher the drop-off rate, the less likely subscribers are interested in its content.  Considering there wasn't any significant loss of subscribers due to a 30% increase, I would assume that this group is price inelastic during their renewal cycle. 

My recommendation is to set up a two tier pricing system. Find or test a front end price (check with competitors) the price that will bring in the most amount of subscribers. List this price as an introductory offer and renew them at a 100% price increase rate.  In other words, bring in as many tire kickers as possible and then punish your best customers.

Good luck and good selling.   

Ken Queen Income For Baby Boomers

June 23rd, 2015

I had a package for photography once that I sold and I started the pricing at $19.95 and it sold like crazy, a went to $29.95 after a few weeks then to $39.95 sales went higher each time i increased the price. When I hit $45.95 sales dropped off so I backed down to $39.95 and stayed there for 4 years. 

Keep in mind depending on your cost a drop in orders could still possible give you a bigger profit. You need to look at that. In my case my cost was .50 cents so the biggest quantity was my goal and when you know your cost it's easy to figure out what makes the most profit.

So it really boils down to testing. You could do split testing where every 2nd sale is at one price compared to the first price to narrow down where the sweat spot is. My sales were direct sales to consumer.

Another consideration is if you are using a small package to convert them too a big package you could lose money on the first order and in the end do well. Stores use lost leaders all the time, they are looking at the long run. Myself I sway the other way, I will take what profits I can make up front because from my experience often the back end never comes in especially if you are relaying on a third party like a boss. That's why I have been my own boss 99% of 45 years in business.

Hoofar Pourzand

June 24th, 2015

The fact that you didn't see any cancellation doesn't show that you could have raised your price but probably sends the message that you are in a weak spot (to your bold competitors). We don't know if your price will pass the market test for those who are not yet on your subscription program as we speak and I guess you are right to be conscious of it. My advice: make sure you offer the current members a good explanation for the raise and keep the entery level price as you had it before, unless you are dominant in your market or you have a vision and know it is a fit price- which I understand it is the case yet. Avoid ROI pricing unless you are an investor. Avoid back doors and directly talk to your users. The most honest response comes from those who will leave you anyway. I saw better replies on pricing here than I could offer you- so I leave it. 
It is normal for companies to raise their price ranges or even change their subscription types- I have worked in software retail for four year in HPC and have seen that every year with most of the vendors- we had over 15 major checks for over 500k annually. Also our lead software developer from my last job mentioned he decided to leave his last company because of what he thought was a bad pricing strategy of his boss- hope your questions is valued more and attracts more replies from those with direct pricing experience. 

Isaiah McPeak Entrepreneur and Debate Coach

June 24th, 2015

There are wise words above. I'll only add a couple complementary points around creative ways to learn more:
  1. Job Changes. When someone at one of your clients changes jobs (watch on LinkedIn) and was familiar with the decision to pay, send a LinkedIn inMail and ask the person if, now that they've left, they would give you some feedback on the value and ROI of your product.
  2. Direct Survey. It may sound like a dumb idea, but especially in the B2B space where people often spent other people's money, some folks will honestly say how much something is worth. Right now, in the B2C space with soccerplayerstats, we've got a live survey that asks "What would be the well-worth-it price to pay for a quarterly benchmark of your soccer rating?" People are answering 25, 50, 150 dollars, which was more than we were expecting to hear, and combined with metadata gives us some pretty solid pricing insight. Just one input of many, of course.
  3. Test with "network effects" that complement the core offering. With some new premium features, if there's a synergy with other parts of the product, test really high and medium prices. Think LinkedIn's $250-per-post job posting. Make some feature more expensive than the rest of the product itself, and see who converts.