Winning with subscription price models

| min read
price models

Consumers today are changing in many ways: how they live, learn, communicate, and shop. One interesting development is the prevalence of subscription services. This article explains how the benefits of subscriptions are not just exclusive to SaaS companies. Here's how subscription price models can help a wide range of businesses expand their customer base and grow. 

In the past, consumers had more of a transactional association with brands and were kept at a distance. Now, aided by technological advances, consumers expect a closer relationship built on mutual communication and trust earned over time.

People used to look at their credit card statements and would see charges for things like their cell phone, internet, and gym memberships. Slowly, streaming services were added to the mix – things like Spotify, Netflix, and Amazon Prime. Now people are subscribing to services to replenish even everyday personal hygiene and pantry items.

Changing consumer expectations create new opportunities for companies to price and sell their offerings. Increasingly, it means introducing new subscription or membership pricing options as an alternative to traditional pay-per-use pricing. We see this playing out across a host of industries spanning music, digital media, software companies and more.

What's particularly intriguing is not the sheer volume of subscriptions, but the variety that individuals subscribe to on a monthly basis. Even conventional retailers and consumer brands, which have traditionally focused on transactions, are exploring various avenues to generate fresh income sources, with subscriptions emerging as their latest venture.

Amazon initiated this trend with its "subscribe and save" scheme, aiming to attract customers who purchase everyday items such as toothpaste, toilet paper, and shampoo. Similarly, Target also entered the subscription market with a comparable service, while Walmart introduced its BeautyBox as a competitor to BirchBox.

Clearly subscription is a popular pricing model – one that both startup and established companies are trying to figure out. Nonetheless, being fashionable doesn't necessarily imply that you should adopt it. Similar to any top-tier price execution, effectively implementing a subscription-based pricing structure requires a thorough comprehension of your customer, your approach, and your data.

What are the signs you should transition to subscription pricing?

Three elements suggest that an industry is ready for subscription pricing: shifts in technology, significant expenditure areas, and a strong desire for disruption.

  1. When technological advancements alter consumption habits in a manner that either simplifies our lives or enhances the customer experience. This has been observed in the music, gaming, and educational content sectors.
  2. Big areas of spending or large ticket items. Rather than shelling out a hefty sum all at once, some consumers prefer to pay a more affordable price over a period of time. For example, they may opt for subscription-based pet insurance to avoid being faced with a decision later on about whether to allocate funds for critical care. The subscription transforms a potential sudden large expense into a manageable monthly payment.
  3. When disruption is welcomed because the industry has previously been less than accommodating to customers. Subscriptions foster a more intimate relationship with the customer and a sharper focus on satisfaction and retention.

3 factors to consider with a subscription price model

  1. What requirement are you meeting with a subscription service?

    The customer should be the beginning and end of everything. When providing a subscription, it's crucial it fits with your value proposition and business model's unique characteristics. Your subscription service should also align perfectly with your consumers' purchasing, consumption, and engagement preferences. Essentially, your subscription service should address a significant value driver in your consumers' buying decisions that traditional transactional models fail to.

  2. How does a subscription facilitate your goals?

    Rolling out a subscription model is a significant undertaking, both operationally and strategically. The subscription service must be flawlessly integrated into your overall brand or category strategy, and not be treated as a side project. Only after you have clearly outlined the goals of your subscription service can you then formulate your market entry strategy and pricing model.

    Who is the intended audience for your subscription service? Implementation can vary greatly depending on whether you aim to establish a completely new category, draw new customers to an existing brand, enhance loyalty among current customers, or boost their total expenditure. Although these goals may not be mutually exclusive, in our experience, the absence of well-defined priorities results in a muddled offering.

    What function does your subscription play in your portfolio? Is it a starting price point to stimulate trial your products and services? Or is it a value-enhanced premium service at premium prices, aimed at capturing the willingness to pay among a consumer sub-group? Understanding your objectives with the subscription service and its intended role within your broader portfolio will significantly impact how you select and set prices your subscription model.

  3. How can you use the data provided by a subscription service?

    Subscription-based pricing strategies are appealing as they can enhance the lifetime value of your customers. This is particularly true if you swiftly make modifications based on insights gained from your data. To achieve this, it's crucial to utilize the information obtained from subscription services to reveal essential customer trends and promote further enhancement.

    Data can offer powerful insights into the effects of price alterations, cross-portfolio influences, and the development of new customer buying behaviors or segments. Nonetheless, numerous businesses fail to fully exploit their data.

    Successful utilization requires appropriate KPIs and analytical frameworks, suitable dashboards/systems, and efficient processes with defined owners. Subscription models inevitably alter consumer buying habits and/or your customer demographics. Data gives you the flexibility to modify your strategies.

    Subscription pricing structures present a myriad of opportunities to attract more customers, utilize new channels, and funnel more revenue into your product categories. However, before this can be achieved, you must have a precise understanding of who, why, and what this model can accomplish for you. Businesses that formulate a strategy based on a comprehensive understanding of these three elements are the ones that will thrive in an increasingly saturated market.

Tailoring your business model for each phase of the customer journey

The concept of subscription business models is not unfamiliar in the consumer, tech and media sectors. Past and present subscription-based businesses span from magazines to phone services to streaming media. These businesses are highly prized due to their consistent revenue streams and enduring customer relationships. As a result, many venture capital and private equity firms assess subscription businesses based on the proportion of customer lifetime value to customer acquisition costs.

Enhancing a subscription business can be described as amplifying this ratio by attaining both a high customer lifetime value and low acquisition costs. It's all about establishing a robust prospect base and transforming them into subscribers by formulating an ideal strategy at each of the four stages of the customer journey: Attract, Convert, Upsell, and Retain.

  1. Attract customers within your target market

    The initial step involves drawing in more potential customers. This can be achieved through three common methods: freemium models, complimentary trials, and promotional offers. The optimal approach varies and is contingent on your business objectives, product, and target audience.

    Freemium models are effective if your business has a vast potential market with a propensity for viral adoption, the capacity to generate revenue from free users, and a product or service that increases in value over time.

    On the other hand, free trials are more suitable when your market has a high service cost and your product's upgrade or migration path has a time constraint that can be enforced.

    Promotions and discounts are ideal in situations similar to free trials, particularly when there are no evident benefits to a larger subscriber base and there is no time constraint.

    An example of how to attract customers with subscription models is Spotify. They appeal to a wide base of potential subscribers and generate revenues through those they do not convert through advertising.

  2. Convert potentials into paid subscribers

    Developing the right incentive for customers to start paying for your product might not be as straightforward as eliminating ads from their preferred music. One of the most significant challenges for any business in converting users is determining the appropriate pricing model.

    The ideal pricing model for your company should strike a balance between the advantages for your customer and those for your business. For instance, to boost conversion, you might take on more of the subscription-related risk, thereby enhancing the value for your customer. Alternatively, if conversion rates are satisfactory but you think your business could perform better, there might be scope to adjust the pricing model in your favor.

    The final point to remember in the context of prospect conversion is not writing off customers who don't transition to paid at the first instance. See if you can convert them on the second or third attempt as they extend or deepen their interaction with your product.

    LinkedIn Premium excels at underscoring the advantages of a premium account over a free one. For instance, during its free Premium trial, LinkedIn accentuates product features that could be suitable for you and includes you in a community of other Premium subscribers.

  3. Enhance the lifetime value of your customers by upselling or cross-selling 

    Ensure that there's scope for your customers to expand within your business. This could involve proposing additional products or services, or simply suggesting new ways to utilize them. One strategy is to structure your offerings into a good, better, best model. While most of your customers will opt for the good and better options, some will be attracted to the "best" you can provide and are prepared to pay for it.

    There are also indirect, alternative methods to boost lifetime value. Take Amazon Prime as an example - although there's a single price for Prime's service, the more customers buy, the more value they derive from Prime. And the more they shop with Prime, the more Amazon profits by diverting sales from other platforms.

  4. Retain - give customers a reason to stay

    One straightforward approach to retention is to regularly remind your subscribers of their importance to you. This can be achieved by offering them perks like early access to new features or other forms of appreciation.

    Delivering top-notch customer service is also vital in keeping your subscribers. If they encounter difficulties in using your product, assisting them should be your primary concern.

    Another strategy to foster customer loyalty is to identify the reasons why customers unsubscribe and provide a solution that better suits their requirements. For instance, Graze, a snack subscription service from the UK, discovered that a significant number of their customers were unsubscribing due to the excessive quantity of snack boxes. Consequently, they incorporated a prompt in their cancellation procedure that offered the option to modify the delivery frequency, thereby retaining some customers who might have otherwise unsubscribed.

Why are so many companies moving to subscription pricing?

Companies are pivoting to subscriptions for both reactive and proactive reasons. Reactively, they are countering new or disruptive competitors who have leveraged a subscription model to establish a market presence. Proactively, they've observed that Wall Street assigns higher valuations to subscription businesses due to their potential to decrease customer acquisition costs (CAC) and enhance customer lifetime value (CLTV). Additionally, these businesses usually have a lower sales cost as they demand less initial commitment from customers.

A subscription pricing model can imply various things across different sectors and situations. For some businesses, the subscription doesn't inherently add to the value proposition and is mainly used to compete based on price. For example, Amazon Subscribe & Save was initiated to increase customer loyalty for staple goods and encourage consumers to shift from purchasing at a grocery store or Walmart.

Which KPIs should a subscription business monitor?

The most effective approach is to comprehend the relationship between Customer Lifetime Value (CLTV) and Customer Acquisition Costs (CAC). Even if a company isn't profitable yet, a strong ratio between CLTV and CAC suggests that they are well-positioned for future success.

In addition to CLTV and CAC, subscription-based businesses should consider unit-level profit margins and comprehensive retention data. It's more effective to assess retention in terms of dollars rather than volume, as this approach includes growth from upselling clients and the effect of annual price increases, which might result in some customer attrition but increased total revenue.

Businesses should also delve further and examine retention at the cohort level. This can offer valuable insights into the customer profiles you're attracting over time and the stickiness of your product.

Are some industries moving away from subscriptions?

Certain businesses are gradually incorporating new revenue structures. In some instances, we've observed a shift from subscription-based to transactional or pay-as-you-go models. This provides customers with a simpler, more adaptable method to test a service without the obligation of a monthly charge. It also enables companies to convey that they only earn when the customer achieves success.

What are additional factors crucial to effectively running a subscription business?

In a subscription-based business, firms must be strategic about how they allocate resources. As you acquire a large number of new clients, a significant portion may churn within the initial months. This is particularly prevalent when aggressive customer acquisition strategies or free trial offers attract less committed customers.

Some businesses pour substantial resources into supporting customers who aren't expanding or are likely to churn. Instead, it's crucial to identify the customers who are worth your time and effort.

Another success factor is the intelligent use of packaging strategies to increase customer value over time. Even though a customer might prefer to begin with a basic offer, there should be a well-defined path for upselling through various packages and add-ons.

Conclusion: The benefits of subscription models

When implemented effectively, subscription pricing can enhance customer value and loyalty, fostering a stronger connection between businesses and their customers. It enables more opportunities to learn about customers’ needs, usage and behavior and then serve up more curated and personalized experiences. Spotify's approach has enabled the expansion of the music industry's scope, prompting a significantly larger expenditure on content from younger audiences than was previously considered feasible.

However, subscription pricing is not a panacea and is not for everyone.

All businesses ought to seriously consider if subscription models are suitable for them and if they can help cater to the evolving customer needs. Even if it's a good fit, implementing it can be complex - avoid resorting to it merely for offering lower prices and discounts.

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