Subscription price is face of your service. When customers find your product seeking something on the net, what they look at first of all is (any guesses?) price. They don’t consider how amazing your product is, so that they will spend any money. They think about whether the product is worth the subscription price and whether they can afford it. Here you’ll find simple instructions for at least to start developing your price strategy.
- focus on customers’ economic value of your product and their willingness to pay;
- to figure this out, interview or poll them;
- keep in mind how your competitors price, but not mimic them;
- plan your costs based on the size of your market;
- experiment with pricing models and prices at the early stages of your startup.
Create with price in mind
Most aspiring product owners do like this:
❌ Don’t think much about how to determine subscription price and don’t be sure customers will pay the price until it is in the marketplace.
❌ Tend to think about pricing as one of the last steps of the project.
❌ Choose a tactic either to copy from competitors, while losing the opportunity to make their product more unique.
❌Decide on how to determine subscription price based on the company’s costs, jeopardizing themselves to set it lower and appear at the bottom of the market, or too high so that customers can’t afford the service.
❌May be eager to make the service «good for all». They over-feature it and finally find out that just a few customers wish for the service. Spending much — does not mean bringing more benefit to the client.
The results: such founders lose money they potentially could earn, struggle to explain to customers why the product costs such a bundle.
Successful product owners do like this:
☑️ Make price development a part of innovation and product building.
☑️ Before they even start looking for a software development company for startups to work on the idea they clearly understand how to determine subscription price.
☑️ Сonsider subscription price as one of the product differentiators, putting the price in relation to values customers receive with their product.
☑️ Know how much customers are willing to pay and build the service within the price limits.
The result: they don’t add unnecessary features people won’t pay for, so they save money. Have larger revenue on long-time periods, because they spend less on marketing and more people agree to the deal.
Economic value to customer (EVC)
When you start thinking about how to determine subscription price, economic value analysis is probably not the first thing that comes to mind. However, it should be among your first steps to work on.
To put it simply, the analysis includes calculation of benefits customers receive with your product in monetary equivalent. You figure it out from communication with potential customers or at least based on what values you and your team think the service brings to your buyers. Examples are increased revenue, time savings, status, reduced expenses, ease of use, higher security, reduced risk. Each of them is possible to apprise in dollars.
How to identify those values for your startup? Let’s say you are developing a music app with an algorithm that allows users to export and sync all songs they like from different apps, including liked music videos on Facebook and YouTube.
1. What problems your service solves or what needs it fulfills. In our case, the problem is that a customer has to spend time and move all the music they like to a new app. Here the value is the ease of use and, probably, time savings.
2. Quantifying benefits. For instance, it takes two hours to export all the songs manually to a new app and then spend 5 minutes each day to add there new songs a user has found on other platforms. So you take your average customer, statistics about their salaries and calculate how much they earn in an hour. If a user spends, let’s say, three hours in a month on messing around with new songs, you will figure out how much they could earn during these hours. Some companies choose to charge 10% of what they save to the client.
For some startups values may be evident: acquiring the subscription to your online workspace they don’t need to pay for the CRM system, calendar, taskboard, and communication separately. Or, as in our case with the music app it can be estimated indirectly. But when you provide intangible values (e.g. emotions) you more than in previous cases need the customer’s opinion on the point.
From where you are now, you will not be able to figure out ALL the economic values you create, and it is not necessary. Most values might appear long-term and not so clear to your clients. You should concentrate on those which can be proved and most beneficial to your customers. Moreover, it is better when the product’s values exceed the price.
Willingness to pay (WTP)
Ask your friend if they like your product. Then ask them if they are ready to pay $20 for it. The whole conversation changes.
WTP is the customers’ desire to pay you for the value they get with your service. Willingness to pay is not equal to economic value.
This is to say that if your market is couriers or maids and you offer a service with costs $1000 per month, WTP might be close to zero.
WTP is discovered through interviews, questionnaires, landing pages. We will consider it further.
To have a more or less clear understanding of the price your customers will approve, research on how much they earn and how much they spent on similar products. Talking about B2B subscription models — what their budgets are.
Market research
1. At this stage you are to discover how much people need your service, i.e. your market size. Is it a small group of data scientists or almost everyone who likes music?
2. You should also estimate how many customers you are able to acquire and retain at the current stage of your startup.
3. Give the floor to your customers — qualitative and quantitative methods. You are to ask questions about buyers’ values in your product, needs, struggles, and, sure, prices.
The qualitative method is most common for B2B startups and when your market is relatively small. The method is usually performed in the form of a 30-minutes-interview. Start with value-questions and then go to subscription costs.
Quantitative research — when you poll a large number of potential buyers. It comes in handy when your market is large and diversified or you identify yourself as a B2C startup.
Example questions.
1. About values and expectations. They may differ from field to field, but there are some ideas:
- What is your income? / How big is your company?
- What is your field of business?
- Do you have challenges with the problem?
- What are the challenges?
- What do you need the result from our product for?
- What alternatives do you use to solve your problem?
- What feature is most valuable for you? Is there anything in the competitors’ solutions that seems unnecessary?
2. Willingness to pay. People won’t tell you the exact price points. According to Van Westendorp’s approach on prices, you should ask the following questions:
- What is a prohibitively expensive price for this service?
- What price do you find too cheap and doubt the quality?
- What is an expensive price for this service?
- What price do you consider as a bargain for the service?
As a result you can expect to get something like this:
After the research, you will be able to segment your customers. Your product may solve various problems for various people. Start with less — 3-4 will be enough, to begin with, and then expand bit by bit.
Note: some businesses may not need segmentation. For instance, if you’re targeting a very small, specific, and well-defined audience.
For instance, you’ll understand that some of your customers are very price-sensitive — some just want a basic version, while others are ready to pay for extra features if the product perfectly solves their problems. These insights will help you a lot in the future — for instance, when you start offering discounts and packages customized to different segments’ needs.
Keep in mind that you should carefully choose only those segments that are commercially profitable for your company. For example, students need your service very much, however, are you sure they will pay you much for it?
Industry and competitors
Certainly, when figuring out how to determine subscription price you should not ignore other market players. Even if you are making something unique, people have probably been solving those problems in some way before.
1. Start with analyzing what the cheapest and the most expensive offerings are to solve your problem. As a startup, you will have a clear picture of your perspectives and what the bottom of the market is.
Customers will compare you with alternatives and you should get ahead of them.
2. Next, consider companies that are about your size. Pay attention to what pricing models they have, their target audience.
Researching competitive intelligence does not limit yourself to companies’ websites: check out comments they leave in interviews, study content they share in social media networks, and forums like Quora. If they are publicly traded companies, it is also worth looking at their financial information like revenue, number of customers.
Important notion! You shouldn’t mimic competitors’ prices. By this, you miss the fundamental point that your product should offer more value, and therefore priced differently.
How you will charge
Segments play a large role here because they are in need of different sets of features or even products within your domain. Having more options you will cover more customers.
Here you can innovate a lot. Unusual payment models, formats. As in Michelin’s case: they charge trucking fleets by the mileage they drove their Michelin tires, not by the number of tires bought.
Well-known pricing models:
1. Tiered model: basic/standard/premium or enterprise/small business/personal use. The model is suitable when your main value metric is a feature. Example: our project for 321JOBS!. They have three offerings for different needs.
2. With flat-rate you offer customers one price for all features and for everyone — clear and simple.
Example: one of our clients Fuzzy Pet Health. They provide a subscription service which lets you chat with a vet from your smartphone for a fixed monthly payment (about $10).
3. Value metric based model. Customers charge per user/GB/hour/videos watched/something else. The agile subscription model even greater customer cover — anyone can find a solution that fits. Why it might be the most profitable model and how to determine your unique value metric — read here.
Example when per user charging is to its place: CRMs, communication tools, help desks, ect.
4. Freemium model. Here your basic service is provided free of charge, customers pay for additional features, services that expand the functionality of the free version of the software.
Example: one of our clients home-sharing platform Roomster. They have basic membership and full membership. You can create an account and post listings for free, but for additional features you need a monthly subscription.
5. Combined model.
Example: our project for Userlytics. They have 3 packages and charge for each participant.
All the models can charge monthly or yearly. With annual subscription customers are more likely to become dependent on your service and agree to renew.
Choosing a pricing model, base your decisions on customers’ values; your costs (fixed and recurring); your competitors.
Calculate your costs
When you know how much your customers are ready to spend and what they are expecting to receive with your product, now you are to estimate what sum is reasonable to develop your service.
Let’s start with several definitions.
COGS (Cost of goods sold) includes materials and labour. Website hosting, website design, salaries, advertising, equipment and technology, legal issues, etc. Here you can calculate the approximate numbers.
CAC (Customer Acquisition Cost) — the total cost of marketing and sales / number of customers. As a startup, you might lack the information, because you haven’t much marketing data yet. You may simply guess because large companies will need more resources than small or individuals. Calculate how much you are planning to spend on sales and marketing and divide the sum of money on how many customers you potentially may cover.
LTV (LifeTime Value)— a key metric for subscription businesses. How much revenue you can generate while a customer is using your service.
The formula for your subscription model:
LTV > CAC + COGS
For an early-stage company, it is a hard task, because to achieve the accuracy you might need quite a few data — how many customers and how much time to spend with your product. Despite this, you can guesstimate using the following formula:
If you have enough data, you can use this formula:
Mentioned variables should be for the same period of time, i.e. year or month.
Experimenting with price
When you are in the early stage it is time for bold experiments. Don’t be afraid to test the weirdest pricing models and most high prices.
Classic A/B testing might be negative to be used on prices. You can get bad reputation if charging initial subscribers higher than the future ones.
However, there are some tricks you can still use not to turn your users angry:
1. Offer the highest price you ever think of to your potential customers when talking face to face. Then look at their reactions. They might just agree.
2. Test two prices. Let’s say $100 and $50, but when a user appears on a payment page you charge him $50 regardless of the price he has chosen.
3. You can start with an average price and then just double it for new subscribers. Measure the result on conversion rate, average revenue per user, overall MRR (monthly recurring revenue), and churn. You can double it for a certain period and look at whether the metrics change.
Note: a high conversion rate does not mean more money for you. Example: if at a price point $50 we have 100 customers, our monthly recurring revenue is $5000, but if at $100 we have 75 customers we will earn more — $7500.
Conclusion
Pricing is a progress.
First, after you determine your price and launch your amazing product you are to start thinking about nuances: detailed packaging, discounting, price localization (which is pretty important) etс.
Second, revision and sometimes even changes are recommended for new companies every 3 months. The process of how to determine subscription price you will have to repeat each time. Your product improves with time, your business team grows, and so your pricing can’t stay outdated. Through time you will have more and more data to analyze and put into practice.
And finally, if you wish to start knowing about your sales, rather than hoping, make price your core focus from the very beginning.
