How do you price your subscription and… how do you increase prices?
A brief history of netflix subscription prices shows that users on the basic plan will have only experienced a price increase once or twice.
The following content draws upon multiple sources, including Stanford’s Building and Scaling Subscription Businesses from Professor Ajay Arora.
There are 3 main ways to price your subscription business.
Flat Rate - think Prime
Feature Based - think Netflix
Usage Based
per user - Think Slack
per feature (ie: data) - Think web hosting sites
Or, a different way to phrase the above is:
Value based pricing - Price based on it's perceived worth
Competitor based pricing - Price based on competitors pricing
Cost plus pricing - Price based on cost of goods or services plus a markup
By the way, freemium is not a pricing strategy. It’s an acquisition strategy. Be wary of the difference.
The most important factor to consider when pricing: Willing To Pay (WTP)
WTP is a powerful lever and is the basis for beautiful pricing strategy. The price that someone is willing to pay varies drastically on certain dimensions. You know your customers best, so you might already have a good idea of what dimension that is.
For Disney+, the monthly willingness to pay for consumers increases by the number of children you have. Figures, right? It’s like a free babysitter.
For headspace, the monthly willingness to pay decreases with athletic use vs stress relief use.
So what are some scientific methods to help you determine pricing? We won’t go too much into detail here, but the following two methods are pretty common.
Max Diff Analysis
Conjoint Analysis
For pricing, you would hire a professional, perhaps with a PhD to figure this out.
Should you A/B price-test?
Take a look at the following headlines for the answer:
The answer is a resounding no. Even if you know Mac users tend to pay more for hotels, it doesn’t pass the Wall Street Journal Test.
Bonus: A long-time pricing expert has some advice for one of the more challenging monetization models out there: monthly fee plus per-transaction fees.
“Shopify is one of the only companies I’ve come across that is a general market solution that can get away with this sort of thing. It’s a combination of first mover advantage and incredible product strategy. Their product drives tons of merchants to their solution.
What Shopify does is create these really great incentive systems like a carrot and stick. Merchants get a lower transaction fee when they upgrade their monthly plan. It’s kind of perfect.
One place where there is a ton of opportunity for this is verticalized B2B software. I’ve seen this play out a lot in very industry-specific B2B software companies.
As far as best practices, make sure you keep it in line with customer willing to pay.
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