Subscription Pricing Models

In recent years, more and more companies are leveraging subscription pricing models, especially SaaS companies. This includes nearly all of today’s most popular enterprise software, such as Salesforce, Slack, and Google Workspace. This model has proven to be not only convenient for customers, but also provides a consistent stream of recurring revenue for businesses.

Within a subscription pricing model, there are multiple options to choose from

• Per unit/user
• Usage based
• Freemium
• Tiered Subscription Service
• Fixed/Flat Rate Subscription Service

One key benefit of choosing a subscription pricing model is having predictable revenue. As a business, it makes sense to prioritise this. This means you could put more of your focus and resources on the product or service itself, as well as marketing.

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Overview of different Subscription Pricing Models and benefits of Subscription pricing

Depending on the type of services offered and the demand, a business may employ one or multiple pricing models. Let's look at the different types of models and their benefits.

Common Pricing Models:

• Pay-as-you-go pricing: As the name suggests, a business charges customers based on how much they use or consume a product or service. This model is commonly used for cloud-based or SaaS (software-as-a-service) products.
• Tiered pricing: Customers are offered different access levels or features at different price points. The price a customer is charged often depends on the number of features available.
• Freemium pricing: Customers are offered a free basic version of a product or service with the option to upgrade to a premium version with additional features or functionality.
• Bundled pricing: A package deal that includes multiple products or services at a discounted price is offered to customers. This model is frequently applied to subscription boxes or media bundles.

Advantages Of Subscription Pricing Models

As you build a stronger, more reliable customer base, and your MRR (Monthly recurring revenue) increases, you’ll begin to notice patterns. Tracking when and why a customer cancels their subscription is key to making sense of these patterns, so you can better tailor your product or service.

Customer loyalty is important for maintaining high MRR. Loyalty can be achieved by incentivizing customers to continue using your product/service by offering loyalty points and referral codes. For instance, if a customer refers your product to a friend, they can get 10% off their next month.

Adopting a subscription pricing model for your online business can lower customer acquisition costs. This is because you won’t have to constantly acquire new customers to grow revenue, as long as you keep your existing customer base satisfied.

Popular pricing models

There are quite a few ways to price your subscription-based service or product. Customers can try out your product/service for free for a trial period and have the flexibility to cancel. This reduces the need to ‘push’ a sale, and you can focus on other areas of the business.

A free trial is especially important if you’re in the early stages of building your product/service. The internet is a deep ocean, and many potential users are constantly comparing your service to your competitors. A generous free trial would make their buying decision easier by trying your service/product to see if it fits their individual needs.

Let’s analyse some pricing models with real-life examples.

Fixed/Flat Rate Subscription Service

You can employ a fixed/flat subscription system that allows customers to pay a set fee for a set period, typically monthly or annually. This fee gives the customer access to a variety of products or services, which they can use as much or as little as they want during the subscription period.

Netflix is a prime example of fixed or flat-rate pricing. It offers a flat-rate subscription system where users can access all their media content for a monthly recurring fee. There are no additional fees for accessing specific titles or features.

Another example to consider is Loom. Loom offers a flat-rate subscription model for their video messaging tool. Users can access all of the features for a monthly fee, regardless of how much they use the tool. Loom also offers a free trial, although users are limited to 5 mins/video.

Pros

• Simple and easy-to-understand pricing model for customers
• Provides predictable and consistent revenue for the business since the access fee is fixed
• Customers can access all of the features and content without any additional fees or charges

Contras

• It may not be cost-effective for customers who only use the service occasionally
• It can be less flexible compared to other pricing model

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Tiered Subscription Service

A tiered subscription service is best for a service that wants to provide customers with varying levels of access to products or services at various price points.

Each service tier provides the customer with different perks, with higher tiers providing more features.

Jasper.ai is a writing software that operates the tiered subscription model. The lowest and cheapest subscription tier allows customers to generate 10,000 per month, while the highest and most expensive tier allows as high as 700,000 words of AI content per month.

Spotify is an appropriate example of a service that is tiered. It offers free, premium, and family plans. Each tier provides different features and benefits, with users paying more to access additional features.

Pros

• It allows customers to choose a plan that meets their needs and budget
• Can encourage customers to upgrade to higher-priced plans to access additional features

Contras

• It can be difficult for customers to understand the differences between different plans

Freemium

A SaaS freemium pricing model means the service provider offers a free basic version of its product or service while charging for more advanced features or functionality.

Webflow runs a freemium subscription that provides a free plan with limited features and paid plans with more functionality. Users can create a basic website with the free plan, while the paid plans include more advanced features such as higher bandwidth, content editors, and custom domains.

ClassPass, a fitness platform, also provides users with access to a free trial and a paid subscription that allows them to access more content.

Pros

• Attracts a large user base by offering a free version, which can increase brand awareness and build trust and loyalty with potential paying customers
• Provides a steady revenue stream from those willing to pay for premium features
• It can help companies to develop and improve their product or service based on user feedback

Contras

• Offering a free version can be costly, as it requires resources and support without generating revenue from those users
• Not all users will upgrade to the premium version, limiting the company's ability to generate revenue

Per Unit/User

Per Unit/User pricing is used by software companies to charge customers based on the number of users or units (devices) that access their software. 

Microsoft uses this pricing model for Office 365 suite, charging customers based on the number of users who access the software. A company, for example, can buy a subscription for ten users, and each user can access the software from multiple devices.

Pros

• Allows companies to generate revenue based on the number of users or units sold
• It can be profitable for companies with a large customer base or those selling products with a high-profit margin

Contras

• It can be expensive for customers with many users or units
• Pricing may not be flexible enough for customers with fluctuating user or unit numbers

Usage-based

In a usage-based model pricing system, software companies charge customers based on the amount of software or services used or consumed.

Here is an example: Customers are charged by Copyscape based on the number of pages scanned for plagiarism, and the price varies depending on the volume of pages scanned. Customers can buy credits or a monthly subscription to scan a certain number of pages per month.

Pros

• It can be more flexible than per unit/user pricing, as customers only pay for what they use
• Allows companies to generate revenue based on actual usage rather than just the number of users or units sol

Contras

• It can be difficult to predict revenue or budget for customers with highly variable usage patterns
• Customers may hesitate to use a product or service if unsure of the final cost

Important factors to consider:

When fixing a subscription system for a product or service, it's important to consider various factors to ensure that the pricing strategy aligns with the company's goals.

Some of the important factors to consider include:

Target Audience

Companies should also consider the demographics, behaviours, and preferences of their target audience when setting prices. This can help ensure that the pricing strategy is aligned with the needs and expectations of the target audience.

Current Customers

Understanding the demographics and purchasing behaviour of existing customers can help companies tailor their pricing strategy to meet the needs of their target audience. For example, if most customers are price-sensitive, a company may need to consider offering more affordable pricing options.

Revenue Goals

Companies need to consider their revenue goals when setting prices. This includes determining the minimum amount of revenue needed to cover costs and generate a profit, as well as setting targets for revenue growth.

Competitors

Understanding competitors' pricing strategies can help companies ensure that their pricing is competitive within the market. This includes considering the pricing of both direct and indirect competitors, as well as any pricing trends within the industry.

By considering these factors, companies can develop a pricing strategy that aligns with their goals and meets their customers' needs.

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To Wrap up

Starting a subscription model can be intimidating at first, it's easy to fall victim to analysis paralysis with so many options. However, with the right research and analysis, you can be in a better place to decide. In any case, do what feels right for your product or service, you can always iterate later down the line. Most companies regularly revisit and update their pricing every 6 months.

We hope this article has helped you make an informed decision on how to best price your subscription-based product or service.

Whats next?

After you’ve decided on the most suitable pricing model for your business, it's time to build it out. Check out this guide on how to create a membership site with Webflow & Memberstack

https://www.memberstack.com/blog/membership-site