Effective Pricing Strategies for Subscriptions: Value-Based Price Optimization
Jan 9 2020
There’s a question that every startup founder, subscription service provider, and ecommerce store owner, needs to ask themselves on a regular basis: Is this the most effective price for my product or service?
If the answer is no, then there is potential for revenue-related issues as your company matures.
Especially if you’re trying to get ahead in today’s highly competitive SaaS and subscription markets. Finding an effective price helps you solidify your position, build trust with your customers, and achieve your business goals. But it can be a balancing act. Not only do you need to consider how much it costs to provide your service and acquire new customers, but you also need to set a price that reflects the value those customers get from it.
When you understand these factors, it’s easy to set a price that resonates with potential customers while still providing enough margin to grow your business.
In this article, we’ll walk through what makes up an effective price and how to conceptualize the most effective price for your business.
An effective pricing strategy is one that accurately connects the value your service provides with your target customer’s willingness to pay. Setting an effective price for your subscription business requires an understanding of the optimal pricing method to support not only the goals of your business but your acquisition strategy as well.
Effective price can also refer to the investment term for the price of a commodity after it has been liquidated from hedge funds.
Using pricing as a growth lever
At ProfitWell, we believe that finding the right pricing strategy for your subscription can be one of the most effective growth levers you have at your disposal. Whether you’re starting with cost-plus, competitor-based, or, value-based pricing (our personal favorite), the strategy you use will inform how easy it is to grow your company.
Effective pricing goes beyond just choosing a price point and adding $0.99 to it. SaaS and subscription companies need to have a comprehensive understanding of their target buyer personas and value metrics to build pricing tiers, packages, and bundles that align with how potential customers want to make a purchase.
It’s also important to make sure that your price matches your acquisition strategy. Companies with a touchless sales process will need to think about price differently than those with a more enterprise sales process.
Understanding how price impacts revenue growth starts by analyzing the factors that make up an effective pricing strategy. From there, you can determine what is best for your company.
5 characteristics of an effective price strategy
There are five core characteristics that form the basis of an effective pricing strategy. Finding the right price for your product or service requires a solid comprehension of each.
Customer perception of value
Value needs to be at the core of every pricing decision your company makes. Any price you choose always has to connect directly to the value customers derive from it. It’s one of the core tenets of value-based pricing, and it’s the basis on which you can evaluate any other aspects of your pricing strategy.
Costs of running your business
It’s important to know the true costs of running your business. The price you set has to cover your costs, as well as provide a margin for profit and unseen circumstances. Look at not only the production and development costs but your customer acquisition, marketing, and operational costs as well.
Competitors in your market
Whether you have one main competitor or hundreds, having a clear picture of what the other players in your market are charging for their service helps you position your price more effectively. While competing only on price is not a sustainable business model, knowledge of the market landscape helps you predict how potential customers will react to your price structure.
Target customer personas
It’s simple: know who you’re selling to. Building out a set of qualified buyer personas ensures that you’re not pricing your service outside the reach of your target customer. It’s also the most effective way to conceptualize what different types of customers you need to reach certain revenue and growth goals.
Subscription businesses depend on recurring customer revenue to grow. When you’re thinking about what price is most effective for your service, it’s important to factor in how each incoming or churned customer affects your overall company growth.
Choosing an effective price for your business
Once you understand the primary drivers of an effective pricing strategy, it’s easier to build one for your business. Here are four tactics you can use to start implementing a better pricing strategy today.
Create buyer personas
We touched on this a bit earlier, but qualified buyer personas are some of the best tools you have for figuring out what price is most effective for different types of customers. Using this information, you can also target each different customer type with specific pricing and features.
Price in tiers
Creating tiers allows you to structure your pricing in a way that’s appealing to a number of different personas. You can target them based on willingness to pay, specific features, upgrade paths, etc., and significantly increase average revenue per user (ARPU).
These tiers can also help you create a more well-rounded acquisition strategy by generating a pool of lower-CAC customers with increased potential for expansion revenue.
Perform a pricing audit
Take stock of your current pricing structure and strategy—seeing what works and what doesn’t makes determining next steps much easier. Start by taking stock of your current metrics. Look at your CAC: LTV ratio, churn rates, ARPU, and more to gain a better understanding of the current status of your business.
Annual plans not only help you build a more predictable revenue stream but also help reduce churn by retaining customers for the long term. When a customer chooses the annual plan, it also gives you the ability to target them with upsell and cross-selling opportunities over a longer period of time.
Effective pricing starts with understanding your value
When you’re able to connect the value your service provides to the price you intend to charge, that can ease the buying decision. But finding that most effective price works only when you understand who your customers are, what drives them to make a purchase, and why they choose you instead of one of your competitors. Balancing these factors with the others we’ve reviewed today ensures that you’re creating the most effective price possible for the growth of your business.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.