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Constructing Pricing Strategy For Subscription Products

《Constructing Pricing Strategy For Subscription Products》

When it comes to subscription product” pricing>, you’re not just guessing…are you?

A while ago, an HBR” study famously claimed that> a 1% improvement in price would increase operating profit by 11%, making it the most effective thing you can tweak for increased business performance.

Pricing is important. It’s also one of the most” difficult ps of marketing> for folks to wrap their heads around. It can be one of the more technical aspects of marketing.

Then, when you bring subscription pricing models into the mix, things get even more complex.

First Thing’s First: How Do You Determine Value and Price?

There’s no way around it. You have to talk to customers and do some heavy lifting research to get accurate pricing. Patrick” campbell>, CEO of Price” intelligently>, put it well in a” growthhackers ama>:

《Constructing Pricing Strategy For Subscription Products》

Patrick Campbell:

“You should not be afraid to talk to your customer about pricing. It’s not a secret you’re going to charge them at some point, and acting like it is a secret is doing you and the customer a disservice, because they need you to stay in business if they’re going to get long term value out of the business.

The other reason it’s so important is that the ONLY data source that’s going to tell you what your value is, is your customer. No one else, no formula, no workaround, is going to get you to this answer, so just go head first and ask them.”

However, you can’t just ask your customer, “what would you like to pay for this?” (well, you could, but the Pay” what you want> strategy is a whole-nother article). Instead, a variety of research techniques have been developed and used through the years. Here are four popular ones:

  1. Gabor-Granger technique
  2. van Westendorp Price Sensitivity Monitor
  3. Brand Price Trade-off
  4. Conjoint Analysis and Discrete Choice Analysis.

Note: if you’re a startup, these techniques might be overkill. Ryan” farley> from LawnStarter” mentioned that getting on the phone with customers and gauging reactions to priced proved work well in beginning>

《Constructing Pricing Strategy For Subscription Products》

Ryan Farley:
“Pricing is tricky, especially with low volume.

I’ve found it best to do pricing experiments over the phone – the qualitative feedback you get can be just as valuable (if not more) than an A/B test. Trying to sell someone on a premium package at a higher rate, then hearing “that sounds pretty reasonable” or “you’re out of your mind for trying to charge that much” is super valuable. Especially when combined with all the other qualifying questions you ask.

Sure, these phone sells cost time and money. But it’s an example of doing things that don’t scale to figure out what does.”

That said, if you’re in an established market, these four techniques are popular and effective:

1. Gabor-Granger Technique

The Gabor-Granger Technique is a simple technique based” on asking people> the likelihood of their purchasing a product at different prices.

To simplify it, the technique involves asking a series of questions like, “would you buy (product) at (price)?” The price will then go up or down depending on the response to the first question. The series will continue 2-3 more times, until the consumer won’t go higher or lower on their interest price.

Here’s a sample chart based on Gabor-Granger data:

In this way, you can clearly visualize what percentage of people would buy at a given price (in the chart above, 3% of people would buy at $41), and you can determine which price would maximize revenue.

Use this technique to figure out the maximum price people would pay and to see the optimal based on amount of people willing to purchase, as well as the maximum revenue produced.

2. van Westendorp Price Sensitivity Analysis

In the van” westendorp price sensitivity analysis>, respondents are asked 4 questions:

  1. At what price would you consider the product/service to be priced so low that you feel that the quality can’t be very good?
  2. At what price would you consider this product/service to be a bargain—a great buy for the money?
  3. At what price would you say this product/service is starting to get expensive—it’s not out of the question, but you’d have to give some thought to buying it?
  4. At what price would you consider the product/service to be so expensive that you would not consider buying it?

In this way, it’s more indirect and can determine” price elasticity> as well as an accurate range of effective pricing for a product.

According” to greenbook.org>, this strategy is often used during new product development, and can help determine which pricing strategy is best:

“Whether a client is contemplating an aggressive entry price strategy or a premium skimming approach to price, the van Westendorp PSA can help determine which strategy is best. Established brands will use the PSA model to guide pricing for re-positioning or other pricing decisions, often as input to a test market.”

Here, the data shows an optimal pricing point:

And it can also show a pricing range:

This technique is perfect for subscription products with multiple tiers.

3. Brand Price Trade-off

Brand Price Trade-off (BTPO) is a statistical technique used to measure your relative ‘brand value’ or ‘brand equity’. Basically, it does this by modeling” the relationships> between your brands and the prices they command in relation to other brands and the prices they command.

More than other techniques here, it answers how much your market is willing to pay for your brand in relation to similar products from other competitors – which makes this technique a competition-based pricing technique.

According to B2B” international>, “It is suited to categories where products and services are relatively similar to each other, and where brand is a strong determining factor behind decision-making.”

Here’s an example of a BPTO exercise:

To reiterate, use this is product categories with little differentiation and where brands make a huge impact on pricing.

4. Conjoint Analysis and Discrete Choice Analysis

Conjoint” analysis> is a statistical technique used in market research to determine how people value different attributes (feature, function, benefits) that make up an individual product or service.

Discrete” choice analysis> is similar. The difference is, in conjoint analysis, respondents evaluate the product configurations independently of each other, whereas with discrete choice analysis, they simultaneously consider the options.

The purpose of both of these is to “yield a measure of the relative importance of each attribute, and a measure of the strength of influence of each level of each attribute. This is how Greenbook.org” explains it>:

“Perhaps the most commonly-performed simulation today is to calculate an attractiveness rating for each of all possible product configurations, and then sort the configurations by their attractiveness ratings. This allows us to identify the most preferred configuration (of all possible). In addition, if price is one of the attributes, and cost information is available, the most profitable combination of features can be identified.”

These techniques have wider applications than just pricing, but can nonetheless determine the values of certain product attributes and inform pricing.

Subscription Pricing Plan Tiers

Nathan” barry described> a huge problem he almost made in pricing: the mistake of having “only one price for your product.”

As he explained, you should price based on value, but the value derived by two different sets of customers can be totally different. On that same note, he relates the study Wlliam” poundstone told on beer prices with different tiers>…

In the study, researchers first offered participants two different beers: premium beer for $2.50 and bargain beer for $1.80. Roughly 80% chose the more expensive beer.

Next, a third beer was introduced, a super bargain beer for $1.60, in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

In that case, the seller actually lost revenue through bracketing because he bracketed his price down.

However, the third time around they removed the $1.60 beer and replaced it with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price.

Determining How Many Pricing Tiers You Should Offer

But is three pricing tiers the ideal offering? It would seem that way looking at most SaaS pricing pages. However, how many tiers you offer actually depends on a few different factors. Here%E2%80%99s” patrick campbell on the topic>:

《Constructing Pricing Strategy For Subscription Products》

Patrick Campbell:

“This depends on the number of customer personas/customer variations you’re targeting. Each persona should align to a respective tier, because then you ultimately have funnel-product-pricing alignment and your little SaaS machine should purr like a kitten.

There isn’t a magic number, but in this” ebook> we walk through what we see on average in the market – typically you’re looking at 3-5, but we’ve seen people with 1, 2, or 6+ plans be super successful, too.”

Once you’ve aligned your customer personas to different tiers, you can use one of the pricing research strategies listed above and optimize from there.

For more information on customer personas, check” out this post on how to create them with actual data>.

Which order is best?

Should you list your pricing from low to high or high to low? There are examples of successful companies that do both, of course. Here’s Freshbooks,” low-to-high:>

And Crazy Egg, high-to-low:

So, which works better? It turns out that, generally, high-to-low works better. According” to lincoln murphy>, “all things being equal (and equally good), the left to right, high to low approach seems to provide a statistically significant lift every time.”

A Quick Note On Freemium

Freemium isn’t really a revenue strategy, but rather a customer acquisition strategy.

As Patrick Campbell put in on his GH AMA, “You need to think of a freemium tier as a really expensive e-book. I know that’s a trite comparison, but when you think about it as lead-gen, then you’re starting to think about it correctly.”

In many cases, freemium pricing has” been shown> to kill growth, especially” early on in your company growth> (not always of course). However, don’t be afraid to offer a short” free trial>.

Here%E2%80%99s” a good guide on free trial and freemium offering for saas companies if you interested in further reading.>

Changing Your Subscription Pricing

Once you set your prices, that’s it. They are set in stone until your seed funding runs out and your company collapses…

…kidding, of course. In fact, Patrick Campbell recommends that should re-evaluate your pricing’s performance every three months, even if you’re a huge company. As far as changing pricing goes, he says you should make changes about every 6-9 months, more if you’re a smaller and more nimble company.

As for how to change prices, it’s a similar qualitative/quantitative research process that we outlined above for establishing prices. Here’s how Patrick explained it:

《Constructing Pricing Strategy For Subscription Products》

Patrick Campbell:

“I’d then collect this type of data from current customers, prospects, and target customers who have never heard of you (we call them market panelists) to figure out what the value truly is in this feature or set of features.

You may find current customers are super biased because they love or loathe you so much that it taints the data pool. You may also find prospects don’t care, but ultimately this data allows you to then figure out if you should:

1. raise the price, because the feature(s) boost value so much,

2. simply include the feature as a retention mechanism (it’s ok for customers to be willing to pay more than prospects, because that means they’re loving the product, or

3. not build the feature out at all because it’s not going to provide proper value.”

How much of a price hike is too much? While there is no magic number, Weber%E2%80%99s” law shows that> it is approximately 10% where customers begin to become aggravated. But you’re going to do the research anyway, of course.

Annual Pricing Plans

Every subscription product should offer an annual plan.

Why? Look up the Time” value of money>. If you’re too lazy, think about it logically from a cash flow perspective – more cashflow upfront allows you to invest that in whatever ways you choose, while not worrying about losing that customer for at least a year.

According” to a price intelligently study>, only about 1 out of 5 SaaS companies are offering both monthly and annual plans. The article then says that “monthly payments may be the lifeblood of your business, but annual subscriptions secure you more business upfront, increase cash flow, and reduce churn.”

Andrew” tate> expanded upon this” on profitwell blog>:

《Constructing Pricing Strategy For Subscription Products》

Andrew Tate:
“But having that money up front means that you can make more investment in your business, growing your user base and boosting your revenue.

A lump sum payment into your bank account can be a lifesaver for a new SaaS business. It can help cover customer acquisition costs and allow you to invest in your company, paying for office space, key new hires, and great SaaS services yourself.

In turn, this increase in investment means that you can spend more on customer retention, more on customer acquisition, and more on great people and your product, which will itself boost your bottom line.”

Annual plans will also usually better active usage and retention than monthly plans. The individual made a bigger investment in the product upfront, so they are more invested in the product overall.

How To Implement an Annual Pricing Plan

Price” intelligently recommends discounting> your annual subscriptions 15-20%, but it all depends on your audience’s price sensitivity. Use one of the pricing research strategies above to accomplish that.

《Constructing Pricing Strategy For Subscription Products》

Another point: Patrick Campbell noted in his GH AMA that, usually, saying something like “1 month free” or “2 months free” works much, much better than saying a certain % off.

One mistake” to avoid> is measuring your yearly members as MRR for the month they purchased. Instead, make sure you divide your yearly plan by 12 for your MRR.

Some companies even push it so far as to only offer annual plans (good for them, annoying for us).

《Constructing Pricing Strategy For Subscription Products》

Pricing Tricks and Tactics

To be clear, psychological pricing tricks should be a secondary thought to your fundamental pricing strategy. Patrick Campbell calls” it the last all of which you could still test for greater revenue>:

《Constructing Pricing Strategy For Subscription Products》

Patrick Campbell:
“You need to make sure your core pricing process is pointing to success or failure in your pricing strategy, because if you really should be priced at $100 and you’re priced at $20, it doesn’t matter if you put “$19” – you’re still going to lose in conversion and monetization…

…If the foundation of your strategy sucks, no amount of “end your prices in 9s” or “just add an annual plan” will solve your problems. Too many people rely on “best practices” that haven’t been rooted in anything, but a lot of people saying they work. You need to test and collect data. If you’re not doing this in pricing, you’re leaving an extraordinary amount of cash on the table.”

Still, to round up, here are a few popular and effective pricing plan tactics:

If you want to go down the rabbit hole in psychological pricing plan strategies, there is no shortage of good resources:

Well, Can You A/B Test Pricing?

You can, but most people don’t recommend to A/B test pricing. To set up a controlled experiment where you offer the same product for different prices to different people opens you up to potential PR blowback.

Even functionally, though, A/B testing isn’t always the best way to determine pricing. Patrick Campbell said that “A/B testing for optimizing your pricing structure and determining your true price point is a terrible idea; it’s a downright awful one.” And as Eric” yu> from Price Intelligently put” it>:

《Constructing Pricing Strategy For Subscription Products》

Eric Yu:

“A/B testing is never the best option for determining an optimal pricing strategy for your company. The practice works great for a lot of things, but its relative nature does more damage than good when coming to the most important aspect of your business. You’re much better off just speaking and sourcing information from your prospects, leads, and current customers.”

A/B testing can cause some adverse anchoring effects. In addition, it is iterative and contextual, not absolute. Even if B beat A, that doesn’t mean B is the optimal price point for your product.

However, there is one potentially effective way to A/B test subscription pricing.

That is, you can split test two different prices (say $29 and $39 a month), but when the customer reaches the checkout page, you charge the same price ($29) for both variations. This way, you can test price elasticity without any PR blowback or adverse anchoring effects (by giving them the lower price as the final price, they won’t be aggravated that you ‘tricked’ them to the checkout).

Conclusion

Pricing strategy is hard. It’s also of utmost importance, so putting effort into optimizing it is well worth it. A few quick tips:

  • Don’t guess.
  • You actually have to talk to customers to get good data. There are tried and true market research methods to determine accurate pricing.
  • Offer multiple tiers for your different customer personas. Price them based on the research you’ve done within each persona.
  • Don’t do long term or drastic discounting. That anchoring thing works both ways.
  • In” most cases don hide pricing or keep it secret>.
  • Evaluate pricing every 3 months. Think about changing it every 6-9.

What do you think? Have you any experience, victories, or defeats with subscription product pricing? Let me know in the comments.

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