Top 5 Pricing Strategies for Subscription Businesses
3 MIN READ
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Updated on May 2, 2023
A 1% improvement in pricing strategy can help improve your profits approximately by 11.1%. But why on earth do we need 5 different strategies to get it right?
The short answer is that there is no subscription pricing strategy that is applicable for every customer base. While one subscription option can be an excellent fit for one company, it may not work as well for another company. So it is essential to consider your target audience’s needs and preferences and the budget for your business.
1. Get people in the door with a free plan – Freemium Strategy
The freemium model is based on the principle that if you can get customers in the door with a free plan, they will eventually upgrade to a paid plan.
Trello is one of the companies that managed to successfully scale its freemium model. They brought in loyal fans through their model and had a laser focus on providing them with real value. Indeed, when Atlassian acquired Trello in 2017, they adopted Trello’s freemium model across all their other offerings.
Typically, a subscription business offering this model does not have a time limit for the free plan but will have some limitations. Some features are unavailable in a free version. Still, freemium products convert customers without sales 25% more often than a free trial mode.
In his book “Free,” Chris Anderson explains that freemium works on the 5 Percent Rule – where 5% of premium customers support the remaining 95% of free users and the cost of servicing the 95% is close to zero.
2. Cater to different factions of your audience – Multiple Edition Strategy
Not every company has a target audience that is looking for the same paid plan. The multiple edition plan allows a business to create paid options for many groups. It is essential to design different price options that apply to specific groups. A billing system like Chargebee can help you accommodate any complex pricing strategy and bill your customers accordingly.
Freshdesk follows a multiple edition strategy that caters to the needs of different segments. They bundle various features that can attract a large customer base from small businesses to enterprises. As the business scales, they’ll be able to upgrade the plans based on their needs.
3. Give customers an incentive to upgrade – Promotional Strategy
Consider offering a free trial or providing the option to try two weeks to one month of a paid service for free. Also, promotional incentives can be an excellent method for convincing dissatisfied customers to stick around. For example, give two months free if they had an issue with your service or provide a $50 credit when there was an outage.
Freemium vs. free trial
There’s always confusion between offering freemium and a free-trial. Offering a freemium option requires you to burn through a lot of money. If your current conversion rates are high or a product that generates value and word of mouth as more people use it (Zoom, Calendly, Bitbucket), opt for a freemium model.
But, as OpenView puts it: “If your business is laser-focused on maximizing paid conversion and near-term revenue, a free trial is the way to go.”
Flow got a 17.3% increase in conversion by optimizing their free trial.
4. Instead of paying up front, users can pay for what they use – Pay as you go Strategy
It can be practical for specific business models to send a bill to customers at the end of the month for the services they used instead of billing for a single fee upfront. Several cloud computing services follows an usage based pricing model. AWS Pricing and GCP Pricing is dependent on the amount of workloads the customer uses.
AWS – Pay as you Go Strategy
5. Lock in your price point up front but keep other options open – Overage Strategy
It’s a model that is being adopted rapidly across subscription businesses. You lock in the customers to get a base price and then charge the customers for extra usage. This idea is adopted from traditional communication companies.
Chargebee includes a base fee in each plan, and if the revenue exceeds the specified limit, there will be an overage charge. It offers a fair solution to both the customer and business. The customer is free to cross the agreed-upon value, and the business can charge accordingly.
Conclusion
Keep in mind that none of these strategies have to stand alone to be successful. There are many options for mixing and matching components from different strategies (here’s our ultimate pricing guide). It is also essential to keep in mind that your pricing strategy is not set in stone. If something isn’t working, don’t be afraid to change it––Chargebee helped Drawboard achieve a 20x ROI with their pricing experiments.
