Subscription business pricing models have been around since the days of print newspapers and magazines. But today, the pricing model has expanded to include companies that sell a variety of items or services, including:
- Software-as-a-service (SaaS).
- Video, mobile or computer games.
- Media, such as web-based news publications or streaming video or music services.
- Apps.
- Food.
- Clothing.
Today, the possibilities are endless for subscriber-based services. But establishing a subscription service does come with challenges, including which subscription business pricing model you should use.
[Read: 6 Steps to Starting a Subscription-based Business]
What is a subscription business pricing model?
Simply stated, subscription business pricing models are the different ways a subscription-based service can price its offerings to drive revenue and satisfy its customers’ needs. Expert marketers commonly recognize four main types of subscription business pricing models:
- Flat rate.
- Tiered pricing.
- Per-user.
- Per-usage.
How to price your subscription-based product or service
The best pricing for your business will depend on your demographics, what you sell, and to a degree, the types of models your competitors are using. One thing you don’t want to do when pricing your subscription service is to just “go with your gut” or take a wild guess on the best pricing model.
Instead, do the appropriate research to determine the best way to attract, retain, and — if applicable, upsell — customers. This means evaluating your competitors, looking at what drives the most revenue for your organization, and considering your customers’ needs along with your product offerings.
For some products or services, such as a meal delivery service, streaming video service, or a news website, flat rate pricing often works best. Other organizations, such as SaaS companies, may require a tiered subscription service to deliver the depth and breadth of offerings their wide range of customers may require.
As long as you have a clear picture of your churn rate (the rate at which you lose customers) and your customer acquisition rate, flat-rate pricing makes it easy to forecast month-to-month revenue.
Flat rate pricing
Flat-rate pricing is the simplest and most straightforward of the subscription business pricing models. Traditionally used for monthly magazine deliveries, daily newspapers and today’s subscription-based news websites, every subscriber receives the same service at the same frequency for the same price.
For instance, keto snack service Keto Krate uses flat-rate pricing for a single monthly box of its keto snacks. The Washington Post and The New York Times use flat-rate pricing to give readers unlimited access to their online content. Streaming service Disney+ allows unlimited users in a household for one monthly or annual price.
The biggest benefit to flat-rate pricing is its simplicity for both for subscribers and the business. As long as you have a clear picture of your churn rate (the rate at which you lose customers) and your customer acquisition rate, flat-rate pricing makes it easy to forecast month-to-month revenue.
[Read: Welcome Back: How to Boost Customer Retention and Drive Repeat Business]
However, flat-rate pricing doesn’t allow you to take advantage of increased revenue from customers who would like more from your service.
Some companies, such as Amazon Prime streaming service and Imperfect Foods, offer flat-rate pricing with options to upgrade the service on a month-to-month basis. For instance, Amazon Prime subscribers receive movies and original programming included with their subscription, but may have to pay extra to access some of the latest titles.
Imperfect Foods delivers produce on a set schedule and allows subscribers to upgrade each box to include meats and fish, snacks, or dairy items.
Similarly, SaaS companies may allow users to add on modules on an “a la carte” basis, so business owners need only pay for the features they need.
Tiered pricing
Tiered pricing offers more flexibility than flat-rate pricing by dividing subscriptions based on additional services. SaaS companies often embrace this model to accommodate everyone from solopreneurs and small businesses to enterprise-level users.
Many graphic design platforms, email marketing platforms, CRM programs, cloud storage and backup services, and other business applications use tiered pricing.
[Read: 12 Common CRM Questions Answered]
Tiered pricing is fully scalable, meaning that as customers’ needs grow, they can continue to use your service simply by upgrading their capabilities. If you’re embracing this pricing model, you’ll want to be sure there is enough differentiation in the different tiers to merit the additional costs.
For businesses offering this pricing model, it can be difficult to forecast revenue, but it provides opportunities to upsell customers on the benefits of a broader plan with more capabilities.
Per-user pricing
Per-user pricing is a form of tiered pricing, in which the various tiers are determined by the number of users. SaaS companies, video conferencing and webcast services, and other B2B subscription-based companies often embrace this form of tiered pricing so that businesses can scale based on the size of their organization.
Netflix is perhaps the most well-known B2C company that uses this form of tiered pricing. In contrast to Disney+’s flat rate, Netflix charges different prices based on how many users can stream at once on different devices.
The benefit to per-user pricing is its scalability for customers. For businesses, it is a simple form of tiered pricing that doesn’t require evaluating product features to set prices but ensures that you’re earning revenue based on the number of people using your product or service.
Usage-based pricing
Usage-based tier pricing charges users based on how often they use specific features or which features they use. For instance, an email marketing company may charge users different monthly rates based on the size of their mailing list and how many emails they send per month.
Usage-based pricing is best for users who want scalability as far as features and frequency of use. It is simple for companies to sell this type of tiered pricing, as it is straightforward while delivering customers the flexibility they might need for their business.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
Follow us on Instagram for more expert tips & business owners’ stories.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
