9 Pricing Strategies For Subscription Business

The fixed price model is reminiscent of the popular phrase "all you can eat" in buffet restaurants. It allows businesses to charge customers a predetermined fee, whether monthly or annually, regardless of their actual usage.

Benefits:

• Predictability 
• Ease of budgeting for both the business and the customer
• Simple and easy to understand.

Challenges: 

• Lack of scalability based on usage
• Potentially leading to perceived unfairness by customers who utilize the service less frequently
• Potential dissatisfaction among customers who feel they are not getting their money's worth if their usage is minimal
• Inability to charge more to customers who are willing to pay extra for additional benefits.

The usage-based pricing model ties the price directly to the customer's usage. This approach aims to align the price with the value received, as exemplified by electric scooters commonly seen in major cities.

Advantages:

• Clear communication of the product's price to customers.
• Fairness and transparency, as customers only pay for what they use.

Challenges:

• Forecasting future costs may be challenging since they depend on usage, which can impact budgeting.
• The ease of implementation and tracking depends on the variables used to determine usage.

The tiered pricing model incorporates elements of both usage-based and fixed pricing. It offers customers multiple price levels to choose from based on their specific needs. A prime example of this model is today's mobile phone plans, where customers can select from S, M, or L tiers based on their requirements.

Benefits:

• Enables precise budgeting and the ability to scale the subscription to match changing needs and costs.

Challenges:

• Too many tiers can lead to confusion among customers.
• Requires careful consideration and strategic pricing to maintain upselling opportunities.

The volume-based model is similar to the usage-based model but introduces a decreasing unit price as usage volume increases. This non-linear pricing approach allows for easier application of discounts and rewards for key customers.

Benefits:

• Lower unit prices incentivize increased usage and provide opportunities for customer rewards.

Challenges:

• Shares similar challenges with the usage-based model.
• Communication of non-linear pricing to customers can be challenging.

In this model, fixed and usage-based pricing are combined. It involves a fixed price for a specific number of priced variables, with the option for customers to increase usage volume at an additional cost.

Benefits:

• Easy to communicate and scales effectively based on usage

Challenges:

• May make customers more cautious about their usage if they perceive higher costs associated with increased usage.

This model combines the tiered and usage-based models, merging both their advantages and challenges. It allows customers to select their desired tier (e.g., S, M, or L), with the option to adjust their level of service based on their needs.

Benefits:

• Customers have the flexibility to scale their subscription according to their requirements.
• Customers often opt for higher tiers to ensure they have sufficient resources.

Challenges:

• Complexity in pricing strategy and implementation is increased to facilitate upselling.

One of the most popular pricing models in the subscription economy is the freemium. In this model, customers are offered a basic version of the product with some features limited or restricted, and certain features are reserved for paying customers.

Benefits:

• An excellent way to get customers to try your product or service for the first time with a low barrier to entry.
• Offering a free version can attract a larger user base and increase brand awareness as more people have the opportunity to experience your product.

Challenges:

• Unfortunately, offering a free version means that not all customers will pay for the product, potentially resulting in missed revenue opportunities.
• Some customers may not see enough value in upgrading to the paid version and may choose to continue using the free version instead.

Another popular pricing model in the subscription economy is the free trial. In this model, a limited time period of free access is provided, after which a different pricing model, as mentioned earlier, is applied to the product.

Benefits:

• Similar to the free version, a free trial allows customers to try your product or service with a low barrier to entry. During the free trial, customers can experience the full potential of the product or service and its features.
• Providing a free trial can help build trust and confidence in potential customers, increasing the likelihood of conversion to paying customers.

Challenges:

• If customers do not perceive enough value during the free trial period, they may not continue as paying customers after the trial ends.

This pricing model charges customers based on the specific features they use. It is suitable for businesses with a diverse customer base and varying needs.

Benefits: 

• Customers pay only for the features they use, which can lead to cost savings.
• Allows you to offer a range of features at different price points, which can attract a wider customer base.
• Can help you to identify which features are most popular and which ones need improvement.

Disadvantages:

• It can be difficult to determine the price of each feature, which can lead to pricing inconsistencies.
• It can be challenging to communicate the value of each feature to customers.
• It can be difficult to predict revenue, as usage patterns can vary widely.

When choosing a pricing model, selecting the right metrics is crucial. Here are a few tips for selecting the right metrics:

• Value-based – the metrics chosen should transparently reflect the value the customer receives. The more the selected metrics encompass this value, the more confident you can be about the customer's perceived value.
  
• Measurable – the metrics should be trackable and measurable in a precise and systematic manner. You cannot charge customers for something you cannot monitor.
  
• Manageable – if customers are charged based on usage, they need to feel in control of the situation. External factors should not significantly impact the final invoice amount sent to the customer.