How to Build Effective Pricing Strategy for Optimal Recurring Revenue

Pricing products and services right is the key to maintain profitable margins while attracting more subscribers. For subscription companies, particularly, pricing is not merely about billing customers, but also intelligent expansion. One dollar too much can turn off subscriptions, and one dollar too little can devalue services.

On the contrary, getting the price balance correct can make repeat payments affordable for customers, and maximize cash flows for companies. So let’s find out how businesses can price correctly, and what they need to take into consideration for that.

Why Effective Pricing Matters for Subscriptions?

Setting efficient prices is important for businesses in general. But when it comes to subscription businesses, it is doubly important. Because other businesses follow one-time payment models, and subscription services charge on a recurring basis. Meaning, if pricing isn’t structured right, then customers have to go through ineffective billing cycles again and again.

This can draw three outcomes: either customers churn due to unfair costs, or businesses price too low and lose revenue, or businesses set fixed fees correctly but still lose revenue because of the changing market conditions. So pricing needs to be done carefully.

Recurring payments carry a more significant weight than one-off payments because they are responsible for bringing in revenue, and retaining consumers. Charging well-planned recurring prices can lead to an uptick in revenue.

Because when customers feel that what they are paying matches the value of what they are receiving, it strengthens their trust in your business, and discourages them from looking for alternative options.

This increases CLV and decreases churn. And also makes the entry barrier i.e. the subscription fee easier for customers to overcome. Another characteristic of subscription pricing is that is represents the growth goals of a business. For instance, if a business accepts fixed payments, it means that it values stable revenue.

And if it adopts usage-based billing, then it might be aiming for faster, non-linear growth and higher customer satisfaction.

The Key Elements of a Great Pricing Strategy

There are many factors that influence the effectiveness of a pricing structure. These are some of those with regards to subscription businesses:

• Customer segmentation

Different consumers have different pocket power. They all can’t be expected to pay in the same way. So businesses can segment their plans and pricing structures according to their target consumer groups. For instance, a SaaS business dealing with both enterprise and startup clients can build two differently priced plans for each. Or, it can adopt usage-based billing so both clients can use services according to their needs, and pay different consumption fees.

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Moreover, if a business targets individual customers belonging to diverse backgrounds, it can tweak its prices to make charges fair for all. For example, it can allow student discounts to undergraduates so that high service fees don’t hold them back from benefiting.

Another segmentation that successful businesses do is by geography. Customers belonging to different economies have different purchase power. So prices can be set lower for those in poorer economies to penetrate those markets better, and to acquire more users.

• Price and value alignment

Price must be aligned with the perceived value of a service. It shouldn’t be based on the business’s operational costs alone (cost plus pricing). That’s because customers pay for the value they derive, and the outcomes they benefit from. If the service price is higher than the benefits it provides, customers are likely to walk away soon.

But if the price matches the value, then customers are likely to pay happily. Plus, this way the business can also charge additional fees for its more premium services. So it’s all about how businesses shape customer value perception, and assign prices that reinforce that perceived value.

• Plan variation based on features or usage

It’s smart to offer more than one subscription plans. Each plan consists of a different feature set, and charges accordingly. For example, basic plans contain the most basic features and charge the lowest prices. In comparison, premium plans give access to all the advanced offerings a business has in store, and charge higher prices accordingly.

• Consideration of consumer psychology

Psychological pricing is one pricing strategy that takes consumer behavior into consideration. In this strategy, customers are attracted toward subscription via charm pricing. Example: a service priced at $9.99 instead of $10 to create the perception of a discount.

Similarly, businesses also implement anchor pricing by offering three or more subscription tiers. Example: monthly plan is $50, quarterly plan is $100 and annual plan is $350. The monthly plan proves very costly for buyers, and even though the annul plan is the most cost-saving, still it is hard to pay such a huge amount upfront.

So customers are naturally led toward purchasing the middle plan that seems the most reasonable, and is also cheaper compared to the monthly.

• Flexibility for customization

Not all customers prefer plans that give access to a fixed feature set for a fixed price. They might need modular options (like hand-picking features and creating a custom plan) or add-on options (buying extra services alongside a basic plan). If a business delivers such flexibility, it needs smarter pricing rules too, that can be implemented in real-time.

Multiple Pricing Models to Choose From

Businesses can choose from the following pricing models with their own strategy in mind. Subscription billing software like SubscriptionFlow accommodates all of them for flexible payments:

Flat-rate pricing: Flat rates are tied to subscription plans, and they are collected on a recurring basis. Customers are rewarded with consistent services in return. For example, a $10 basic movie streaming plan that allows access to one user device only.

Tiered pricing: Features are divided into different tiers. Lower tiers may contain only the basic features or a mix of basic and advanced. Higher tiers contain all the advanced features. Each tier is priced differently, and its price reflects the value of its features.

Moreover, businesses can also set up tiered discounts. For example, if a customer buys subscription to 3 products, they pay $50 per product. But if they buy 5 products, then they are moved to the upper tier, and they get to pay $45 per product instead.

Usage-based pricing: It also goes by the name ‘pay-as-you-go pricing’. Users pay according to their unique consumption levels. They are not charged fixed and rigid fees. Those with high consumption pay higher, and those that utilize less pay lesser. So charges become fair for all. Business revenue too, experiences a spike when usage peaks, and declines when usage becomes slow.

Freemium + paid upgrades: Customers can access the most basic features of a service for free. But to unlock higher functionality, they need to subscribe to a plan. This gives customers a taste of the services and lets them assess value before committing.

Hybrid pricing: Hybrid pricing models combine two or more billing models into one to create a more flexible charging structure. Hybrid models create win-win situations for both businesses and their consumers, so that neither side suffers losses. For example, fixed charges can be combined with usage-based fees. This adds to revenue stability (as customers still have to pay a fixed fee upfront), and also makes way for fairer billing (by tying the majority of the fee to actual usage).

Steps for Building a Smart Pricing Strategy

These are the steps you need to follow for establishing a pricing structure that amplifies your revenue, while also keeping customers happy:

Step 1: Research the market

The first step is always studying the market and your competitors in the same industry. It gives you insights into new market demands, latest trends (what customers currently prefer), how much customers usually pay for rival services, which seasons often see a revenue decline, etc. The better the market research, the more well-thought the pricing strategy would turn out.

Step 2: Understand target customers and their spending power

Focus on the consumers you are targeting and study their demographics and behaviors. What age group they mostly fall into, what backgrounds they belong to (e.g. students and employed individuals), and how much they are likely to spend on your product. Center your pricing strategy around your consumer needs, and segment pricing plans according to customer groups if that is more effective.

Step 3: Define value metrics

Define the units on the basis of which you will charge. For example, if you want to offer usage-based billing, then think about which value metrics you want to set up. They can be the number of user licenses, API calls, computing power used per hour, etc. Be careful to choose metrics that actually match the users’ perceived value.

Step 4: Test & experiment

When you decide upon a pricing structure, thoroughly test it out by conducting experiments before fully adopting it. For instance, if you are going with tiered-pricing, create two or more tiers to experiment first. See which tier brings in the most customers, and faces lower churn. Plus, you can also grandfather old users so that they are not impacted by price increase, and they don’t walk away because of that.

Step 5: Measure outcomes

When experimenting with different pricing models, measure the impact they produce. Such as churn rate, average revenue per user and CLV. These show you whether your strategy is effective enough, or whether it requires further tweaks.

Step 6: Adapt pricing as needed

Pricing isn’t, and shouldn’t be static. Because market trends evolve constantly, and supply and demand keeps on fluctuating. If businesses do not adapt their pricing strategy according to the changing market conditions, they will lag behind their competitors. Successful strategies require continuous monitoring and optimization in order for the prices to remain relevant, and continue satisfying the customers.

Using SubscriptionFlow for Setting Up Smart Strategies

Smart pricing strategies require billing tools that can execute and sustain them effectively. Without these tools, strategies remain in theory, never fully realized in practice. SubscriptionFlow offers the modern billing features your strategy needs.

It allows businesses to select from a range of pricing models: pay-as-you-go, tiered, freemium, hybrid and more. Then on the basis of the model selected, it automates billing flows, generates flawless invoices, provides the right set of gateways, and streamlines subscription renewals.

You not only get to see your pricing strategy in action, but also get to measure its outcomes in real-time. SubscriptionFlow’s reporting and analytical capabilities give you access to rich insights regarding your revenue and customer activity so that you can keep on refining your charge structure. 

Plan your prices. Power your growth. Sign up for SubscriptionFlow to experiment with various pricing models, and seamlessly implement the right one.