Written by Miguel Van Damme
Similar to the rise of discount stores after the Great Recession in 2007-2009, subscription-based pricing is emerging all around us as companies need to improve their margins and cash flows. The pricing mechanism is well established in the SaaS industry [1], Netflix and Spotify being the most common examples. However, the concept is also applied in traditional industries, Michelin offers a Tire subscription, Amazon created one for household products and Volvo makes an all-inclusive car subscription available to its clients.
The rise of this type of pricing mechanism isn’t surprising as subscription-based pricing has major advantages. Think of predictable revenues resulting in better cash flow management, increased opportunities for cross- and upselling, and higher margins. In this article we lay the foundation to set-up a subscription-based pricing model:
1. Consider entry fees
An entry fee is a pricing element that is often used in the TelCo industry and usually disguised as an activation cost. Industries with shrinking margins, such as B2C cleaning services or services with high setup costs, also started applying this technique. Entry fees can not only boost the initial revenue from your customers, but they are also a great way to incentivize clients with promotions such as “Subscribe now and the entry fee is on us”.
2. Define differentiated value (per package)
Subscription-based pricing often includes different types ofpackages. These differences will allowyou toreach a larger target audience and increase the ‘average basket value’. It is important to understand which features to include in each package and thatsimplicity is key. Customers must easily understand what the additional value is of the higher-priced package(s).
3. Assess payment frequency
Monthly, quarterly, yearly payments, which one will you choose? Convincing your customers to a limited number of payments per year, preferably one, has a lot of added value for your company. Cash flow improves and administrative hassle diminishes. On top, client experience less “pain” of paying.
4. Attach bumper offers
Subscription-based pricing offers the opportunity to up- or cross-sell your customers via bumper offers. After the initial choice of product or service, suggest additional elements such as additions or improvements to the initial purchase.
5. Install nudging tactics
Many opportunities arise to nudge customers to a certain package or to increase overall revenue:
Increase adoption rate of higher priced packages by offering different packages, ideally two to four
Boost most profitable package by highlighting it as most popular
Increase customer acquisition by temporarily discounting the entry fee or offering free trials
Install referral program to attract new customers by offering discount for certain period
Do you still have some questions about this pricing-model or do you need some help to implementing one? Don’t hesitate to contact Miguel Van Damme.
[1] Software as a service
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