Subscription Pricing Strategy

The trend in software pricing is to move into a recurring style model. The benefit of such a scheme is immense. Although this short article will not delve into every facets of this topic, it would be worthwhile tips for any business attempting subscription for the first time.

It is important to state upfront that the decision to do this is NOT because you want to replace your current perpetual licensing scheme outright. It is also NOT a scheme to offer leasing terms to your customers. If your intention is one of these then you should be wary of considering subscription pricing.

Is your business ready for this?

Opting for this pricing model does not necessarily mean cannibalizing your current licensing model. Neither does it mean the end of it. Very often, you will come across new products or new segments of the market that could accept and thrive under such a pricing model.

A perfect example to see the effectiveness of such a pricing model in software sales is the Business Process Outsourcing (BPO) market. Typically, businesses in this segment provide services that are based on usage. A good example, I can think of is the payroll outsourcing business. Such business charges on a per employee per month basis. Because of this, the fees collected may not allow the business to purchase outright software to service their clients. Doing so, would mean a period of time before they are profitable.

Another good example would be point solutions that are offered on a SaaS model. Placing high entry point in term of initial investment before businesses can adopt the solution will not work. This is where subscription pricing will kick-start such businesses.

So how does one make money

Subscription pricing is advantageous for new products that are looking for quick acceptance in the market. It is also ideal if you want to move into market segments that are generally not attracted to the general licensing model.

Money is made because the customers you attract is not a typical customer.

Many times, businesses relying on outright licensing sales will find it hard to accept receiving a lower initial value for a sale. This is because they see that they are replacing their sales model with a new one. In fact, the idea is not to replace but to find a new untapped market to sell your product. The earlier example of a payroll BPO is a good example to understand this point.

If your business depended entirely on licensing software to end user customers, the move into the BPO segment will let you tap into a new revenue source. Customers of such BPOs will generally not license product from you. They have already made up their minds to outsource. So, it is not you losing a potential customer but you gaining one which is normally not available to you.

It is also likely to have customers of your traditional licensing model, deciding to move away from a perpetual licensing scheme because of high support cost or the business do not see an importance to do it themselves. Again in the case of payroll, it illustrates this point well. A company choosing not to manage payroll in-house would switch to a BPO agent. If your product is not already offered by your BPO partners then you stand to lose a customer.

So, you can see that offering a subscription pricing plan opens up a new segment of business to you. There is no concern whatsoever if you were to price it differently from your traditional licensing model. In fact, you should not base your pricing on the perpetual model. That would be a mistake because you are then adopting a leasing scheme for your customers.

Subscription is not a leasing scheme. If your planning was done along that line then you are doing it wrong. Subscribers are also not customers but they are now your business partners.

So what is the pricing strategy?

Fast adoption, volume and completeness are the keys to subscription pricing. The price and the model you use must satisfy these 3 points.

Besides a lower entry point in the fees to attract customers, you should also consider tiered rates. Tiers should gradually be cheaper at higher volume of usage. You want to incentivize your customers to use more. Do note that once a customer takes up subscription, they will find it harder to move back to standard licensing schemes. They will also find it harder to move to competitive subscription pricing. Reason for this is that it will take time to migrate from your system to another. This means the rates they pay to your competitor during the initial stage will be prohibitive.

Also, make tiers in tighter bands at the entry level and then broaden it out at the higher tiers. The strategy here is to encourage faster take up as they see savings when they move to another tier quickly.

Typically, prices are steeper at low volumes and it could be dramatically cheaper at the top end of usage. Do not price it the other way around. You must reward your better customers.

Often, customers hesitate to move to a subscription model. Be prepared to offer attractive first year discount from your rates. Do not do this by setting lower rates at the lower tiers. Remember subscription pricing is designed for long term business outlook. You want to build a long term business relationship. Once they begin to see ROI with your pricing, they will surely increase their usage.

Completeness should not be overlooked. Pricing should include any variables that may affect the effective and efficient use of your product. Instead of pricing separately for services such as support, training and upgrades, you should have them inclusive in the price. If possible, enable your partners to be self supporting. This will mitigate any concern you may have with lower revenue stream by reducing your business cost.

You want to project a simple pricing scheme. You can have all the layers in your perpetual pricing scheme but keep your subscription pricing simple and uncluttered. You want your subscription partners offering your product without fear and uncertainty of prices. Because your prices are tiered and are known to your partners, they can use the information to bid successfully for new businesses since they can determine the cost when the usage volume of the new deal is added to their tally.

However, it is acceptable to place a fee for initiation. This can be used to cover cost of on-boarding the new partner. It is also a mean to ensure the partner is sincere to do business since they have committed cost to the partnership. This “sign-up” can be coupled with a renewal fee each year but at a reduced amount.

In summary

Although a fair amount of areas are covered in this article but it is in no way a complete study of the subscription model. The author has successfully introduced such a scheme in the past and has seen the results offered with the scheme.

The time to offer subscription is now. However, do it for the right reason and in the right way. Take note that you will constantly challenge this model as you implement it. This is because you are constantly comparing it with your traditional model and thinking that you are replacing it.

Good luck.

One thought on “Subscription Pricing Strategy”

  1. I really like your blog.. very nice colors & theme. Did you design this website yourself or did you hire someone to do it for you? Plz reply as I’m looking to create my own blog and would like to know where u got this from. thank you

Comments are closed.