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How should one go about pricing and creating a subscription model for a business?

I have built a startup and am looking to offer it's services through a subscription model, but have no experience pricing something like this up.

What are some of the key tips, things to think about and must do's when trying to create a subscription model?

Filed under: Freemium: Business Models, Business Modeling
3 answers • 11 years ago
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Answers

Tom Williams, Clarity's top expert on all things startup answered:

You have two questions. One is how to actually establish a price or pricing plans, the other are tactics most useful after pricing has been established.

I think Laura provides some great tactics around pricing but as I read her answer, I think it addresses the tactics part less than the pricing part so I'll focus exclusively on how to find the right price.

First, I'd suggest you go to http://www.harrisonmetal.com/ and scroll down the page to find their workshops on pricing. I've attended their class on the subject in-person and they have published the course materials on their site.

Pricing is part art, part science. It comes from understanding what other offerings exist in the marketplace and how your offering differentiates. So for example, customer development that focuses on understanding how your customers perceive your offering against competitive offerings would provide clues and insights into whether it might make sense to price your offering higher or lower to your competitors. Pricing is also entirely dependent on it's related messaging. Decisions are made and confirmed by two entirely different parts of our brain, and so appealing to intuition or emotion without providing context for the logic/rational part of the decision will often fail to complete the sale.

Happy to talk to you about any of this in a call with you, if you'd like.

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Kevin McCarthy - Founder, BlindSpots.com, Human Behavior Consultant, Leadership & Teamwork answered:

Pricing a subscription model can be a bit complicated depending on the product you are offering. These are some of the factors that came in to play with one of my SaaS software clients.

First, determine your fixed cost per customer. Most entrepreneurs in the SaaS (Software as a Service) subscription space do not realize there is a very real cost per user.

Look at all your infrastructure costs. How many concurrent users can your infrastructure handle before you have to scale? What are the variable costs based on usage such as per-user storage space requirements? Number of emails allowed (if that is part of the offer)? Bandwidth?

Overselling the infrastructure is an acceptable practice. Meaning, if you use a 20-1 ratio, you are saying for every one real user accessing the system at any given moment, you can have 20 subscribers paying for the service. The assumption is that all 20 will not generally access the system concurrently.

What will be your expected user support load? Depending on the simplicity or complexity of your offering, your users may or may not need to contact support. The simpler the program to use, the higher the customer to support ratio can be. For instance, if you remember Countrywide Financial, they staffed approximately one customer service rep for every 684 loans they serviced. A 684-1 ratio. Your ratio will probably not be that high with software.

Look at your competitors. What do they charge for similar services? Decide if you are competing on price or quality. I generally prefer to not compete on price. But, that is a situational decision.

Keep your pricing model simple. The more options you add, whether the number of plans or the add-ons, the higher the shopping cart abandonment will be.

I've been involved in subscription models since 1997 when I first created an online real estate agent portal and sold subscriptions to agents in the US and Canada. Give me a call if you have any further questions. I'm certain I can save you time, money and a lot of grieve.

All the best!

Kevin McCarthy

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