If you have a subscription to Netflix or Dropbox or any other subscription-based service, you're familiar with some of the pricing models for this category. However, there is a wide range of pricing strategies for other subscription services (see examples of several here), which can make it difficult to determine the best strategy for your product launch. In addition, subscription pricing addresses three factors: the price, the product features or capabilities delivered, and the term (monthly, quarterly, or annual subscription).
To place added pressure on this consideration, pricing is a critical factor in subscription services' success. It relates directly to sales tactics, channel partner marketing strategies, and customer success. Along the same lines, pricing also is a primary basis for competition, contributes to your market position, and relates directly to your ideal target customer.
For all of these reasons, it's important to get the pricing and channel partner marketing strategies right from the beginning, and then commit to adjusting and improving them regularly as you collect customer data.
When developing your pricing strategy, keep in mind two important points:
- The clearer and more simple the pricing model, the better. Customers need to understand and see the value immediately; they won't take the time to figure out overly complex pricing structures.
- Focus the pricing messaging and channel partner marketing on the product benefits and competitive advantage.
Let's take a look at a few different pricing strategies that work well for cloud subscription services:
- Fixed, Recurring Price: This is the simplest pricing strategy, consisting of a single product offered for a single flat price that is charged on a recurring basis—for example, a $12 flat fee per month.
- Tiered Pricing: This common format offers customers several pricing models, each of which is associated with a different level of features. Often the first tier is a free trial or low-cost basic version, while the second (mid-grade) option offers additional value, and a third premium option presents the full spectrum of product capabilities. The primary factors for success in tiered pricing are the clear communication of the added value of higher tiers and your ability to upsell customers to the highest tier.
- Freemium: By presenting most of the product functionality for free, you can quickly grow a large customer base. The focus is on leveraging the customer base to cross-sell complementary products or advanced functionality.
- Per User: This model bases the pricing structure on the number of users or "seats" desired.
- Consumption Pricing: Based on your ability to measure customer usage, this model allows customers to pay for only what they consume.
- Unlimited Usage: Customers are provided full access to the product without limits for a set, recurring fee.
- Value-Based Pricing: A significantly more complex formula for pricing, this relies on your ability to determine the value that is delivered to a customer. This is an ideal model, as it removes risk for both the customer and provider and perfectly balances the buyer's costs while maximizing your revenues.
- Adaptive Pricing: This may be the pricing model of the future as more and more companies are able to collect data from their customers and perform the analytics that can predict customers' future use. Enabling responsive pricing can optimize your revenues and renewals, and support a positive and trusted relationship with customers.
Developing the pricing strategy for a cloud subscription model is one piece of an in-depth product launch process. This process should start with extensive market research to understand how your competitors are pricing their similar products and to identify customer pain points and pricing motivations. Building an open dialog with customer to gauge the impact of your pricing structure while monitoring conversation rates and sales metrics will give you solid data to use in adjusting the pricing models as needed.
Once you have determined the right pricing model and channel partner marketing strategy for your cloud subscription product, check out our free eBook, “Your Guide to Transitioning to a Cloud Subscription or Consumption Usage Model” for more guidance on getting your employees on board with the transition and rolling out channel partner marketing for your new cloud subscription program.