How to Price Subscription Based Products

Many companies, not just software and technology, are entering the brave new world of bundling products or services together into a subscription. Take for example Blue Apron or Dollar Shave Club, who pioneered subscription based pricing in industries outside of tech. There are many benefits of subscription based products, like greater customer retention, accurate forecasting, and ease of marketability. While subscription pricing is relatively understandable, adopting pricing analysis to get a sense of how much your customers are willing to pay and what features (or bundles) they feel add the most value is less clear.

2 Methods for Pricing Analysis

Pricing analysis in its simplest form is using a quantitative method to assess consumers’ expectations of price for a new product or service. Traditional pricing models centered on “cost-plus” pricing provide a starting point for pricing analysis. However, it’s still difficult to find the sweet spot that drives purchase intent. As a result, there have been many strides taken in market research to provide a means to analyze pricing. Two such methods we know to be effective include the monadic and Van Westendorp pricing analysis:

• Monadic pricing analysis compares the same concept at different price points independently from one another across purchase intent, quality, and value metrics
• Van Westendorp pricing analysis determines an acceptable price range and plots the relative price sensitivity within that price range based on perceived value

While these two methods are simple enough to understand, relating them back to a subscription pricing model proves more challenging, but with the right framework it’s not impossible. 

Applying the Methods to Subscription Based Pricing

In order to utilize the methods above to determine pricing for a subscription based product, you first have to decide what pricing model is most relevant to that product. When it comes to subscriptions, price can either be based on number of users or usage. For example, enterprise solutions are typically user based— the more users or licenses required, the greater the cost. On the other hand, cloud storage services require payment based on the amount of the service (or storage) used rather than the number of people using it.

Based on your overall business objectives and needs, it’s now time to conduct a pricing analysis:

1. Organize the three elements to be tested: this includes the bundles, pay period and feature combinations.
   • Conducting a feature prioritization test—pre-pricing analysis—to determine which features are the most desirable can be beneficial before executing this step.
2. Determine whether a monadic or Van Westendorp method is required: this depends on whether you have predetermined price points (monadic) or you’re looking to determine a price range (Van Westendorp).
3. Align the metrics being tested with how your customers perceive the value of the product: while purchase intent, value, and quality may factor in, more specific metrics related to the product’s value will also need to be tested.
   • For example, the compatibility or user friendliness of a subscription product may be important to the pricing of it and should be translated into metrics in order to better assess the value.

While traditional pricing may feel easier to determine, subscription based pricing is on the rise. With all the resources that help businesses determine the right strategy for subscription pricing, there’s no reason to shy away from it.

Finding a partner in market research that understands how pricing analysis is actually easier to measure when it comes to the impact of value and features than traditional methods to pricing, could even make the process enjoyable. To see an example of the Van Westendorp pricing method in use, check out the research report below.