How to set pricing for my subscription business?

Getting the perfect pricing will make a huge difference on a business, from sales velocity (how fast do you sign customers) to free cash flow (how much can be re-invested quickly into growth). Every market, product and situation is different. It will take trials and errors to get it right. Let's just remember rule #1.

Slicing and dicing

Let's see common pricing strategies in subscription businesses.

1. feature-set pricing

   Personally I don’t like this strategy much. It requires to technically add code to cripple the product for non-premium plans. Best to pull off this kind of pricing is to have (semi-)independent products that can interact with each other (ex: Excel and Word). First or Third-party Plug-ins/Add-ons will get you there too.

2. quota pricing

   Pricing per seat/user is difficult to pull off unless it is at really low price points or comes with heavy hands-on professional services. Pricing per server/disk/request/etc. is often more acceptable to customers and easier to sell. Both approaches suffer from the cost-pricing vs. value-pricing issue. To make this model work, it is best to do bucket pricing. One of the advantage of bucket pricing is the notion of budget and control of cost from the customer perspective. The economics can be very advantageous to the business if most customers usage is in the low end of each bucket.

3. revenue-sharing pricing

   The pricing model where a percentage of revenue is charged to the customer are very common in marketplaces. Because there is no cost until there is revenue, it is easier to attract early adopters. The issue with this model is that it often create resentful customers. Most people know there is no more work to move $1,000 into a bank account than to move $10,000. The only way to pull this pricing off without getting into a cut-throat price competition is to bundle an insurance policy into the model. If the funds are insured, I would understand the risk is greater with a greater amount.

4. insurance pricing

   Because the product in a Software-as-a-Service (SaaS) business is often only a mean to deliver, well, a service, dedicated customer support play a greater role than in any kind of software business. Lawyers, contractors and many professional services work on a retainer fee. With big data analytics becoming more powerful, I wouldn't be surprised cloud security and other SaaS will be sold on the model of life-insurance policies very soon.

How low can I go?

Once you have settled on a pricing model, you must try with all your wit to set and maintain a mind set of value pricing. This is especially critical for boutique businesses. Otherwise customers, with the marketing backup of your competition, will undoubtedly start to negotiate within a cost pricing framework. Pro-active customer support (Pick up the phone) goes a long way to keep customers paying. A side question then would be How Cheap a Product Can You Have And Still Have Salespeople?.

The Checkout Pipeline

Once you decided on a strategy, still remains to implement the checkout pipeline and the options available here.

More to read

If you are looking for more posts about what it is like to build subscription products, you might enjoy A typical day building a boutique hosting platform and How to bring your own service online

More business lessons we learned running a SaaS application hosting platform are also available on the DjaoDjin blog. For our fellow engineers, there are in-depth technical posts available.