Subscription Price Optimization: Six Tactics to Get It Right

Price your products for maximum lifetime value and profitability

You have set your subscription price, now what? Now one of your more difficult tasks as a subscription business owner is just beginning: Optimizing your price so you can realize the maximum lifetime value and profitability.  Of course there is no single, or correct, answer. Said another way, finding the pricing that works best for your business requires a consideration of many factors, including price testing, site design and sale pricing.

Remember from our previous article, Six Concepts for Pricing Subscription Products, that the price of your subscription will primarily depend on the perceived value your product or service provides, rather than the cost of labor and materials that constitute the price of non-subscription products. It should be noted that these factors are not mutually exclusive, as subscription box companies provide physical products as part of a membership, and any subscription company will have basic costs it will seek to recover, no matter what subscription product you provide. But the fact remains that as a subscription company, your price must reflect the market’s perceived value of your goods or services.

But before you seek price optimization, remember avoid these key mistakes outlined in our previous article:

  • Asking your customers (or even worse – your prospects) what they think your price should be.
  • Basing pricing solely on recovering your costs.
  • Copying your competition’s pricing.

This article will introduce some price optimization concepts to get you started toward maximizing the performance of your business

1.    Setting Optimization Goals
2.    Price Testing
3.    Site Design
4.    Using Two Prices for Perspective
5.    Sale Pricing
6.    Offering Premiums

1. Setting Optimization Goals

The cardinal rule of successful testing is to “begin with the end in mind.” You may remember that phrase from Steven Covey’s 7 Habits of Highly Successful People. The same is true for price testing. The goal of your testing could be the price point at which you achieve any of the following:

  • The highest amount of conversions.
  • The highest revenue for a certain month or the entire year.
  • The maximum Lifetime Value (LTV) of your customers.
  • The lowest rate of customer churn, or highest renewal rate.
  • Which subscription term (and its companion price) brings you the highest amount of conversions, revenue, LTV, or renewal rate?

Subscription businesses that are just starting out will be most interested in either the price point that will get them the highest amount of conversions, or the highest amount of revenue. No matter your goal, it’s important to understand what exactly it is you are trying to achieve before you begin, as it will save you time and frustration later.

2. Price Testing

testing-sign

Depending on how complex your goal is, there are different ways to approach your testing. At the very least, you’ll need:

  1. Website pages graphically designed with the different price points.
  2. The pages linked to your shopping cart.
  3. Enough traffic to achieve statistical significance.
  4. A way to split the traffic evenly between the test pages.

If you are testing for a simple metric like conversions, much of what you are doing will follow the basics of A/B testing, which is covered in this article. Splitting the traffic on your own will depend on technological ability of your company.  Better yet, there are great tools available for A/B testing on the market you can use to test that won’t involve a development project each time you want to run a test, like Google Analytics or Optimizely.

It’s important to note when price testing, don’t change anything but the price on the test pages. Keep images, buttons and the copy on the page the same. If you’re testing the layout on the page and the location of your price, make sure that every other element remains untouched. Leave all the other pages on the site and the shopping cart exactly the same while you test, because in the end you won’t know what element caused the behavior you saw – was it the price or the headline that influenced conversions?

If you don’t send the same amount of traffic to each page you are testing, your results will be invalid. If you are using testing software, it will tell you which page version got the highest amount of conversions. Look for 95% conclusive results.

If your site traffic or the amount of your conversions is small, try testing by posting your different pricing pages for uniform periods of time, and then track the Bounce Rate and Exit Rate of each page through Google Analytics. This is not optimal, but a way to understand directionally which price is better.  That challenge with this approach is that seasonality and other factors can includes this “sequential” testing.  That said, if you have low traffic and want to start testing, this may be a good option for you.

If your goal is more advanced, like measuring the LTV of customers at a certain price, make sure you have set up tracking codes to track the subscribers in each pricing group after conversation to understand how long each stays and their ultimate value. As you can imagine, this analysis can take many months so make sure your tracking is set up correctly at the start so you don’t have to start ovoer!

If you are testing additional variables like page design or the placement of your price on the page, you’ll need to use Multivariate Testing software. See this article for more information. It should be noted that Multivariate Testing requires a very high amount of traffic, which you may not have if you just launched or if you are measuring a pricing page with low traffic.  Multivariate testing is used to measure the performance of many different aspects of your site, while A/B testing is used to measure just one variable.

When analyzing your results, you may find that a lower price attracts more conversions, but provides you with less initial revenue. A higher price, on the other hand, may attract fewer conversions but provide you more initial revenue. If more LTV is your goal, setting a lower price is the way forward as it brings more customers into your orbit. The bottom line is that you won’t know any of this until you test.

3. Site Design

While testing is the most important task you can undertake to optimize your price, there are a many other design variables that will impact whether or not a prospect converts into a paying subscriber or member, and should be taken into consideration:

  • site-designStrong guarantees on the page.
  • Descriptions of particular product features.
  • Compelling benefit copy.
  • Significant differences between you and a competitor.
  • The overall design of your landing/offer page.
  • The usability of your Shopping Cart.
  • The difference in price between the subscriptions you offer (ex: monthly and annual).
  • Overall performance and reputation of your service and site.

Taking into account these factors along with your price will give you a well-rounded insight into how well your site converts visitors into customers.  Make sure you run tests to understand how design and copy impacts conversion and ultimately the LTV of your subscribers.

4. Using Two Prices for Perspective

A classic pricing tactic is to give your potential customer the choice of two offers – one lower priced and one higher priced. One will make the other look more reasonable than it otherwise would appear. Say your price point was $49 per annual subscription. Here are two ways you could you position the pricing:

  1.     Levels of service: “Pay $45 for Silver or $49 for Gold”
  2.     Price it monthly: “Pay $9.95 per month, or just $49 per year”

In the first example, customers will feel they are getting a little more value with the Gold level, with just a slight increase in price. In the second example, perspective is especially powerful for month-to-month vs. annual sales. With this in mind, never set your monthly price by dividing your annual price by 12! First of all, understand what your average months your subscribers join for and use that as a guide to determine pricing. Secondly, consumers are accustomed to getting a bargain when they buy in bulk. Thirdly, inflating your monthly price a bit makes your annual price look like a bargain. We have seen many tests focused on just the variable pricing between monthly and annual subscription plans, and the results are always surprising.  If you have not tested this yet. You should.

5. Sale Pricing

Because subscriptions for online content and software products aren’t tangible, it’s often hard to convince someone they’ll want to enter into a subscriber relationship for the long-term, especially when they need to hand over their credit card information for re-billing until they bother to cancel. Relationship sales like subscriptions are more difficult than one-off eCommerce sales, and when selling internet content, it’s even more difficult competing with an ocean of free content. Even if your content is superior to anything on the internet, many people won’t care. They’re either ideologues who believe that everything should be free, or they believe if they search hard enough they’ll find something “good enough” that’s free.

Of course the subscriptions economy is worth more than a billion dollars a year, but it takes work to convince your marketplace that your subscription is worth paying for, so why would you want to immediately undercut your premium value by putting it on sale?

There are only six situations, in our view, where a sale or discounted price is warranted. These situations fall in line with expectations of when a high-value brand might offer a discount without lowering its intrinsic value:

1.     Launch Sale


For a limited time, you can offer a special “launch” price. This tends to work best if the sale price is no more than 30% lower than your regular price. The goal is to get people to sign up quickly before your offer runs out, so your time limit should be carefully chosen (30 days maximum) and overly promoted as a special “one-time-only” offer. Raise your price to the “regular” level once the launch sale is over. This offer works best for businesses that already have an opt-in or past buyer list relevant to the marketplace, or who have a lot of relevant traffic already coming to the free areas of their site. This offer should be targeted to a population that has either heard of you or has had a previous relationship with you.

2.     Price going up “Last Chance” warning


This is an offer that works best with sites that are about to raise their price and who have an established list of prospects, or perhaps even opt-ins who never converted. It’s also a traditional offer for subscription products that don’t utilize recurring billing, instead depending on customers to make a renewal buying decision every time their term runs out. Just as with a launch sale offer, you must establish and promote a firm deadline that’s not too far into the future, and stick to it.

3.     Trial offers (See our recent article on this topic)

A trial offer should be for a very limited term, anywhere from a few days to a month, based on what works best for your site. Many sites don’t charge for trials, but do require a credit card so the customer will automatically be billed when the trial ends. If you don’t require a credit card, your conversions will drop sharply and you’ll end up nixing the offer test pretty quickly. Requiring a card up front preemptively moves the prospect along toward their buying decision. You’re also psychologically establishing “premium value” from the very start of the relationship. Also, some subscription businesses require a small fee upfront to initiate a trial. It can be as low as one dollar, but is only a sale price for the trial term. If trial participants are sent marketing materials during the trial term, this fee can be used to cover printing and mailing costs. If you’re counting on cross-sales, up-sales and ancillary sales for revenue, paid trials may help you better pre-qualify incoming leads and determine who will be the best spenders on your site.

4.     Package or Bundle discount


If you are offering groups of products, it makes sense to give a discount on the bundled offering. However, don’t toss in the subscription for free! Instead, give a certain amount off the total.

5.     Bulk discount


People buying a group subscription of site license expect considerable savings on the per-individual price. However, this doesn’t mean you should hold a specifically-timed sale for them. Instead, this discount should be routine. The decision-making process with groups is complex enough that a timed sale will generally not lead to a faster decision. Decisions are made according to the group’s needs and financial rhythms, and are not generally impulsive.

6.     Partnership deals

Some marketing partners, especially associations, will try to insist on a special discount for their members. This is part of their own internal marketing to prove to their own members that unique value is being provided in exchange for membership fees. These types of offers should be approached with caution, however, as you’re effectively giving strangers a better deal than you give your own opt-ins and subscribers. Your own list should always get the best deal. These partners typically want to promote their special deal year-round as well, so the sale price doesn’t help incentivize timely action. Also, to enable the discount, you’ll probably have to add a coupon section to your cart or order form. Every additional form field in a cart can reduce conversions overall because it clutters the page and potentially causes confusion. Try to find a partner that can feel like they’re giving something special to their members without hurting your business. Sometimes a special premium will work, like an eBook specially made for their members as a bonus for signing up at the regular full price. Put a price tag on the book so that “savings” are represented. Instead of giving their members a discount, give the partner a direct commission on all the sales they send you.

6. Offering Premiums

Instead of lowering your price to get more sales, try offering your prospects more perceived value. A classic example of this is the old infomercial trick, “But wait. There’s more!” The seller has already established the basic price of the product, but is piling on perceived value through the addition of other products, when consumers “Act now!” This is known as offering a premium with your subscription, the premium being whatever you offer as a free gift.

Premiums that work best in subscriptions are those related to the theme of your product, software or content. If you’re a publisher, a free giveaway of something like an iPad wouldn’t work as well as a specially-produced topical report.

If you’re marketing premiums outside the United States, check direct response laws for any regulations about the value of the premium. In the past, Germany’s direct marketing law has limited the amount of money a premium can be worth in relation to the amount paid for the subscription.

When picking a premium, consider something that sounds valuable enough to be worth the entire price you’re asking the subscriber to pay up front. Remember that very often a subscription purchase is an impulse buy and the premium you’re offering may be the dominant reason why they buy. In their mind, they’re buying a premium where a subscription happens to be attached. To encourage impulsive shoppers, give a deadline for these offers.

For that reason, premium selection and naming can make a big difference to your response rates. It’s as important as naming a product because you are, in fact, naming a product. Market research surveys can be a big help with this. However, as we mentioned in our previous pricing article, never ask “How much would you pay?” in a survey. Surveys help you find out what topics and items are desired, not a particular price point you should assign to them.

comparisons-1Conclusion

Optimizing the price you charge for your subscriptions is a mixture of goal setting, testing, website optimization, perception, sale pricing and offering premium value. You can run tests to inform you on the best price, where it’s displayed and how it’s explained. You can change how your price is perceived by how it’s broken down by subscription term. You can add value to the price you charge by offering special pricing or adding premium value. Taken altogether, these tactics will help you determine the best path forward as you seek to get the maximum value from your subscription business.

Many subscription businesses want to just stick to a price based on their gut or their competition, which guarantees they won’t be making the money they could – and should – be making. Price optimization is a profit-making activity, and we strongly suggest that not only do you test, but have a program where you are continually testing elements of the pricing of your product or service.

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