Pricing is one of the most significant tasks for a subscription business owner, from pre-launch research to the routine price tests that ensure you’re getting the most sales and profits as is possible. Yet pricing is a nuanced task that many tend to overlook, or simply settle on a price that’s a gut reaction based on what they perceive will bring them the highest amount of revenue.

It goes without saying that knee-jerk reactions should be avoided at all costs. Instead, your pricing decisions should be deliberate and well-thought-out. The six concepts we discuss in this article are important to keep in mind as you develop a pricing strategy for your subscription business:

1. Benefits and Desires
2. Strategic Pricing Goals
3. Free Versus Paid Pricing
4. The Three Biggest Pricing Mistakes
5. Pricing Psychology
6. Conducting Market Research

Understanding these concepts will help you build a more objective view of your subscription offering and more importantly, help you understand where you need to test, which we will address in the next article.

1. Benefits and Desires

In deciding on a beginning price point, understand that would-be customers don’t care about your bottom line. Unless it’s a very rare occurrence where your service is commoditized with multiple look-alike competitors, they don’t make buying decisions primarily how your price stacks up to the competition.

Rather, customers purchase subscriptions or memberships because the service promises a benefit that meets their desires at that moment. With that in mind, consider the following five critical pricing points:

1. Benefits outweigh pricing. If a potential customer turns you down because of cost, they are really telling you that the benefits of the membership aren’t worth the cost. Pricing problems often stem from improper marketplace Research and Development. Testing different benefit and offer copy can help increase sales at the same price point.

2. Positioning can inflate or deflate what’s considered a “reasonable” price. For example, iTunes prices an hour of a TV show at $4.99, but a two-hour movie starts at $19. Both may be equally entertaining and professional videos that feature household-name stars, but consumers perceive a movie is “worth” almost 400% more than a TV show, hence their disparate price points.

3. While any subscription sale is an ongoing relationship, subscriptions are most often an impulse, of-the-moment purchase. Business information provider Hoovers says its best customers are sales reps who are desperately researching prospect information the night before a meeting. Your pricing structure may be devised for a long-term relationship, but remember that the prospect is still making their buying decision with a single moment’s needs in mind. As yourself: Is what they’ll get right now worth the amount you’re asking them to pay? How can you convert that short-term need into a long term subscriber?

4. Subscription buyers usually look at pricing at the very end of their decision-making process. They don’t start out looking to purchase a subscription based on brand and offers, or searching the web for the best bargains. Rather, they start by looking for subscription content, services or products after they’re completely sure you have what they want, and then they look at the price tag and make a final decision.

5. The “right” price for a consumer may not be the lowest price. Not everyone is motivated by sale pricing or bargains, and lower prices actually run the risk of negatively affecting your sales, in the sense that nobody would trust information you advertise as high-level business research, but sell for only $1.99 a month.

With all of these points in mind, the success of your subscription pricing is first and foremost tied into how well you serve the passion or need that drove the prospect to your site. Without the right value proposition up front, your prospective customers wouldn’t have made it to considering your price in the first place. If your value appears high enough and is clearly understood, it can lift your prospective customer right over the pricing hump.

The tightness between your value proposition and your primary market’s desires is what really makes the difference in conversions. Your price point is ultimately secondary in the decision to buy.

2. Strategic Pricing Goals

Before setting your specific price, you must arrive at an overall pricing goal of the metric you believe will be the most helpful in the growth of your business. Examples of pricing goals include aiming for the following:

1. Accounts which are as profitable as possible at the moment of sale. These are customers willing to pay a high price for a subscription. You might have fewer unit sales, but a higher value per order.

2. Accounts which are more likely to renew, and thus have a longer subscription lifetime value.

3. Accounts which are more likely to buy other products and services from your site, and thus have a higher account lifetime value.

4. The highest possible amount of accounts, even if they are not highly profitable or generate a lot of value up front.

5. As many buyers as possible, at a moderately profitable net at the start.

6. Extremely high-priced accounts, even if just a handful, that can be upsold to stratospherically-priced personal consulting services.

Knowing who you are targeting with your strategic pricing goal will give you a direction in which to move, which you can always refine as time moves along. Different competitive situations and target markets, along with what your typical customer is willing to pay, will heavily factor into your decision in this regard.

3. Free Versus Paid Pricing

Unlike physical products, when your subscriptions involve things like online content or freemium software, you face an additional pricing obstacle from the “free lunch” crowd. These are the people who have been conditioned to believe that anything they could obtain or experience for free elsewhere should always be free of charge. In most categories, the fact that you’re asking for money at all, even if it’s just pocket change, presents an additional psychological barrier that your marketing must overcome.

The key to transforming these “freemium” prospects into buyers is to segment your offerings. Provide a basic version that introduces your subscription, educates and creates a perception of value and need for the premium piece over time. This gives you a chance to introduce your brand, product or service slowly and turn prospects into subscribers through a mixture of previews, deals or freemium access to your software, service or content. But be sure that when offering a free trial, freemium access or discounted access that you don’t go broke!

4. The Three Biggest Pricing Mistakes

There are a few mistakes to absolutely avoid when setting your initial price point: Asking what the price should be, basing your pricing on costs and copying your competition’s pricing without testing.

Mistake #1: Asking what the price should be.

Do not base your subscription pricing on a survey where you ask “What would you pay?” What people think they might pay, what they tell you they’ll pay and what they actually will pay are indeed very different. Surveys for pricing are fundamentally flawed, because respondents will tell you what they think you want to hear, or worse, that your subscription offering should be free.

There are many tactics to help you hone in on a pricing strategy including “Dry Testing” products/pricing and A/B testing live products. What people will pay often changes considerably with different benefit copy and marketing tactics. Pricing isn’t a flat data point, but informed by running tests when your business launches (which we’ll cover in the next article).

Mistake #2: Basing pricing on costs.

Do not base your pricing on how much money you need to make to cover costs, or for your anticipated profit. Your customers won’t care about how much a product costs to produce, nor how much money you want to make. They’ll pay only for the perceived value they’ll receive. Set your initial pricing based on what customers will pay and then do the math to see if it makes sense to launch the site at all.

Mistake #3: Copying your competition’s prices without testing.

Do not assume your competitor’s price is the price to match or beat, unless you’re providing heavily commoditized information in a saturated market. Your competition may not have done price testing, and other factors about your competitor’s perceived value or primary market may be more different from your own than you realize.

5. Pricing Psychology

Counterintuitive as it might seem, higher prices don’t always mean fewer customers, nor do lower prices always mean more customers. Just because a subscription is super-cheap, doesn’t necessarily mean that a lot of people will buy it.

In general, each site has a neighborhood of value, a range within which you could make the majority of your sales. If you’re priced too low in that range, people in your target market will think your site isn’t worth bothering to take seriously to make a purchase. If you’re priced too high, they’ll also pass.

Within that range of value, you may find that a higher price could get more sales, just because your target market thinks a higher price indicates a better product for their needs. Consider a luxury retailer versus a dollar store. Consumers at both buy the same things but they pay very different prices for them, for very different reasons, because perceived value and target market psychology have a lot more to do with pricing than the actual cost of the goods.

The following tips don’t always hold true, but they are worthy of your consideration nonetheless:

1. Buyer Price Points:

$10, $20, $50, $100, $500 and $1000 are all examples of typical price points that can cost you sales. Someone who’ll shell out $99 will balk at paying $100. If you can get a buyer past that point, they may then be willing to pay much more. Someone who’ll pay $100 would probably also pay $110, $119 or even $125. A few brands will price directly on a point, such as $20, to appear transparent, clean, and honest. It can work, or it can flop. The only way to find out is to test.

2. The Number 7:

Some subscription businesses have found that a price ending in the number seven will outperform any other price in tests. The seven can be in dollars or cents ($97 or $9.97). On the other hand, if your price starts with the number seven and you’re selling very well, you are priced far too low. Those who will pay $7, $70, or even $700, are willing to go up to a number that starts with nine. Try charging $9, $90 or $900 instead. Don’t even bother with eights.

3. The Number 3:

Three is a rotten number to end a price on, and generally anyone who will pay an amount starting with the number three will also pay an amount starting with the number four. This is particularly true for prices in the three and four digit range. For example, if you are getting $397, you might be able to get $497 just as easily for the same product.

4. $500 (or rather, $499)

If you are selling to middle management in Corporate America, research what’s their typical “sign off” level, or the price point at which a typical manager can make a buying decision without seeking authorization from a boss. For many years this point typically was $499. If they have to get a purchase authorized first, you’re going to lose sales because it’s not worth the trouble to ask, people simply forget about you and bosses always have different spending priorities than their underlings. Worst of all, you may see a high level of credit card chargebacks, which cost you real cash and harm your reputation when impulse buyers fail to get reimbursed and cancel the purchase. Tip: Make sure any taxes and shipping and handling costs don’t exceed this level.

5. Seats

If you intend to sell a substantial number of group subscriptions and/or site licenses, build your individual price based on how you plan to discount it “per seat.” For example, an individual price point at $499 and $999 per three users sounds like a bargain and perhaps an easy upsell. However, if your price per individual is $19.97, your price per seat for large groups may be at a point where your costs outweigh your income.

6. Cents

For prices over $100, omit cents in all marketing copy. The three extra characters in the price make it seem larger than it really is. A visually intimidating price limits sales.

7. Cents Redux

In situations where you are talking about savings, like promoting “Get $10.00 off!” always include the cents so that the savings look larger.

6. Market Research

All potential subscription businesses should see the value of prior market research before launch. Of course, it’s good business practice to gauge the size and scope of the market you are planning on operating in. If the market is saturated, it may be a sign to move on to something else. However, competitors in the same space aren’t a bad thing and will help inform you on whether or not to launch your subscription business. It’s the spaces with no competition that potentially should be avoided, because that’s indicative of a potential lack of interest in your topic.

When conducting market research, remember to avoid becoming wedded to what your competitors are charging. Every target market has its own spending quirks and you should keep your focus there, rather than on any secondary markets you may have identified. Your goal is to establish a best price for your target market that’s not too high for your secondary markets either.

Look for indicators of how much your primary market has spent on subscription products overall. For example, professional engineers are infamous for never paying more than $50 for any type of professional content, whether it’s a book or a website. On the other hand, top executives at companies that target the engineering marketplace will pay thousands for useful, highly relevant market and sales research.

Ask questions that will provide you with insight into the behavior of the prospects in your target market.

1. Are your prospects motivated by saving money?
2. Do they buy now impulsively on credit and worry about paying tomorrow?
3. Do they research competitive offers and try to compare apples-to-apples when making a decision?
4. Do they enjoy the feeling of safety and/or status that buying a top-priced product may bring?
5. Will they promise to pay anything as long as they can cancel and get their money back?
6. How likely are they to cancel?

Subscription Pricing: The Basics

When pricing your subscription product or service, keep the six points found in this article in mind in order to arrive at the proper pricing points that will ensure the success of your business:

1. Benefits and Desires: Proper subscription pricing is a mixture of understanding your market’s desires and how well the value you provide corresponds to those desires.
2. Strategic Pricing Goals: Determining the type of accounts you are seeking to attract will help to chart your course.
3. Free Versus Paid Pricing: There are always people in your prospect pool who will not pay a cent for your subscription product. Try to bring them in with a freemium offer, or ignore them altogether.
4. The Three Biggest Pricing Mistakes: Avoid basing your price on what your customers think, on your costs and what your competition is charging.
5. Pricing Psychology: Higher prices don’t necessarily mean you’ll lose out on customers, and low prices don’t necessarily mean that you’ll gain customers.There is a range that your prospects will pay you based on the perceived value of your offering.
6. Conducting Market Research: Take time to deeply consider the motivations and behaviors of the prospects in your target market.

Once you have considered these six concepts for pricing your subscription products and services and have settled on a proper beginning price point, it’s time to test, which will be covered next week.