It really doesn’t matter if we talk to larger established corporations that are on the verge of launching their subscription business model or existing successful subscription companies. Discovering and setting the correct prices for subscriptions can put anyone on a razor edge.
Price your products too high and traffic conversions on your online shop will never see a high mark. Price them too low and you will realize that you’re working for free - just imagine being busier than ever without making a profit.
If you fail to prepare, you should prepare to fail. By the end of the day, subscription businesses like yours must do their homework. This starts with key financial measures of your products, which include purchasing costs, possible repairs, and refurbishment, shipment and distribution as well as depreciation. However, pricing entails more than mere crunching figures. Calculating whether you'll break even requires doing the math, which should be part of the procedure. But before getting to do any of the numbers work you should do one particular thing: know your market.
The first step in achieving this market knowledge is to lay out the options available to your clients and be aware of their alternatives. What other product could replace you? What other firms are out there renting out identical or similar products? Or different: Is the customer stereotype in your market still buying rather than renting? In any case, learn how much others price and identify the gaps.
At its core, there are two ways to figure out the best price for your product subscription: first, calculate the cost plus margin and use it as a starting point, then study the market and position yourself somewhere along the continuum. Here you can also study the prices and margins of other product categories that were translated into subscription business models. The relative differences can give you a rough dimension about where the prices should go. Although most rental firms use these strategies independently, they are more effective when used together.
The initial step: Cost plus margin calculation
Calculating the cost plus margin is the first method for determining what you need to charge to operate a viable and profitable subscription business. You will do this by calculating the equipment's total cost of ownership. The next step is a crucial one: You want to identify your break-even point. If you’ve come so far then you can get into goal setting and define a revenue goal for your subscription business unit. Imagine that for a single product you will need 2.000€ to break even and another 2.000€ in profit, you’ll need 4.000€ in revenue x the number of products you’re planning to sell, to reach your revenue target.
From here on it gets more explorative and playful as now you can start juggling around with the initial numbers you have. Let’s say you charge 50€ per week for that product. In that case, you’d need to have your customers subscribe to that product for a total of 40 weeks in order to break even, and 80 weeks to make your desired profit. This, however, is just a very simplified example but the math is as easy as this. We know from working with our customers, that a sense for the correct pricing comes intuitively with time, therefore go ahead and start exploring until it feels right.
As promised before, this is just a very basic way to identify suitable subscription prices that lead to profitability. In that case one could say, all ways lead to Rome, as you’ll have more options to figure out the correct pricing. To take your customers and competition on the market into account, you’ll need to do a bit more than crunching some numbers.
The crucial component: market research
As mentioned early on in this article another and very important step to figure out how to set your prices, is doing your homework. Here you should keep your aim on making sense of average pricing practices that are applied across your subscription industry. If you’re an early bird and there is literally no competition out there, then we’d encourage you to take a closer look at other subscription firms from different industries - as said before, the actual prices will differ, while margins and relative differences may not too much. By identifying their pricing strategy and positioning you’ll learn how to strategize for your positioning. Are the other firms out there the premium selection of the industry? Are they somewhere in the middle? Or do they aggressively disturb the industry benchmark by entering with a pricing model that feels as if it runs a permanent end of the season sale?
While keeping an eye on your competition or other subscription business peers in different industries is helpful, watch your customers. In the end, they are the ones who will utilize your product and service and bring the money to your account. What’s their willingness to pay for the luxury of more convenient and flexible access to your product? Are they subscribing to a product because of their values that strive for sustainability? Or are they doing it because comfort and flexibility are what they really value? How heavily does the pricing influence their decision-making process? By asking questions like these you’ll be able to empathize with your customer and take a spot in their role. In that way, it will be a lot easier for you to develop a fitting pricing model that does both: bringing in the traffic and the profit.
What are you waiting for?
There is no one-size-fits-all formula for deciding the best subscription pricing model. Every company has its own range of goods across different industries and based on what your competition does you might need a unique approach. The best advice is to do some research and figure out what would work best for you and your clients.
One more thing… What would you do, if you could gain significant insights into how to price your products within just 15 minutes? If you’re eager to learn more feel free to reach out to circuly. We are a subscription management software designed for product-as-a-service.