Pricing & Packaging in a Subscription World

June 9, 2008

by Tien Tzuo


In this blog, we often contrast the product world, where you purchase items, with the subscription world, where you subscribe to services. One area where the differences really stand out is in packaging and pricing—the way a product or service is sold to you.


In the product world, pricing is pretty straightforward. You’ll pay one set price, like $9.99/widget, perhaps with some volume discount.


But in the subscription billing world, it’s a bit more complex. Pricing options for subscriptions are almost unlimited. Price can be set by time, like a monthly or annual fee. Or by usage, like the number of DVDs you plan to borrow. Or by users, like the number of sales reps that log in. The possibilities go on and on.


On top of that, customers want a custom service level that’s just right for them. The occasional movie-watcher doesn’t expect or want to pay for the same service as the die-hard movie-watcher. It’s almost impossible to have a one-size-fits-all model when every customer wants to pay for a different set of features, in different quantities.


Let’s take a look at some examples.


Netflix, the king of entertainment subscription services, offers 5 pricing plans based on the number of DVDs a subscriber plans to watch. This way, Netflix signs up and satisfies both the die-hard and occasional movie-watcher, plus everyone else in between.


Car sharing service Zipcar also offers subscribers 5 plans based on how often they plan to reserve and drive a vehicle. But Zipsters need not agonize between the options. They can switch plans at any time.


When we launched, we thought the simplicity of a single $50/user price option would appeal to customers. While the price was just right for some customers, it priced out many small businesses and actually fell short for many larger companies demanding higher levels of service. Fast-forward 9 years, and we had expanded to 4 price and packaging options: Group Edition, Professional Edition, Enterprise Edition, and Unlimited Edition. This way small start-ups and big enterprise customers alike could get just the right bundle of CRM features to match their size and needs. This chart illustrates the many pricing and packaging options available to subscribers:


Why do these companies offer different price plans? They do it to satisfy different customer needs, capture both new and seasoned users, and to create competitive advantage. How? When two companies offer the same service, one can stand out by offering the best pricing and packaging options. Recall the infamous MCI takeover of AT&T market share in the 1990s.


It’s no accident that successful subscription businesses like Netflix, Zipcar, and embrace flexible pricing and packaging strategies. These companies have set customer expectations high for subscribing to any other service out there. In order to succeed, every subscription businesses must be prepared to meet these high expectations with a flexible pricing and packaging strategy of their own.