Marketing is an art and a science. So, too, is the marketing function of pricing. In order to acquire new customers, increase the CLV (customer lifetime value) over time, and reduce customer churn, you need to actively manage your customer relationships. One of the most important tools you have for building and monetizing your customer relationships is thoughtful pricing and packaging - and marketing needs to take an active role in this pricing exercise. Pricing should be dynamic. And the importance of your pricing strategy in marketing cannot be ignored.
When you're selling products, pricing tends to be "cost plus." In other words, the product costs you a certain amount to build (whether this is actual manufacturing or just development costs) and sell, and you assign a price above the cost so as to make a profit margin. Depending on how many products you can sell, your prices may be smaller (and margins lower).
But business models are changing - and, along with it, so are effective pricing strategies. Were in a new subscription world where customers don't just want to buy products. They want the services and features they want, how they want them, and when they want them. So how do you price for that?
Simply put, in a subscription model, you can think about pricing as 3-dimensional: how much you charge, for what, over what period of time. Pricing is based on usage: you charge customers for their consumption and the value that they get from your service. Packaging is strategic in that you bundle features together as a specific offering and price accordingly.
One way to drive customers with a low marketing cost is to offer a free trial or freemium version of your service. Neither model is the clear winner - it depends on your particular business and your market. A free trial typically provides a full service offering for a limited time. The hope is that prospects will convert to a paid subscription once their trial has ended. A 10-20% conversion rate is best practice. For a freemium offer, you provide a stripped-down version of your full offering in the hopes that prospects will eventually shell out for a paid subscription for access to the full offering. If you can show the value in conversion, you can hope for a 3-5% conversion rate.
Beyond a free trial or freemium version, here's a rough outline of the marketer's pricing path:
- Start simple: a fixed recurring price plan
- Add new offerings to drive upgrades
- Play around with different package bundles and add-ons
- Track customer usage
- Use customer data to offer more customized packages and price points
- Test and iterate!