It is crucial to create the right pricing model for your recurring revenue business regardless of whether you are launching a new subscription-based offering, transitioning from a perpetual to a subscription model, or trying to optimize monetization for a an existing subscription product. In their work on hundreds of projects helping companies to determine their subscription pricing models, Simon-Kucher & Partners has uncovered two aspects of determining price that are often marginalized as effective monetization levers:
Price metric: Define how cost is measured for customers (e.g. per seat, per concurrent user, by a usage measure)
Price structure: Define how the price level changes over time / usage / etc. (e.g. flat fee, variable, tiered)
PRICE METRIC = CUSTOMER’S UNIT-OF-MEASURE FOR PRICE AND VALUE
Price metrics are a powerful lever for subscription products because there are many metrics possible for a single type of subscription business. A good example of this is in online computer backup services. Customers in this space include both consumers, who often have no idea how much data needs to be backed up, and businesses that often have a network of computers that need to be backed up. Some online backup service providers charge per computer while others charge by data storage limit, but the majority have only one price model. Carbonite is a great example of a subscription business that has successfully aligned its metrics with customer value and needs. Carbonite offers “Personal Plans” that are charged per year per computer and “Pro Plans” that are charged per year per gigabytes. Using multiple price metrics lets consumers use as much data as they need and lets businesses support multiple computers.
SYSTEMATICALLY EVALUATE AND CHOOSE YOUR PRICE METRICS
The first step in identifying the right price metric is to understand the possibilities – what metrics align with customer value? What are competitors using for their price metrics? Price metrics for subscription products typically fall into the following categories:
- User-based: named user, concurrent user, etc.
- Activity-based: number of transactions, number of reports, etc.
- Business scale: size of business, number of customers, etc.
- Performance-based: against key performance metrics or client performance, etc.
Create a list of metrics to brainstorm possibilities. Discussing even seemingly odd metrics can spark good ideas. Once you have a list of 10-20 possibilities, you should evaluate the performance of each metric on its benefits to customers:
- Fairness / acceptability: The metric is tied to the intrinsic value of the product, enables competitive comparisons
- Flexibility: The metric allows customers to scale service with their willingness-to-pay, overcome budget constraints, and scale with future usage & growth
- Predictability: Costs can be estimated and forecasted The metric should also have a positive impact on your internal goals and be rated on its benefits to your business.
- Customer adoption: The metric drives adoption, enables up-sell & cross-sell
- Ability to capture full customer value: The metric covers all customer segments, scales with customer growth, and allows future price increases
- Ease of implementation: The metric makes it easy to administer, monitor, control and enforce prices; it is easy to sell and communicate
Create a single score for “benefit to customers” and another for “benefit to your business”, and plot the score for each metric on a matrix (as shown in the Metric Evaluation Matrix). The metrics you should use are the ones in the top right “Ideal” corner of the matrix.
It is likely you will find that a few metrics land in the ideal quadrant. As you are choosing the metrics to move forward with, keep in mind:
- It is alright (and typical) to use multiple metrics together
- It is possible to have different price models for different customer segments – like Carbonite did
- Align the simplicity or complexity of the price metrics you use with your company goals – just because a competitor or even the market leader is using a metric does NOT mean it is the best metric for your company.