Let’s talk about how pricing models can help build a relationship with your customers.
Your product isn’t just a product. More often than not, it defines the relationship between your company and your customer. Your Minimum Viable Product (MVP) is your first impression in that relationship. And how you price your MVP will determine the length and the depth of that relationship.
So it’s imperative you get the model right on the first try.
Most of the advice I’ve seen on pricing an MVP is pretty pedestrian: Know your costs, know your market, know your customers. I’m not shocked at the simplicity of that advice, because you’d be surprised at how many companies ignore, forget, or just plain misjudge those simple things.
But we’re also well past the days of a single price for a one-time transaction with an anonymous customer. Over the last 20 years, I’ve built and launched dozens of products for all kinds of different customers, and I’ve learned that each customer comes with their own use case. I’ve also learned that how much they pay, how often they pay, and when they pay are just as important as settling on a number.
Recently, I’ve seen a lot of companies choose a pricing model as a means to an end — the one that feels like it will generate the most revenue the quickest for the longest time. But the selection of a pricing model should always be made solely on what makes the most sense for the customer/company relationship.
The Subscription Model
Subscriptions are the hot thing at the moment. They’re also the most misunderstood. So here’s what they are and what they’re not.
Let’s start with a stone age subscription model. It used to be you subscribed to magazines — pay five bucks for a single issue or subscribe and pay $50 and get 12 issues over the course of a year, mailed to your door.
That’s the perfect example of how a subscription model should be used — when a customer wants the same serving of our product at known intervals. But as marketplaces go digital and delivery closes in on immediate, we’ve seen the subscription model evolve with varying degrees of success:
Replenishment: Dollar Shave Club sort of pioneered the personal item subscription model, which brings a set-it-and-forget-it approach to items we usually buy only when we run out and have to remember to replace. Now you can subscribe to everything from coffee pods to air filters.
Subscription boxes: These are usually things we don’t need, but those boxes offer us a gateway to discovery in those areas of our lives that tend to get stale. Boxes deliver everything from exotic food and drink to fashion to personal items to toys, most selected for you, some you can send back. The jury is out on the sustainability of this model though, as the customer relationship is almost always pretty short.
All You Can Eat: Probably the most misused model that’s really not a subscription, but it gets lumped in because calling All You Can Eat a subscription is a sneakier and easier sell.
And that’s where the first mistake is usually made. An all-you-can-eat approach to selling a product seems like a panacea, but all we’re doing is making a bet that the cost of customer usage won’t exceed the price of the subscription. Furthermore, this is a bad bet on either side, because we’re either losing money when the customer uses the product too much, or we’re not providing enough value to the customer who isn’t using the product enough.
The unlimited subscription model isn’t one of my favorites, because while it seems simple, it actually requires a lot of hidden work to produce a balance of value. If we’re not doing that work, we’re assuming the customer will find the balance for us.
Which is why MoviePass kept running out of money.
A good chunk of what people call subscription pricing is actually membership pricing. The membership model requires the customer to pay a fee, monthly or annually or whatever, to get as much as they need of our product, either for a reduced charge or in rare cases no charge.
Let’s anchor our discussion of the membership model by going way back in time again, this time to a gym membership. Instead of buying all that expensive exercise equipment or jogging out in the rain and cold, we pay a monthly membership fee to not do it anyway.
Amazon evolved the subscription model to the digital age with Prime, which originally offered unlimited 2-day shipping for an annual fee. For an amazingly detailed history of the evolution of Prime from subscription model to membership model, dive into this Vox article.
TL;DR: We don’t purchase a 2-day shipping subscription from Amazon anymore, we buy a Prime membership, which comes with a lot of extra perks as they expand their business model.
Taken to the digital age, membership models allow us access to all we care to consume for things we would normally rent or buy. Netflix pioneered the content membership model with DVDs and Spotify took it to music. Oddly enough, both services are now usually referred to as subscriptions.
As technology advances and the membership model evolves, we’re starting to see membership models in everything from video games to automobile ownership to Uber, who recently announced a membership model across rides, bikes, scooters, and delivery.
The biggest mistake startups make with the membership model is disregarding the usage balance equation, which still exists. In other words, a membership model only works when the product has standalone value and when most members use the product with a frequency that makes financial sense for both sides.
When this mistake happens, the right model is probably more likely to be a Tiered model.
A lot of companies turn to a subscription or a membership model when what they really want is a tiered model. Tiered models are used to provide a fixed cost for the budget-minded customer without either side having to do a lot of math on usage balance.
Tiering allows us to accommodate different types of customers at different usage rates, usually breaking down into individual/infrequent, group/moderate, and organization/heavy, with some variations thrown in. It doesn’t escape the problems of cost vs. value, but it diminishes them, and it usually puts the onus of balance completely on the consumer.
There is always a catch though, and that catch is usually the reason customers hate poorly applied tiered models. Two of best examples are cable and mobile service, because they both do tiering wrong, yet a lot of startups try to copy them.
With cable, the tiers are package-based, not usage based. In other words, I have to have 60 channels to get the ones I want, regardless of how much I use the channels I don’t want, which is usually zero.
With mobile service, if I break a tier, I get penalized, either by paying more than tier rates for additional usage or by being throttled to a lower level of service. If I have too many spikes in my usage, I’ll leave the tiered model and never come back again.
When tiering is done properly, it works really well, especially for products where usage can be measured in real time. Technology allows us to do this in both the digital and IRL worlds.
What Works For Your Customer Relationship?
While it can be complex, the solution to making the most out of a company/customer relationship could be using a combination of two of these models.
Netflix streaming combines membership for content and tiering for delivery across devices and quality. At my current startup, Spiffy, we use a combination of subscriptions and tiering to keep our customers’ vehicles clean and maintained to their individual tastes.
Again, it all depends on how we want the relationship with our customer to play out. And like any relationship, it works best when we keep it balanced, keep it simple, and always make the other person happy.
Easy enough, right?