How to Optimize Tiered Pricing Options for a Subscription
By: Robbie K Baxter
Tags: Business Development, Subscription, Membership, Pricing Strategy, Netflix

Netflix, one of the largest and most successful subscription companies in the world, has among the simplest of business models. There’s a one-time, short, free trial and then the only option is to subscribe.* They only offer a few subscription options, are very limited in the partnerships they utilize and generally stay away from bundling their products with those of other organizations. You don’t get a free toaster with your Netflix subscription and you don’t get a free Netflix subscription with your toaster. The clean model makes it easy to track subscriber behavior and understand how people value their offering. After all, if you only subscribed to get the toaster, you’re going to behave differently than if you intended to make Netflix content part of your new normal.

In contrast, news organizations have a huge range of offers. They bundle with other content providers — music, video and other news organizations. They have dynamic paywalls, offering more free articles to some people than others. And they have dynamic pricing, trying to optimize for revenue on every transaction and every relationship.

Tactics around dynamic pricing, while effective in the short term, don’t always make sense from a Membership Economy’s long-term perspective, and focus on lifetime customer value (LCV). For example, it is accepted wisdom that long-time subscribers are less likely to cancel or complain about pricing. So there’s a temptation to give new customers better pricing than loyal ones. To me, that logic seems like “our best customers are dumb enough to trust us, so we can charge them more than we charge new customers.” In a world of increasing transparency, where it’s easier than ever before to quickly assess what any product is worth and the best available price, this is dangerous.

Organizations moving to subscription pricing always want to launch with at least three tiers, so they can emphasize the middle option. This is what most software-as-a-service companies do as a matter of course. Many organizations go a step further and incorporate other pricing elements, such as additional fees based on usage, service levels or specific features.

However, the important thing is to keep the pricing simple, especially when just starting out.

You don’t want to confuse subscribers. The more options you put in front of a customer, the more of an expert they have to be about your pricing. After all, if they don’t take time to understand the options, they are likely to get a suboptimal solution. In other words, they can’t just trust the company and relax into the subscription. A key goal in any subscription business is to gain the trust of the subscriber. You want the subscriber to make your offering a habit and be confident that the value they’re getting exceeds the price they’re paying. More complex pricing is harder to trust.

You also want to manage your own internal systems — the more options you provide, the more SKUs you need to track. It will be harder to understand what’s working and what isn’t. And if you have a lot of different options to begin with, as you learn, you risk expanding across all of those areas, multiplying options and complexity. Pruning options will eventually follow, and whenever you take something away, there will be some group of subscribers who are disappointed. So you’ll have to deal with that.

Start with a single option that is really well-defined and optimized for a key segment of your audience that is easy for you to reach, likely to recognize and benefit from the ongoing value you provide, and willing to pay for it.

Once you have a successful subscription offering, you can start exploring tiered pricing.

Tiers can be driven by volume, features or service levels. Those are the levers you have to create different options. Each option should have a clear audience and rationale for offering. Sometimes tiers provide increasing value for the same subscriber (bronze, silver, gold). Others are optimized around different use cases (student, family, professional).

When you add a new pricing tier, you should have specific hypotheses about what’s going to happen. Are you going to attract new subscribers, or build deeper relationships with existing subscribers, or retain subscribers who want something lighter? If it’s the former, you want to make sure it’s easy for the “right” new segment to find the new tier that’s optimized for them. On the other hand, if you are adding a new tier to deepen the relationship with an existing subscriber, you’ll need to track conversion, and also make it easy and obvious that this higher tier has additional benefits.

Many organizations default to three options, with popular wisdom being that this approach “anchors” prospects to the middle one. I haven’t seen evidence that three options increases the number of new subscribers vs. a single option though — if anyone has that data, please share it with me!

The issue with launching with three options is that you have to have three options, and someone is likely to subscribe to options one and three, which means you will also need to support those two options.

However, when you’re ready to expand, hopefully because you have identified specific ongoing use cases that justify different options, moving from one to three options seems like the right next step.

Let your existing subscribers know about the new tiers, and make it easy for them to move, if it makes sense. If you really know your subscribers, you’ll probably be able to anticipate which tier is right for them. For example, if you have three people in the same household with individual subscriptions (or very high and varied usage from multiple devices on a single subscription) you might guess a family plan makes sense. Or if you have a very light user, who accesses a limited set of features, they might be happy to have a less expensive, stripped down option.

The important thing is that each option has a clear headline benefit for the target audience, as well as engagement features that are going to make your offering a habit for that group. You have to be confident that they’ll stay once they join.

And whatever you do, make sure that the best options go to your long-time subscribers.

A good subscription should reward subscribers for loyalty — because consumers will do what they’re rewarded for. We’ve seen how consumers have been “taught” to threaten to cancel their cable because it almost always leads to a better price. If you give better pricing to new subscribers or squeaky wheels, you teach them to cancel and to shop around. It might take a while for consumers to catch on, but when they do, it will erode your brand equity, so beware.

Remember, the goal of your pricing is to align price to value and create an ongoing relationship that feels custom-made for each subscriber.

For more on subscription pricing, check out my 10 Tips About Subscription Pricing.

*Netflix recently introduced some pay as you go and free options, and has experimented with making it possible to buy titles outright, but for the most part, they have kept their pricing simple and consistent.