May 3, 2019

What are the best practices for pricing tiers?

Chris Moffitt @cmoffitt

I am curious if there are any standard guidelines for how many pricing tiers and/or discounts to offer for subscription options?

For example, I have a product where the base price is $50 for 1 month of usage.

I am considering the following options:

  • $45/month if user agree to monthly subscription
  • $495/annual for one time bill

My questions for the group are:

  • Any guidelines on how much of a discount is "standard" for annual plans?
  • Is there a sweet spot for number of pricing options? I think some choice is good but 50 would be too much :)

Thanks for your help,
Chris

#ask-ih

  1. 3

    You should figure out what you want kind of subscribers you want before you worry about the discount structure.

    What I mean is, do you want more annual customers or more month-to-month customers? If you want more month-to-month customers, I wouldn't even worry about a discount for going yearly since it doesn't align with your goals.

    Going to assume you want more annual customers, so I would probably go with a more aggressive discount on yearly, which you can accomplish by increasing your monthly rate and not sacrificing that $495 price point. Could also offer quarterly pricing to allow people to opt in for a shorter period of time for a lesser discount than yearly.

    Honestly though, if you don't have any paying customers today, I would just worry about your monthly pricing and let your customers come to you when they want yearly. There's a lot to figure like how many pricing tiers you want to offer and all of that. Maybe 45$ is already too high and you're not showing enough value. Split testing pricing shouldn't be off the table either.

    I personally like "2 months free" for one of my services, but I came to that after years of trial and error and split testing to figure out what was working for MY customers.

    1. 1

      Thanks for the comments. Two months of free service for 1 year seems like a good rule of thumb.

      These comments have also been helpful to get me to focus a bit more on which type of customers to target. That is going to be a big driver for the final strategy.

      1. 1

        Good stuff!

        Forgot to mention (actually originally mentioned it then reworked my reply and it was lost). I was one of those folks that started with EXTREMELY low pricing (like, $1/month) just to test the waters and well..... I wouldn't recommend ever going that low.

        Ended up with a crap ton of fraudulent activity. People were using the service to validate stolen credit card numbers, since it was a low priced transaction. Didn't find out until month 2 when the cards were all being declined. Lesson learned and seems like $5+ is a good number to keep the criminals away.

        1. 2

          Really helpful tip. I had not that about that angle but certainly can see how people would try that.

          1. 1

            It's one of those things, if you're a decent person you'd probably NEVER think about that. Between that, and running a social network where I've gotten to see everything from spammers to sexual deviants, it's definitely sobering.

  2. 3

    Hey Chris, the research for this is really easy to do — I was browsing price plans just a few days ago and literally just googled "pricing".

    Pretty much every result for at least 10 pages was a product or service's /pricing info page. You'll be able to quickly go through and compare various pricing strategies :-)

    1. 1

      True. Good points.

  3. 2

    Hey,

    Pricing is the one thing you need to get right. It comes over time and with lots of experimentation.

    Do follow Price Intelligently's blogs for some brilliant advice on pricing. For your questions:

    1. Anything between 15-40% for annual plan works well. We offer a 20% discount on annual plans, which gives us a fair annual-monthly ratio. Higher the ARPU, higher annual discounts.

    2. The optimum number of tiers is 3 for subscription-based models. The reason: initial users can try and experiment with lower plans and once they are ready to take the leap, you have avenues to upsell.

    Hope this helps.

    1. 1

      Thanks. Very helpful!

  4. 2

    I'll highlight two things: leverage and profitability.

    Some SaaS businesses depend heavily on key accounts. E.g. most customers are on the $50/mo plan while some clients are worth $2000/mo. You want to know how to handle this in terms of customer support, account management, risk diversification, and sales team structure.

    As for profitability, let's say that you're looking at 10 or 200 or 4000 paying customers. Compute that in line with the average basket size, which can be $50. See what it costs to run this operation every month and how you're ultimately earning profits.

    This is a sliding scale and you can design this however you want. You can sell a $20/mo self-service app to 1000 customers. Or you can run a sales operation that supports key a few key accounts at $2000/mo.

    1. 1

      Really good points. That is definitely part of the trade off I am evaluating.

  5. 1

    Pretty much every time I open a saas url, the pricing page is the next page I go to. This is not exact and researched data, but from my observations and memory:

    • annual discounts are between 10 and 20 percent

    • around 90% of the companies have either 2 or 3 pricing tiers, not counting the free one which is also very common

  6. 1

    Hi Chris - first, I want to thank you for your blog! Your help was instrumental in my transitioning from Excel to Python as my primary analytics tool.

    I think you’ve keyed in on an interesting pain point with slideZing. You certainly want to factor in how much service you’re providing per subscription to accurately forecast margins as mentioned in this thread.

    I’ll add —

    • Price Intelligently has some great content on pricing

    • PythonAnywhere is an excellent example of base + variable pricing that could work for your model (# number of presentations vs attendees)

    Here’s an unsolicited analysis —

    I like to reverse engineer from the base economic unit to figure out where to draw lines. In your case, the number of presentations someone delivers is the main driver for value, so that’s where I’d start.

    Say an average presentation is delivered to 40 attendees. Now let’s calculate your cost for that single presentation based on the following assumptions:

    • $1 for the unique phone number

    • $.30 for slide requests from attendees

    • $.50 for questions/feedback

    • $0 for emails/hosting as the marginal cost is negligible

    ———

    => $1.80 per average presentation

    If your target user is someone delivering a presentation 1-2x a month then you could anchor your “popular” tier at 5 presentations per month in the $45-50 range that you intend to offer. Generally, companies do offer 1-2 months free for the annual upgrade, and in this case it makes sense to do $450/yr.

    On the high end, you could introduce a premium/business tier for consultants, trainers, etc. with larger, more consistent crowds. Using the same cost structure as above for presentations to 100 people 15x per month would put the base cost at $67.50/mo. You could price this option at $200 for 25 presentations.

    Finally, I’d consider a one-time use fee of $5-$15 for someone who wants to try the platform without committing to a subscription (vs a free trial) as your low entry point. This leaves room for CAC and covering your messaging costs.

    Potential tiers:

    • single use - $9

    • standard - $49/month or $490/year

    • business - $199/month or $1990/year

    1. 1

      Glad you found the blog helpful. It's always fun when I hear it has been useful to people.

      Thanks for the detailed analysis! That is extremely well done and very insightful. I would also say that the costs analysis you have gone through is spot on. The biggest unknown variable is how many requests will be made during a given session. I think that's a case where I just need to start getting some users and determine the true amount of messaging back and forth.

      The three tiers you broke out make a lot of sense to me. I have toyed around with the idea of a starter tier that would be a much more impulse buy in order to get them started and spread the word with the hopes that a percentage will upgrade to a higher tier.

      Once again, thanks so much for your well thought out response. You've given me great advice to think through and incorporate in the final product.

      1. 1

        You’re very welcome. And I agree, your testing will certainly help you pinpoint the median message throughput.

        Do you plan on delivering the slides via SMS (with a link) or will you feature a sequence for capturing the attendee’s email? Or are you planning to send them via MMS?

        1. 1

          Right now the process works by converting the uploaded PDF presentation to individual jpegs which are then sent via SMS to the end users phone. There is no additional link or email sharing needed.

          At this time it just sends 1 slide at a time. The basic use case is to get a nice quality image of the slide instead of trying to snap a pic from across the room.

          There is no reason I couldn't send the full slide deck but I am waiting to see if that is a desirable feature or not.

          1. 1

            Ah, gotcha. Let us know how it goes!