How to Price Your Software with a Subscription-Based Model

FastSpring

Estimated read time: 4 minutes, 26 seconds

Pricing your software correctly is a crucial part of selling software, but sometimes it’s hard to know if you’re on the right track with your pricing strategy. Here are some tips for setting up a pricing model that attracts business and retains long-term customers.

Offer Options

Everyone likes options and a good pricing model offers choices—giving three to five options is the industry standard. As you can see from FastSpring’s own pricing, one strategy is to present a small group of clearly-explained options to prevent overwhelming potential new customers. Divide your pricing packages by audience—something like “Basic,” “Pro,” and “Enterprise”—and give short explanations that clarify the differences among them.

But what, exactly, should your pricing look like? That’s a subject of much debate. Some experts warn against pricing based on legacy competitors—meaning don’t price your downloads like the big dogs who have been in the business for years. Instead, develop an upper and lower limit to what you could possibly charge at launch, create pricing packages from there, and adjust as your business expands.

Be Transparent

We can’t stress this enough: your pricing must be transparent. It should be easy to understand, free from hidden charges, and up-front about extra or recurring fees. Customers hate hidden fees, and charging them can be one of the quickest ways to drive them away. Cell phone and cable companies are famous for tacking on extra fees—helping to earn them the lowest ranking in the country for customer satisfaction. Clarity about pricing = loyalty.

The Enduring Value of Free

Think the “free trial” is cheesy? Don’t discount it too quickly. Customers are so used to free trials, they have almost come to expect it from a new service. Netflix, for example, markets free trials heavily because their data shows that they work, retaining about one in three people for a subscription. And don’t worry too much about people abusing the offer. Research shows so-called “serial trialers” account for a tiny percentage of consumers. Most people use free trials for exactly what you want them to: trying out your product. Once they’ve seen the platform or software in action, they’re more likely to continue use and eventually even upgrade. Many subscription based models have actually seen many of their enterprise customers start out as free trials.

Settle on Metrics

There are hundreds of ways to measure your success. Don’t get too caught up in dissecting the statistics. Many successful SaaS businesses find it is best to select a small group of metrics and give them intense focus.

One of these metrics—and one of the best indicators of a new service’s growth—is churn rate, or the percentage of customers who leave every month. Reducing churn is essential for building a solid customer base. This is why many SaaS providers select a subscription platform that accepts multiple payment types and offers recurring billing. These solutions address the simple fact that every time your customers have an opportunity to abandon your service, you are at risk of losing a customer.

You can also measure your average revenue per customer and determine the lifetime value (LTV) of a customer. The LTV might seem hard to determine, but it’s really just a combination of your average revenue per customer and your churn rate. A SaaS business finds it by taking the average subscription length and multiplying it by the average monthly revenue per customer. So if your average subscription length is 12 months and your average monthly revenue per customer is $60, you’re looking at an LTV of $720.

Implement Recurring Payments

In the above example, the glaring question is: why is my customer lifetime so short? Why aren’t my customers sticking with me beyond 12 months? The most obvious answer is that 12 months is your default subscription renewal point. It’s also possible that you’re ending trial periods/pricing at 12 months, or your customers are just hooked on a 12-month cycle.

This is where recurring payments can enter your pricing model. Recurring payments, or automatically renewing a subscription unless the customer ends the arrangement, increases your potential LTV dramatically. As long as you are totally up-front about setting up customers for recurring payments—which means asking for their explicit approval—it can be a long-term revenue booster that your customers find convenient.

Capitalize on Cancellations

Let’s take a moment to look at cancellations. Every SaaS business deals with customers canceling, and all reputable SaaS businesses should have cancellation information clearly stated. But don’t give up on these customers.

Cancellation is a golden opportunity to show your users how much you care about retaining them. This is why Amazon.com emails people who cancel Prime membership with a 50% discount offer. Amazon is likely looking at the LTV, realizing it’s better to take a renewal at half price than lose the customer altogether.

Your software business can boost retention the same way. Consider creating tiered discounts for at-risk customers and reaching out at critical points. It’s key to preserving the long-term relationships that are essential for SaaS success.

Once you’ve determined your pricing, head on over to our Subscription Revenue Forecaster to find out how your revenue will change based on your new subscription-based pricing. Click here to calculate now.

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