A long time ago, in a galaxy far away, most consumer enterprises were in the business of selling physical items that could be held, consumed, and bought again. Whether it was a cheeseburger at McDonalds, a quart of milk at the grocery store, or a stamping machine from an industrial supplier, the pricing model was simple: Take the cost to produce, add profit (plus padding for high market demand), and you’re done. Ship one unit, charge for one unit. Simple.
However, companies started changing the game in a bid to squeeze more juice from the berry. Companies like General Electric pioneered the concept of service contracts—added on to unit sales to help increase recurring income. In its model, GE would, for example, sell a jet engine for a fixed price, and along with the engine, sell a lifetime service contract – “power by the hour.” It worked for both the customer and the supplier – the customer got rid of the maintenance cost and headaches, and GE found a way to add additional revenue and profit.
Then, with the dawn of the computer age, software companies took this a step further. True, software originally started out as a “by-the-unit” purchase. You bought Microsoft Office for a fixed price, installed it on your hard drive, and eventually bought another one for a fixed price some years later when the software was updated with new features and speed. Eventually, however, software companies started offering subscriptions – for the “convenience” of paying a certain amount per year, you will be rewarded with the benefit of always having the most current version. The advent of the cloud hyper-accelerated subscriptions, since software maintenance and updates were now quick and effortless.
Today, subscription services are expanding into unexpected areas. A local car wash is offering an unlimited $12.99 per month subscription – stop in any time. The idea is to create a “habit” of getting your car washed, and, of course, once there, upsell other services (would you like a hand wax to make your car even shinier?). And, of course, most people today get their cell phones on a subscription.
With such a dizzying array of pricing options, it can be hard for a company to settle on what’s right for its business model. Are you “old style” unit pricing, “new style” subscription pricing, or a little bit of both? Here are four tests to help you figure out what is best for your business:
Not all is perfect with subscription pricing. Some cautions:
Subscription pricing is here to stay, and in many cases, has big benefits for both the customer and the supplier. The key is to understand your market, how people use your product or service, and what other products or services might be related. But a smart consumer will ensure they evaluate subscriptions periodically or even “sunset” them so they can truly understand whether the price/value scales are still tipping in their favor. Understanding all this, and executing smartly, can result in better business for you, and a better experience for your customer.