Pricing Models and Strategies for Physical Product Subscriptions.

What is subscription pricing?

Subscription pricing is a pricing model in which customers pay for a product or service regularly. The pricing model varies from one subscription business to another and often depends on various factors such as value metric, time and resources required, customers needs, competitor strategy, pricing gap etc.

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What is a pricing model?

A pricing model is a model you can employ to determine the best working price of a product. Pricing models take into consideration factors such as cost of producing the product, cost of acquisition of the product, the product value and perception, and profit margin. The pricing model you use should be based on its revenue maximisation potential.

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What is pricing strategy?

Pricing strategies are promotional tactics, models or methods a subscription business employs to lower marketing costs while acquiring as many new customers as possible.

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What are different pricing models?

1. Flat-rate pricing model

Also commonly known as fixed pricing. In the flat-rate pricing model, a single price is set for the product that unlocks all features. The customer pays a fixed price every month or for the subscription duration.

When to use -  the flat-rate pricing model is perfect for products that have limited features, limited differentiating factors and a singer buyer persona.

‍Pros - Flat-rate pricing model is simple to use, understand, communicate and sell, has easy billing processes, and has more predictive monthly revenue.

Example - Swapfiets
Swapfiets is a dutch mobility subscription company that offers bike and e-bike subscriptions.

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Products - Swapfiets offer 2-3 bicycle types depending on the city.

‍Additional features - The bike comes with additional components such as gears, lights, and a lock.  

‍Non-fixed subscription period - The bikes are available at a monthly fixed price and do not have a fixed subscription duration. The subscription contract can be cancelled on a monthly basis.

Fixed subscription period - there is a minimum subscription period only when the customer would like to skip the one-time set-up fee. This also serves as a pricing strategy to make the customers go for a longer subscription duration of 6 months.

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2. Tiered pricing model

In the tiered pricing models, subscription products are available in various combinations and at different price points.

When to use - tier-based pricing model is used when there is diversity in consumer needs, budget and usage. The tiers must have enough recognisable differentiation points between them.

Pros - Flexible and sclable. Address multiple customer segments and persons. Increases the Customer Lifetime Value (CLV) as customers have the possibility to upgrade and downgrade subscription products.

Types of tiers

• Tiers based on subscription duration - the subscription prices decrease as the subscription duration increases. It is commonly used as a pricing model for product subscription companies to push customers towards more extended subscription periods. The incentive for the customer to subscribe for a longer period is a lower subscription price.

• Tiers based on number of users - the subscription price increases as the number of users increases. It is commonly used as a pricing model for SaaS subscriptions.
  

Example: ‍Grover

‍Grover is a german tech subscription company that offers IT products such as laptops, smartphones, and drones on an all-inclusive subscription service.

Products - a wide variety of IT and tech products.

Additional features - the subscription products from Grover come with free shipping and return and have no initial deposit fee. Grover also covers insurance and damage in the overall subscription price.

Subscription price - the subscription price is based on the duration of the subscription—the price descreses as the subscription duration increases. The subscription duration also serves as the minimum subscription duration.

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Stokke Start by Stokke

‍Stokke Start is a subscription pilot by a Norwegian manufacturer of parental solutions, Stokke.

Products - the subscription offer from Stokke includes the famous Tripp Trapp for a fixed price and the Tripp Trapp accessories in a bundle as a subscription.

Subscription price - The subscription price for the Tripp Trapp and accessories bundle is based on the duration of the subscription. The subscription price of the bundle accessories decreases as the subscription duration increases.

Read the full success story about Stokke launching a subscription pilot.
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3. Usage-based pricing

‍In the usage-based pricing model, also commonly referred to as a consumption model and pay-as-you-go, the subscription price to be paid is directly linked to its usage or consumption by the customer. The pricing in such a model is much more variable as it usually includes a fixed base rate that remains constant and then a consumption rate that is variable. This type of model is common in mobility subscriptions, especially cars, and is often combined with other pricing models such as the tiered-pricing model.

When to use - when subscription companies have the means and capacity to monitor the usage of the product

Pros - considered to be the most flexible model for customers. Low, upfront costs help attracts more customers.

Cons - tends to be more complicated for the business.

Example - ‍aboDeinauto

aboDeinauto is a car subscription company that offers cars on a subscription basis.

Products - they offer cars from different dealers on a platform they operate.

Additional features - the subscribed car comes with an all-inclusive service; insurance, maintenance and taxes are included in the subscription price.

Subscription price - the subscription price is partly tier-based and partly usage-based. The tiers are based on subscription duration; that is, the subscription price decreases as the subscription duration increases. The usage aspect depends on the kilometre package; that is, the subscription price increases with a higher kilometre package.

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4. Pre-added pricing module

In the pre-added pricing model, the product price is based on the functionality offered or selected by the customer. There is typically a base product and the possibility to add modules to enhance functionality. Usually, adding more functions also increases the subscription price, but sometimes the customisation options are offered to the customer so that the customer can only pick parts they need.

When to use - when function modules can be easily added to the base product and the customer finds value in these additional functions.

Pros - higher upgrade potential. Product scales with the customer.

Example: Dance - Dance is an e-mobility subscription startup that offer e-bikes on a  subscription basis.

Products offered - a selection of e-mobility solutions

Additional features - the subscription price includes repairs, delivery, maintenance and part replacements.

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Factors to consider when choosing a pricing model

1. Value metric - a value metric, also commonly interchangeably used with pricing dimension or pricing axes, is the metric upon which the price is based (i.e., for what you're charging and how you're charging). To get started, make a list of all axes or dimensions that you could charge for. Here are a few metrics to consider:

• Length or duration of the subscription
• Kilometers package
• Whether the product is new or refurbished
• Is maintenance, repair or set up needed and offered
• Are products acquired or manufactured and therefore what’s the margin that covers all costs
• Are there any usage aspects of the subscription that increase the price
• How is fulfillment taken care of
  
  

2. Time and resources required - complex pricing models such as the usage-based pricing model require more time and resources. Especially at the beginning, if you're starting out and the goal is simply to test, going for a complex pricing model is not recommended as it requires more time and resources than you might be willing or able to spend.  

3. Your offering - before deciding on a pricing model, take into consideration you're offering and your value proposition. For Example, if your product has opportunities for add-ons and upgrades, then consider a pre-added pricing model in place of a flat rate model. If you can track usage of the product, then add a usage-based pricing model.

4. Your customer base - central to your pricing model is your customers. Try to understand what they want, what gap you're filling, or the problem you're solving with your product. For Example, bike subscription customers have varying needs when it comes to accessories. The base price, in that case, shouldn't come with pre-fitted modules rather the customer should have the possibility to add the accessories he needs. By taking a deeper dive into your customer's needs from a subscription offering, you can conclude which model best reflects and matches that need.

5. Your competitors - If your competitors already operate a subscription model, find out how they are modelling the price. Are all subscription companies in your industry following a similar pricing strategy or different ones? Based on your research, try to identify if there is a gap that your subscription model can fill and then add a pricing model that supports that.

6. Your financials - the pricing model you choose, should also take into consideration your goal with your financials. Do you want to set up a minimum duration for the subscription that at least covers the fixed costs? Do you want to charge more for heavy users as more usage also means more repairs and maintenance? If yes, then a usage-based model might be a better pricing model over flat-rate pricing model.

Commonly used pricing strategies

1. Price based on subscription duration

As per this strategy, the product is offered at a lower price if the customer subscribes for a longer duration of time; that is, the price is dependent on the length of subscription, longer the subscription, lower the subscription price. The incentive for the customer is a lower subscription price, and the incentive for the subscription business is a steady and predictable cash flow.

This strategy is typically used by micromobility subscription companies, baby goods subscription companies and sometimes even furniture subscription companies.

2. Freemium

Freemium is a commonly used strategy. It is the strategy of offering a premium product for free for a fixed period of time with the goal that at the end of the free period, the subscriber will wish to continue the subscription. This strategy employs the tactics of "being hooked", that is, when someone tries out a product, they see how convenient it is to use it, and they become dependent on it, which results in an extension of the subscription contact.

Different subscription companies use the freemium strategy in different ways. Some offer a free month of use while some waive off a part of the fee if the customer agrees to certain conditions such as subscribing for a longer duration etc.

Swapfiets, for Example, waives off the one-time fee if the customer subscribes for a minimum of 6 months.

Swapfeiets also offered free bike rides for a week to commuters in London during the strike period. The idea, of course, was to get people to try out the Swapfiets bike and raise awareness.  

3. Freemium plus upsell

‍In this strategy, the company offers a base product to make the customer try out a product and then offers to upgrade possibilities for a higher price. This strategy is typically used by car subscription companies.

4. Subscription with fixed contracts

In this model, the product is offered for a fixed period, and a contract of sale is made simultaneously with another company for a fixed price. For Example, car subscription companies typically use this strategy to calculate the subscription price. They make a contract with companies that buy second-hand cars and fix a price at which the company will buy the car, for example, 20,000. Then work backwards to set the monthly subscription price to see how much they need to charge to make a profit, cover costs and add some margin.

This strategies is also commonly used by car subscription companies.

5. Rent to own

In this type of strategy, the subscription offers the customer the possibility to own the product at the end of the subscription period. If the company knows that the customer will buy the product at the end of the subscription period, then the subscription price is just the sales price of the product (including margin and profit) divided over the subscription duration. The business knows that it will earn back the costs and also make a fixed amount of profit, and the customer gets access to a product at a lower price and can pay it off in smaller sums.

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