When introducing a subscription business model, however, a number of mistakes can be made - we have evaluated ten of them so that you can keep an eye on them right from the start and ideally also avoid them:
- Basis of the price calculation
- Subscription vs. leasing
- Pricing too low
- Knowing the customer
- Offer variation
- Offer combinations and "packages"
- Freemium strategy
- Discounts
- Roadmap
- Flexibility by changing the offer
Basis of the price calculation
With traditional one-off purchases, the price is usually set at the cost plus a certain surcharge. This surcharge calculation cannot realistically be used in the case of digital subscriptions, as these devices lose value through use and the price would therefore fall with each cycle. This is not economical and means a loss of profit. Therefore, pricing should be based on the "three Cs": customer, cost and competition. So a Market-oriented pricing.
Subscription vs. leasing
A lease should not be confused with a subscription. Leasing is a pure financing model, whereas a subscription-driven model involves more. It provides the customer with a actual added valuethat goes beyond the mere purchase of the product:
- In the case of software (e.g. Adobe), subscriptions are sold with an automatic update to the latest version, for example.
- The added value of an eMobility charging subscription (e.g. ChargeNow) is that the customer has access to the charging structure across multiple providers.
- For example, there are subscription models where the customer only pays when they use the service (e.g. "Pay per wash"). Through long-term use and the offer of flexible additional packages, the customer may even end up investing more money than if they had only invested once in an appliance/service (e.g. washing machine).
Pricing too low
Another problem is that many companies start with a low-priced subscription in order to quickly gain market share. With a subscription model, however, it is very difficult to increase prices retrospectively without also offering concrete added value for the customer. So if companies offer a price that is too low from the outset in order to capture market share quickly, the low price will remain with the first - usually very valuable - customers. This is because if the subscription was sold cheaply once, the customer expects the cheap price every billing cycle and is annoyed or even cancels if there is a subsequent price increase. Pricing that is too low is therefore not sustainable in the long term and can lead to losses.
Knowing the customer
"Find out how your customers think and reflect their way of thinking in the subscriptions." When defining pricing models, it is essential to always focus on the customer. After all, an unfamiliar pricing model that the customer does not know or understand is less likely to be purchased than a familiar one. The customer must feel comfortable with the subscription and be able to identify with it.
Offer variation
Product variations based on customer requirements are a major challenge for industrial companies. "One-size-fits-all" products are easier to develop and market. However, they restrict the customer and are therefore not recommended. A subscription should be offered in at least three different variations: e.g. a cheap, a medium and a more expensive version.
Offer combinations and "packages"
If offer combinations are too complicated, the customer is more likely to be put off. There are some subscription packages and variations that have proven themselves and that the customer can quickly absorb and understand. An example would be a "Standard", "Exclusive" and "Premium" package or S, M and L variants. This is easy for the customer to understand, as this type of subscription package has already established itself on the market.
Freemium strategy
Freemium is a good way to get users to test the products and build up a large number of users. However, a common problem is that a provider offers a subscription freemium offer without a clear strategy. "How do I manage to turn customers into long-term, paying customers?" One way to increase the attractiveness for customers would be to offer extended functions that are subject to a charge. However, these enhancements must always represent significant added value for the customer.
Discounts
High discount levels are common in the industry, but the existing price structure should not simply be transferred to the subscription offer. A distinction should be made between subscription prices with graduated price levels - depending on volume or usage level - and a high discount level for subscription prices.
Roadmap
The business model roadmap also includes the strategic planning and further development of pricing policy. There is a mutual dependency between the value proposition to the customer and the service offered. It is therefore also important to constantly compare the offer with that of the competition and to revise it if necessary if the offers are very similar.
Flexibility by changing the offer
The advantage for the customer in a subscription system lies in the flexibility: the subscription can be adapted as required. The better the possibilities for this, the greater the growth. The prices must be packaged correctly, as well as being dynamic and flexible. If this is not the case, a subscription system offers no added value for the customer.
Conclusion
Many companies have already made the switch to a subscription-based business model and shared their successes and failures. We have experienced recurring errors in various subscription projects. We have taken a closer look at these and learned from them. For all ten points, it is important that the underlying IT system is quickly adaptable. This is the only way to avoid errors:
- Market-oriented pricing: IT systems must be quickly adaptable when the market changes.
- As subscriptions are more than just pure financing models, additional individual services are to be offered.
- Flexible campaign management is important in order to offer attractive offers at market launch, but also to convert freemium users into paying users.
- Subscription models should be adaptable to the needs of customers
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This blog post is based on the article by Stephan M. Liozu (Chief Value Officer of the Thales Group):
