The benefits of value-based subscription pricing

• Many publishers price subscription products based on their competitors’ pricing, or by working backwards from revenue goals.
• Publishers would benefit from revisiting their pricing to focus more deliberately on the specific value their products deliver.
• Value-based pricing can help boost revenues, and has other advantages for publishers such as promoting discipline and focus.

Pricing subscription products effectively is an ongoing challenge for most publishers. It’s a difficult balance to strike: Pricing too high typically results in fewer conversions, but pricing too low risks leaving money on the table and potentially undermining the value a product delivers.

As their subscription businesses and products mature and evolve, many publishers would benefit from revisiting their pricing approaches – and the assumptions (or guesses) that often underpin them – to focus more deliberately on the specific value their products deliver.

Moving beyond competitor-based pricing

When advising subscription publishers on their pricing strategies, an initial question we ask clients at Toolkits is how they arrived at their current price points. In most cases, they say their pricing is a reflection of the value their products deliver to subscribers (after any discounting or promotional activity has been accounted for.)

In reality, this is rarely true. Whether publishers are aware of it or not, they’ve often engaged in competitor-based pricing. They’re aware of what their direct competitors (or peers catering to different audiences) are charging for their products, and have anchored their pricing – consciously or otherwise – to those figures. “We’re providing more value than [insert competitor] at a lower price point” is a common refrain, although it’s rarely presented with convincing evidence to support those claims.

In other instances, publishers have used a variation of cost-based pricing where they’ve agreed on a revenue target, made some assumptions about what portion of their audience they’re likely to convert to paying subscribers, and worked backwards to arrive at a price using little more than back of the envelope math.

In some cases publishers extend this approach beyond pricing and let it dictate the development of their products. As noted last week, this often results in a “kitchen sink” approach to products, where publishers piece together features and benefits in an attempt to justify a predetermined price point, regardless of their ability to deliver those features to a high standard, or whether their audiences even place much value in them.

These early approaches to subscription pricing are understandable. Publishers often rushed to develop their subscription offerings and didn’t have the luxury of investing time and budget in detailed market and pricing research. The better option was to launch, test, iterate, and attempt to reach product-market fit through trial and error.

But for those publishers that have seen early traction with their subscription initiatives and are now investing in them as a key pillar of their businesses, it’s essential to price products based on their value, first and foremost.

What is value-based pricing?

Value-based pricing means selecting a price for a subscription product based primarily on how much an audience perceives it to be worth, rather than the actions of competitors and peers, or internal factors such as costs and revenue goals.

Value-based pricing is a combination of art and science, but typically requires conducting research with current and prospective subscribers in order to understand their perceptions of a product. This information can then be combined with behavioral audience data to arrive at a price point that much more closely reflects the value that customers and potential subscribers assign to an offering.

The benefits of value-based pricing

Value-based pricing, and the research that’s necessary to inform it, has a number of benefits for subscription publishers. These range from the obvious and tangible (such as increased revenue) to more indirect benefits (such as promoting discipline and focus throughout organizations.) Key benefits and advantages of value-based pricing for subscription publishers include:

Increased revenues

In our experience (based on work with a range of publishers on their pricing strategies) value-based approaches often translate to greater revenues. This is frequently because:

Products are underpriced and money is being left on the table, because pricing decisions were informed by assumptions rather than meaningful research. A publisher might simply have matched the price of a competitors’ offering, for example, but failed to factor in the unique and differentiated value they bring to the table. In other instances, pricing might have been based on the approach of a publisher catering to an entirely different audience or market, for which price sensitivity, budgets, motivations and needs are entirely different. Finally, publishers may not be fully aware of prospective subscribers’ consideration sets. For example, readers might consider access to a publisher’s subscription product as a viable alternative to a far more expensive conference pass or professional qualification, potentially giving the publisher the option to price more aggressively.

Products are overpriced, resulting in fewer conversions: Products that are overpriced relative to the value audiences see in them can result in missed opportunities to convert subscribers, higher than necessary subscriber churn, and reduced revenue. Publishers with overpriced products are often better served by reevaluating their pricing to better reflect value, and subsequently exploring ways to add value and increase pricing from a solid foundation.

Price increases are easier when they’re tied directly to value: Publishers that are confident their pricing reflects the perceived value of their products can typically increase pricing as and when they add additional value to their products, or if the value of their products is increased by shifts in the market around them. Subscribers are far less likely to challenge pricing increases or cancel subscriptions if they feel their value for money is being maintained. 

Products are positioned or marketed sub-optimally: What audiences find most valuable is rarely the same as what publishers assume is valuable. As a result, simple changes in product positioning, marketing and packaging can often help increase conversions and subscriber retention, and/or enable publishers to raise their prices, confident in the fact that they’re communicating the value of their products optimally.

Other advantages

In addition to driving increased revenues, value-based pricing can also help promote:

Higher-quality products with clearer value and differentiation: Value-based pricing – and the research and rationale that underpins it – can also be used to help pare down products and feature sets to focus on what subscribers value most. In most instances audiences derive the most value from one or two features provided by a subscription product, even if it provides access to nine or ten. Pointed products are often easier to market, while bells, whistles and tote bags often undermine value perception in the long-run – especially as audiences become increasingly savvy about the marketing tactics employed by publishers to eke out incremental conversions.

Greater emphasis placed on the needs of subscribers: One of the core benefits of subscription models is their ability to more closely align publishers’ interests with those of their audiences. Value-based pricing serves as an extension of this dynamic, forcing publishers to focus on delivering the value that their price points promise, promoting executional discipline and removing temptation to prioritize their own short-term business needs and interests over those of their subscribers. Long-term, this typically results in more highly-engaged and invested subscriber bases.

Implementing value-based pricing

Effective value-based pricing hinges on a publishers’ ability to conduct robust audience research – including the development of surveys, focus groups and other qualitative sources – in order to effectively gauge value perceptions of a product and to ascertain the price points a specific audience might support.

For an optimal approach to pricing, qualitative audience feedback should also be combined with behavioral audience data to better understand differences between an audience’s self-reported behaviors and its demonstrated ones. 

(Coming soon: A thorough guide to subscription pricing strategies and value-based pricing approaches that will be made available to clients and subscribers to our Subscription Publishing Toolkit in the next few months.)

Pricing in a vacuum

Finally, the caveat to the above is that value-based pricing should not mean ignoring other factors entirely when evaluating potential price points for subscription products.

Any pricing decision should also consider variables unique to the publisher in question, including the characteristics of its content and products, the nature of its target audience, its own revenue needs and business priorities, the choices and actions of competitors, and the broader landscape of the market it operates in.

Nonetheless, a focus on value-based pricing – and reinforcing those value perceptions on a consistent basis – is essential for any publisher attempting to build sustainable, long-term subscription products and businesses.

For more practical guidance on building sustainable subscription and membership products and businesses, see the Subscription Publishing Toolkit.