Description

Everything you need to know on pricing your membership for perfection

Topic

Pricing

Type

GuidesTemplate

Created by

Michael Gillespie

Membership pricing is not a one-size-fits-all topic. In fact, different memberships in different industries command their own pricing strategy due to the nature of potential customers, their buying habits and features of the product itself.

In today’s online landscape, the traditional offering of a monthly and annual plan shouldn’t be the starting point. Instead, your pricing structure should be determined based on the unique characteristics of your membership product and how those characteristics match up with the problems faced by your target market.

The Big Picture: Your membership pricing structure should be viewed as a feature of your product that uniquely serves your target market.

The Statistics:

• Memberships that utilize a Price Spectrum strategy see churn rates that are 40% lower than those that don’t
• On average, monthly memberships produce revenue churn rates that are 49% higher than those of longer-dated plans (such as quarterly and annual plans)
• Consumers that purchase longer-dated memberships are more engaged and deliver a Lifetime Value that’s 3.8x higher than than the average monthly-renewing member

🚀 The Action Plan: Leverage this formula for implementing a quarterly-annual pricing strategy to maximize your revenue and minimize churn

Part 1: Pricing and Risk: A Delicate Balance

All pricing decisions introduce risk - to you as the operator and to your current (and potential) members. Risk exists on each end of the spectrum of outcomes. On one end, pricing your membership too low will risk leaving significant income on the table. On the other end, pricing it too high means your customer acquisition and churn will suffer.

Both of these are extreme outcomes. But what happens in the middle of the spectrum - the area where current and prospective members constantly weigh the decision to keep paying you or to even pay you at all?

This is where outcomes are determined - and the two most important factors in play here are:

1. The price of your membership
2. The frequency of the renewal

And how the above two items match up with the ongoing value and utility of your product needs to help shape your pricing strategy.

Below, we’ll look at the strategic approach to determining the price of your membership and then how to determine the optimal renewal frequency for your product.

The Right Price Doesn’t Exist. Perceived Value Does.

Pricing is everything. But how do you know the right price for your membership product?

There is no right price.

Let me explain…

Each member and potential member carries a unique view and tolerance for pricing. Those views and tolerances are constantly being shaped by influences outside of your control - macro and micro-economic factors, life circumstances, etc. The list goes on.

For any member, their perceived value of your product will constantly change over time.

Here’s a visual representation:

Fluctuations in perceived value are natural, expected and guaranteed - especially for subscription products.

So how do you address this and most importantly deal with it?

By implementing a Price Spectrum in your overall pricing strategy.

Creating a Price Spectrum

🟢 At the highest end of the spectrum: You’ll sell to members who carry the highest perceived value of your product at the time of purchase. These prospective members will convert easily and represent a near-perfect fit for your product. They pay full price without needing to be incentivized and typically carry low risk for churn.

🔴 At the lowest end of the spectrum: You’ll sell to members who carry the lowest perceived value of your product. They require nurturing, educating and incentives to purchase. These potential members take much longer to convert. While they may not be a perfect fit, your product still offers enough utility to them for value to be present. Often, significant recurring discounts of 50-60% will remove the barrier to purchasing and reduce their higher-than-average risk of churning.

Setting Your Maximum and Minimum Price

The Maximum Price

The maximum price of your membership should reflect a price that the ideal member would be willing to pay. You likely have a general idea of your product’s worth based on your own research. Your primary objective is to ensure your maximum price doesn’t undervalue your product and still preserves value for you (the operator) and potential members located at the lower end of the price spectrum when discounting is implemented.

Based on my research and hundreds of hours spent helping other Memberful customers grow their businesses, a great rule of thumb would be to set your maximum price around 20% higher than what you feel it’s worth. This is because most operators underprice their product. Doing so also gives you room to remain creative and aggressive with promotional offers and discounts that you leverage in your acquisition strategy.

The Minimum Price

Your minimum price represents the absolute, bottom-dollar price you’re willing to sell at. It’s a price where you either break even on the sale, or are just slightly profitable.

Unless you know with 100% confidence that enough renewals will occur downstream to recover that loss, violating this rule guarantees your business cannot thrive and is at risk of failing.

It may be tempting to violate this rule from time to time, however, once violated, it becomes easier and easier to violate again.

Your minimum price must serve as a guardrail for your membership business.

Part 2: Determining Your Renewal Frequency

Without a doubt, the frequency of renewal has clear and measurable impacts on overall member churn rates, revenue growth and member lifetime value.

For membership operators, renewal frequencies can be leveraged to reduce churn and amplify perceived value.

Let’s begin with some directional facts about renewal frequencies. You can use each of these as a guidepost for determining the optimal plan renewal frequency for your own program.

In general:

• Monthly-renewing plans always carry the highest risk for member churn and consistently see the highest churn rates compared to longer renewal frequencies
• Quarterly-renewing plans consistently produce lower churn rates than monthly-renewing plans
• Annual-renewing plans consistently produce churn rates at levels that are either comparable to or lower than quarterly plans

👉 The data is clear on monthly-renewing plans: consumers quickly become fatigued when it comes to monthly payments. With rising rates of failed payments (card declines), and the lower prices often associated with monthly plans, such plans bring considerable risk to membership operators and result in significant revenue being left on the table.

This doesn’t mean that monthly plans should be avoided at all costs. But given today’s environment and the overall membership landscape, they shouldn’t automatically be considered as the go-to option.

If you can design your membership product so that a member has a minimum of three months to decide if they want to continue their journey with you, two things happen:

1. Your churn rate will be lower and more predictable
2. You’ll realize more cash flow with each payment

Let’s face it: More than ever, things compete for our time and attention. Giving members three months to truly experience your offering will create a better experience for them and create more financial freedom for you (the operator) to continue building upon and investing in your product.

Determining Your Plan Mix

I could make a case for why any mix of plan types could work for you. But there’s a foundational understanding of just a few points that will allow you to arrive at the right determination for your own program.

Let’s take a look.

The Problem with Offering Monthly and Annual Plans Together

Consumers makes purchasing decisions quicker when the decision is actually easy to make.

Let’s say you offer a $5 monthly plan alongside a $48 yearly plan.

Here’s how it would look on a website:

Nine times out of ten, a consumer will choose the cheaper option for them today - which is the $5 monthly plan. Especially when they get access to the exact same product for a fraction of the cost up front.

That’s a decision that’s easy to make. And it causes you to miss out on significant revenue.

There’s simply too much separation in price between the two options and not enough incentive to purchase the annual plan today, leading to a purchase of the monthly plan most of the time.

When this happens, you acquire a member who brings a significant risk of near-term churn into the membership - a situation we want to avoid.

Quarterly-Annual Pricing Structures are the Remedy: How to Implement

This is where the attraction of quarterly plans comes into play. Offering an annual plan that’s priced attractively relative to a quarterly plan will naturally produce more annual-paying members because it closes the price gap between the two while amplifying the perceived value of the annual plan.

Here’s how it would look on a website:

Suddenly, the value proposition of the annual plan becomes crystal clear and the gap in pricing between the two plans being offered has been reduced.

This will lead to more purchasers of the annual plan compared to the quarterly plan - again, a decision that’s easy for a consumer to make. The only difference is that the path of least resistance leads toward the annual plan, not the monthly plan like in the prior example.

And in cases where consumers do decide to purchase the quarterly plan, you’ll still realize higher cash flows up front and have three months to win that member’s confidence and trust.

Knowing When to Implement Quarterly Plans

Quarterly Plans work best when they’re offered alongside a monthly or annual plan. They do not perform well as a single offering.

Below are the common situations and signals that indicate when a quarterly plan would produce favorable results for your membership.

You offer a monthly and annual plan, and:

• Monthly plan churn is higher than 10% (signals high monthly churn risk)
• Annual plan churn is less than 30% per year (signals strong appetite for longer-dated plans)
• More than 60% of your total members reside on the monthly plan

You offer a monthly plan only, and:

• Monthly plan churn is above 30%

You offer an annual plan only, and:

• Annual plan churn is above 50% per year

Remember, the primary objective of offering a quarterly plan is to produce more annual plan purchases by amplifying the perceived value of your annual plan.

The secondary objective is to still provide an accessible, lower-priced option that serves potential members who still may not want to purchase an annual plan.

Together, these two characteristics will work to maximize your cash flows and reduce the overall churn risk within your program.

Situations Where Monthly Plans Perform Well

There are certainly cases where an audience is best-served through monthly membership options. A few examples are:

• Memberships that offer benefits geared toward professional services (think B2B)
• News-based memberships that offer real-time coverage of current events
• Memberships that have existing churn rates below 5%
• Memberships that are still “learning” their customer base and purchasing tendencies

The Takeaway

Leveraging a price spectrum will allow you to take full advantage of the varying levels of perceived product value that’s present among your target audience. Establishing this “range” of pricing gives clear and actionable pricing points you can readily act on depending on the dynamics of your market.

Once you’ve established a price spectrum, you can then determine the optimal renewal frequency of the plans you choose to offer. Among the options, quarterly plans can be leveraged to not only significantly reduce your churn but amplify the perceived value of an annual plan.

Members tend to respond favorably to longer-dated plans and typically carry a lifetime value that far exceeds that of monthly paying members.

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