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Align Your B2B Subscription Pricing Models to Your Pricing Strategy

Picture of Petri Takala Petri Takala : Apr 26, 2023 9:53:41 AM

Service Pricing pricingstrategy

Align Your B2B Subscription Pricing Models to Your Pricing Strategy

When deciding on a pricing model, there are many aspects to consider. It all starts with business targets, market analysis, and picking up a pricing strategy. Different capabilities are then needed to be able to execute the selected strategy. For agile strategies, agile tools are needed.

Choosing Pricing Strategy

There are four basic viewpoints for setting a pricing strategy: cost, competition, market maturity, and value. Here are five strategies based on these viewpoints.

1. Cost plus margin pricing strategy

Basing your pricing strategy on your costs can be a quick and easy way to guarantee a profit, as long as you meet sales goals. Essentially, take your cost level and add a suitable markup. This is an easy-to-understand and easy-to-apply model. But, as noted below, it is often not well-aligned with market dynamics and customer value.

Pros:

A simple pricing strategy that is easy to calculate and understand.
Ensures that the company makes a consistent profit margin on each product sold.
Provides transparency in pricing to customers.

Cons:

Does not take into account market conditions or demand for the product.
Limits the potential profit margin for the company since it only takes into account the cost of production and a fixed markup percentage.
Does not encourage the company to be more efficient in production or to lower costs.

2. Competitive pricing strategy

When using a competitive pricing strategy, you first look at the competition and align the prices with them a bit. To do this, you need to analyze your competitors' prices across all customer categories, from individual users and small businesses to large enterprises.

You should also take a look at the features and benefits of their offerings, as well as any discounts or promotions they may be offering customers. By conducting an in-depth analysis of your competitors and their offerings, you can ensure that your services are properly priced to remain competitive while continuously providing value.

But looking too much at what the others are doing may be too easy and not optimal. Too aggressive pricing will hurt margins. Value is not honored much there and you may also leave money on the table in the end.

Pros:

Can attract customers who are price-sensitive and who are looking for the best deal.
By pricing its products competitively, a company can increase its market share.

Cons:

May result in lower profit margins for the company.
Pricing differentiated products or services solely based on competitors may not be appropriate.
Likely not effective in highly competitive markets in attracting new customers.

3. Price skimming

Price skimming means setting prices as high as possible in the beginning and adjusting lower if needed. This maximizes margins per unit. This strategy, however, is quite distinctive and does not suit every business. With innovations, price skimming might work, with prices starting high and lowering over time. For those with an effective brand image price skimming may be a long-term strategy. But, of course, your brand should be so strong that it has a positive effect on customer value.

Pros:

Can help maximize profits by capturing the most revenue possible from early adopters who are willing to pay a premium price.
Can help create a perception of high quality and exclusivity for the product, which can improve the company's brand image and reputation.
By setting a high initial price, a company can gain a competitive advantage over its competitors, as they may not be able to match the price.

Cons:

May limit the size of the market, as some customers may be unwilling to pay the high price and will maybe wait until the price drops.
Can create a negative perception among customers who feel that they are being charged too much for the product.
May be inflexible in responding to changes in market demand and competition, as the company has already set a high price that may be difficult to adjust.

4. Penetration pricing

When looking at a quick market share increase, penetration pricing may be worth considering. To do it, you enter the market with a tempting price and increase as market share improves. Be careful not to sacrifice your margins in the long run.

Pros:

Companies can attract price-sensitive customers who might have otherwise purchased from a competitor.
Can help increase market share, which can help achieve economies of scale, lower costs, and increase profitability in the long run.
Can help companies generate buzz and increase brand awareness, which can be especially important for new or unknown brands.
A lower price point can encourage customers to try a product or service, which can lead to repeat business and long-term customer loyalty.

Cons:

Lower prices mean lower profit margins, which can be a problem for companies that need to recoup high development or production costs.
Once customers have become accustomed to low prices, it can be challenging to raise prices without alienating customers or losing market share.
Price-sensitive customers may not be loyal to the brand and may switch to a competitor when prices increase.
Some customers may perceive low prices as an indication of lower quality, which can be a challenge for companies looking to position themselves as premium brands.

5. Value pricing strategy

It is often said that the most important aspect of a price is customer value so maybe consider building your pricing strategy based on that!

A good value pricing strategy demands a thorough understanding of customers since value perception varies between customer segments as much as between individual customers. But knowing your customers is increasingly a must for any business nowadays. The importance of data grows, and the best performers can benefit from that data.

Pros:

Focuses on meeting the needs of the customer and providing them with a product or service that offers the best value for their money.
By emphasizing the value of the product or service to the customer, a company can charge a higher price, which can lead to higher profit margins.
Can provide a competitive advantage over competitors who are focused solely on price, as it emphasizes the value of the product or service to the customer.
Can help build customer loyalty by offering a product or service that meets the customer's needs and provides them with the best value for their money.

Cons:

This may create a perception of expensiveness among customers who are price-sensitive and not willing to pay a premium for the perceived value of the product or service.
Perceived value is subjective and can vary among different customers, which can make it difficult for a company to determine the appropriate price for its product or service.
In markets that are saturated with similar products or services, a value pricing strategy may not be effective in attracting customers, as customers may not perceive enough added value to justify the higher price.

Pricing model types

After initially setting the pricing strategy, you need to consider the actual pricing models. For recurring services, there are several typical pricing models available, such as pay-as-you-go, subscription plans, and usage-based fees. It is important to weigh your options when determining which pricing model works best for your company and selected strategy. The most typical pricing models are Flat fee, Unit, Tier, Volume, and Overage but there are also variations of those.

Flat-rate pricing models
Fixed one-time	Customers pay a sum once.
Fixed recurring	Customers pay a sum for each period of service.
Consumption-based pricing models
Unit	Customers pay a certain sum for each unit consumed.
Tier	Customers pay a different price point based on certain tiers or levels of usage, features, or quantity. Typically, the more a customer purchases or uses, the lower the unit price becomes.
Volume	Customers pay for a product or service based on the quantity purchased. The more a customer buys, the lower the unit price becomes.
Overage	Customers pay an additional fee for exceeding a certain pre-determined limit or threshold of usage.

There is an overall trend towards consumption-based models as they typically are better aligned with value: customer pays according to usage and also have more control than with flat fee pricing. Evaluating your capabilities on pricing and billing is very important there. A mismatch between the pricing models and capabilities creates lots of manual work and may lead to revenue leakage and eventually customer churn.

With low pricing capabilities, it may be wise to stick with simpler, flat-fee pricing. If that is against your pricing strategy, you should consider looking to improve capabilities: processes, and especially systems on pricing and billing. This also applies to companies that are transforming from products to services: evaluate capabilities first and only after that go for this change. Otherwise, the transformation may not succeed, not because of a lack of motivation but a lack of capabilities: processes and systems.

Putting Customers First

Finally, perhaps the most important factor when selecting a pricing model is understanding your customer's needs and preferences. This means finding out what features they need and value, as well as how much they are willing to pay for them. It is important to remember that not all customers perceive value in identical ways. Processes and systems are the key there as you need data and insight into customer behavior and combine that data across the organization, from product to sales and customer service. Again, a capable subscription management system helps there as it automatically gathers much of the needed data.

Testing

Experimenting with pricing models is valuable for B2B businesses, as it helps them to better understand customer needs and tailor their offerings accordingly. By trying out different pricing structures, they can gain insights into which services are most profitable and popular with customers, allowing them to make improvements in areas where demand is low or cheaper alternatives may be desired.

However, your ability to experiment with pricing models will depend entirely on the agility of your pricing solution. Automating pricing and billing processes can make it simpler for businesses to experiment with different models. This eliminates the need for manual effort and reduces time and cost associated with adjustments, freeing up resources to focus on other areas such as customer service and product development.

Agility is the Key to Strategy

There is no one-size-fits-all solution to pricing strategies, pricing model types, or customer preferences. Only with continuous experimentation can a B2B SaaS company find the right combination of strategies to maximize profits. The architecture of your billing solution must support the influx of data and enable instantaneous changes to all aspects of pricing strategy.