What You May Be Getting Wrong About Membership Pricing
As a website owner running a membership site, how are you setting your membership pricing right now? Are your pricing models effective at converting leads to members? What are the best membership pricing models to look at in 2021 and beyond?
Perhaps you spend time looking at the pricing models of your direct competitors, then set yours to reflect what they’re doing. Or maybe you’ve meticulously worked out all of your costs and add in some margin to what you charge your members.
If you’re like a lot of website owners, you may even be going simply by what your gut tells you. And while any of these approaches have the potential of working, they also tend to restrict your growth. In fact, the most profitable membership pricing models put customer value at the forefront. They’re data-driven and align with the purchasing habits of your customers.
In this guide, you’ll learn how to maximize the monetization and long-term retention of your online membership business. We’ll take a close look at why gaining memberships is difficult, outline the most successful membership pricing model strategies, and detail why value-based pricing is so important.
Now, let’s take a look.
What Is a Membership Pricing Model?
In a membership-based pricing model, your customers pay for a service or product on an ongoing basis. Membership pricing is not the same as the pricing you set for traditional products, because the cost of a membership is normally based on how long it will last.
This means that for most memberships and subscriptions, longer agreements typically mean less cost per month.
What You May Be Getting Wrong About Membership Pricing
How much you charge users to become members of your site isn’t a decision you should take lightly. Unfortunately, many membership sites don’t put a lot of genuine thought into it.
Did you know that, on average, businesses only spend about ten hours every year on their pricing models?
There are a number of reasons for this, including:
- Feeling pressure to gain new customers, rather than optimizing the value of existing customers
- Failure to take time collecting and studying customer data
- A lack of understanding proper pricing strategies
However, even if you’re spending 100 hours per year figuring out your pricing model, if you’re making one big mistake, you’re probably charging a lower membership rate than you should be.
What is that big mistake?
Don’t Just Trust Your Gut, Trust the Data
When you first began your membership site, chances are that the first thing you did was check out what pricing strategies the competition was using.
Perhaps you made an educated guess on what you thought you should charge based upon that information. However, as time goes on and you begin to learn more about your customers, you’ll find that the true value of your membership (what a customer is willing to pay) may be very different from what your competition is doing.
Because of this, true data should be at the center of the pricing model you eventually settle on. If you don’t base your membership pricing on solid data, it’s too easy to underprice (or overprice) your membership.
Remember that value is subjective. If your users value your content, products or services, they’ll be willing to pay a more premium membership fee than they are paying to your competition.
Infrequent Pricing Updates
If you found a price point that worked well back in the days when your online membership was just starting, that same price point will often undervalue your product as time marches on.
This is because your product is going to improve as you perfect your craft. As you offer your members improved versions of your product, it’s important to revisit your pricing model to reflect those improvements.
And data backs up this idea.
Organizations that revisit and update their pricing structures twice per year enjoy almost double the ARPU (average revenue per user) than ones that only adjust pricing on a yearly basis.
Overlooking Core Revenue Drivers
Businesses and individuals with membership websites spend an unbelievable number of hours trying to improve product, tweak positioning, and find new customers. However, they also spend a surprisingly little amount of time considering their pricing model.
Unfortunately, discussions about pricing are typically overshadowed by talks of acquisition. But the truth is that your pricing model is your most important factor to leverage for growing revenue.
In fact, hard data from 512 different organizations show that price considerations have almost double the impact of efforts spent on acquisition. Beyond that, pricing model considerations show an improvement of 400% over the time you may spend trying to find more customers.
The Most Effective Membership Pricing Models
Each of these membership pricing models can be scaled to according to your specific business model. Choose the right model for your membership business based upon your specific situation.
1. Fixed Pricing Model
A fixed pricing model keeps things as simple as possible. You offer a single product or service, have a fixed set of features, and price it at a fixed rate for every month a member subscribes.
Fixed pricing is simple to communicate and easy to sell. Then, if you add more valuable features or add additional products, you can raise your flat-rate pricing or add it on top of the current base fixed cost.
However, while this may be the pricing model that’s easiest for your customers to process, you’ll also leave a lot of cash on the table.
2. Tiered Pricing
This membership pricing model allows you to offer several different membership packages that have varying features or product combinations that are available to members at multiple price points.
How many different tiered packages you offer is completely up to you. Just keep in mind that most membership sites will only offer a couple of different pricing tiers.
As an example, the social media management tool called Spout Social has created different tiers that focus on the needs of their many different customers. Independent professionals might be looking at their “essential tools,” while larger organizations are looking for advanced tools that can be scaled
Social Spout has figured out a formula, by catering to different buyer personas at different price points, to extract as much revenue as possible from its members and subscribers.
They’re also good at upselling to businesses as they outgrow their current pricing tier.
However, if you extend beyond three options, things begin to get confusing for customers. Too many choices will lead to customer indecision and a decrease in membership sales.
3. Per Unit/User Pricing Model
This is the go-to pricing model for the vast majority of membership websites. The reason is that membership pricing scales evenly alongside how many users you have.
In other words, the more users you have on your membership site, the more you’ll be able to charge.
This type of product model is simple for customers to understand and makes the sales process very straightforward. It will also make forecasting your revenue easy because it will scale in proportion to how many users you have.
Per unit/user pricing does have its downsides, however. This model doesn’t accurately reflect the actual value of your service or product. After all, just because more people are using it doesn’t necessarily mean that each customer will find more value in it.
When you charge per user, you’ll also find that many users will share their login information with other users, which cuts into your revenue stream.
4. Usage Pricing Model
Pricing based on usage isn’t that common in the membership business. It’s most often used by IT services or telecommunications companies.
In this model, users get charged based upon how much of a service or product that they use. For example, if you download 8 GB of data this month and 10 GB next month, you’ll be charged an additional fee for the extra data that you used.
This pricing model makes it easier for smaller organizations to start out with your membership plan, while avoiding many of the huge upfront fees that some membership companies charge.
However, it can also be cost-prohibitive for users that plan on using your product a lot. In addition, when you charge based on use, it makes it a lot more difficult to predict how much revenue will be coming in every month.
Each user’s membership rate can vary widely on a month-by-month basis.
Things To Consider When You Choose Your Membership Pricing Model
No two situations are alike. Before you decide on the pricing model to use for your membership business, ask yourself the following questions.
1. What Fixed and Variable Costs Do You Have?
When you set your membership pricing, make sure it accounts for both your fix and variable costs of doing business.
To do this, first figure out how much it will cost to deliver your base value to a customer. This should include all operating costs, such as:
- Payroll
- Benefits
- Site hosting fees
- Office rental
- Taxes
- Merchant fees
- Tools and software
After this, add in your variable costs:
- Travel
- Advertising
- Contract or freelance labor
- Miscellaneous services
Average out your operating costs across your number of total customers. This will give you the absolute baseline of what you’ll need to charge each of your customers just to break even.
Of course, you’ll want to make sure that your pricing is high enough to give you healthy returns and margins or you won’t be able to sustain your business in the long-term.
2. Who Exactly Are Your Members?
Do you members join your site to use your product for leisure or for business? Would they rather pay the membership fee up-front or spread out their payments over the course of time?
Do they prefer more choices or simplicity when they make a purchase decision?
How much is your typical customer able and willing to spend on your membership?
When you have a good understanding of your customer segments, it’ll help you define the proper membership pricing models to use and how much you’ll be able to charge for them. For example, a customer that values simplicity may prefer a fixed pricing scheme over one that’s usage-based.
When you’re setting up your pricing model, pay special attention to match the pricing and features of each tier to your primary customer segment, rather than choosing the tiers based only on the features you feel like including.
3. What’s the Competition Doing?
As previously mentioned, avoid using this as your only strategy for setting your membership pricing model. However, it’s still important to understand what field you’re playing in.
The customers you’re looking for will be benchmarking your pricing model head-to-head against your competition. Even though there may be no direct way of knowing how effective your competitor’s pricing model is, this still makes it an important benchmark to look at.
As you scope out the competition, you’ll notice that they’re always tweaking and updating their pricing models to meet the needs of their users. While their current model may work fine for your users, it’s equally likely that you’ll be missing out on revenue if you copy their strategy verbatim.
4 Popular Membership Pricing Strategies
A membership pricing model gives you the framework for the way you’ll charge your customers for a membership. However, it doesn’t specifically address the amount that you’ll actually charge.
To do this, you need to have a pricing strategy.
Defining a pricing strategy requires that you take into account three important factors.
1. Cost-Plus Pricing
This is the simplest approach for setting your pricing. All you do is sum up the variable and fixed costs it takes you to do business, then add a fixed margin of around 20 – 25%.
That is the cost of your membership.
With this strategy, you won’t need to do much in the way of market research. Of course, it’s much easier to work out the price you need to charge when you have a solid handle on the cost of doing business.
The cost-plus pricing strategy isn’t the perfect solution, however. While it may be the simplest number to figure out, it doesn’t take into account the value of your product. It’s a decent place to start, but in most cases shouldn’t be the final solution.
By basing a price on cost rather than the value of the product, it’s difficult to figure out how much your customers would be willing to pay for a membership. A lot of customers are much more concerned with value than they are about cost.
It’s a good idea to have an understanding of costs to assist in defining your basement-level pricing, but basing a membership price solely from costs is rarely the best strategy.
2. Competitor-Based Pricing
This strategy involves researching the prices that the businesses in your sector are charging for similar memberships. Then, you raise or discount your pricing rate to account for how much value your product has in the segment.
Competitor-based pricing is a very viable approach for new companies or businesses that are experimenting with a new product. It also works well if you’re exploring an entirely new industry.
This is a straightforward approach that’ll get you close to what you should be charging. However, you’ll still be charging what they think their membership is worth, which could be very different than yours.
Use competitor-based pricing to understand what the competition is doing, but don’t necessarily let it determine how much your membership is worth.
3. Value-Based Pricing
Rather than looking at your internal business costs or laterally at what your competition is doing, the value-based pricing strategy looks outwardly to the individuals who will decide what the exact right price is for your membership.
Those individuals are your customers.
This pricing strategy uses detailed customer data to access the value of your product. It also takes into account the breakdown of the value of each feature when you set your membership price.
To implement this strategy, you’ll need to talk to people and find out what they’re willing to pay. When you tie your price to the value of what you provide, it will also incentivize you to give customers more value by creating new features or improving services.
Of course, you’ll want to use a changelog to announce changes,
The value-based pricing model is your best bet as a membership site owner to reach the optimal price point for your membership.
Getting Your Membership Pricing Right
Spend some time evaluating your membership prices this week. Maybe you haven’t taken a look at them in a while. Don’t be afraid to raise your prices!
As we mentioned before, as you perfect your craft and add more value for your members, it’s important to revisit your pricing model to reflect those improvements.
If it’s been a while since you took a look at the pricing models of your competitors, maybe it’s time to take a fresh look at how your membership prices compare. Competitor research can provide a ton of insights into other areas that may lead to inspiration for additional changes. We’ll tackle more on doing competitor research in an upcoming article.
You may also want to check out this new inspiration guide for membership sites if you need some ideas from some of our favorite membership sites. Or maybe it’s time to check out these bonus content ideas to give your members.
