Many consumers have had the experience of dancing between wanting to shop and wanting to save money. Especially when it comes to subscriptions, which are simultaneously guaranteed repeated costs and consistent savings on behalf of consumers, it’s a fine line between the perception of saving and spending money.
That’s where strategic subscription pricing and discounts come in.
Choosing the right subscription pricing model and subsequently setting the right prices — along with effectively leveraging discounts — can all work wonders for boosting customer retention. In fact, these strategies are often key drivers of growth.
We’re outlining what you need to know about making the best pricing and discount decisions for your Shopify brand — including different types of subscription pricing models, different subscription pricing strategies, and some best practices for utilizing discounts to promote customer retention.
Before we dive into the importance of effective subscription pricing, let’s quickly define what it is in the first place.
The subscription-based pricing model allows brands to receive regular payments from consumers (usually on a monthly basis for DTC businesses) in exchange for the continued use of products and/or services. This model offers advantages for both consumers (convenience and savings) as well as for businesses (the chance to generate recurring revenue).
We’ve talked about the many benefits of the subscription business model and why so many DTC founders are attracted to subscriptions, but an important part of actually reaping the benefits of this model is making wise decisions early on. And that starts with pricing.
Per Shopify’s Future of Commerce Report 2022, pricing is a key factor that influences 74% of consumers — and choosing the right pricing for your eCommerce subscription business can often determine whether or not your brand succeeds. But here’s the tricky part: “success” can be viewed through different lenses.
Of course, there’s your bottom line and the health of your recurring revenue — but as we all know, subscriptions are uniquely contingent on developing customer relationships and loyalty.
This means that you want to set your prices high enough to generate revenue and convey the value of your product but low enough to attract and retain your subscribers. The secret to striking this delicate balance is in the right subscription pricing as well as effectively peppered-in discounts, which are both crucial for the rise of DTC brands.
Now that we’ve talked about the importance of subscription pricing, let’s take a look at what this actually means in practice.
First up: subscription pricing models.
These pricing models are often highly dependent on your vertical. In other words, not every subscription pricing model makes sense for every subscription business — and it’s important to consider how your choice impacts your end consumer. Because at the end of the day, the right subscription model naturally encourages retention, while the wrong one will have the opposite effect.
When you’re picking your subscription pricing model, be sure to ask yourself the following questions:
With these questions in mind, let’s take a look at the different subscription pricing models. Bear in mind that this is a general overview, and the real-life application of these models can get a little more complex.
Flat Rate or Fixed Pricing Model
Much like the name implies, flat rate or fixed pricing operates on a set price for your products. This model makes sense if your subscribers will all interact with your brand in a similar way, which is the case with many subscription box businesses. Take Chillhouse’s Mystery Box, for example. For a flat rate of $24, subscribers get two surprise Chills Tips every two months.
Depending on your offerings, flat rate pricing might also make sense if you’re looking for subscribers to have unlimited access to your products for a set monthly fee. Additionally, we’ve seen brands get creative with sequential subscriptions, where customers pay a more substantial one-time fee to buy a product with an element that will then need frequent replacements.
For example, Jolie sells showerheads via this sequential subscription model. For a one-time payment of $148, you can buy a showerhead, one filter, and automatically enroll in the filter replacement subscription for the flat rate fee of $33 every 90 days.
Tiered pricing creates different “buckets” (think along the lines of basic, standard, and premium) that allow consumers to pick between packages at different price points based on their budget and their needs. This pricing model is particularly popular among SaaS companies with a variety of features that might be necessary for some users and not relevant for others.
While this may not be the most popular model for DTC subscription brands, there are definitely creative ways to leverage it — particularly when it comes to memberships. Take Xendurance, for example. Consumers can choose between the option to do a regular monthly subscription and get 10% off or they can opt to join TEAMXND for $95 per year and get additional sitewide discounts, more loyalty rewards, and other perks.
Similarly, we’ve seen brands create memberships in the form of clubs. Sip Tequila is a great example of this. The Sip Tequila Club costs $199 per shipment and includes three-bottle bundles of tequila every month for members to sample. The membership also unlocks additional savings and exclusive access to specialty bottles.
Choosing to add a membership option as part of your tiered pricing can work really well for brands that already have (and want to further foster) strong communities, like health and wellness or food/beverage brands.
A pricing model with another self-explanatory name, per-user pricing charges for the number of people (or users) who use the product or service. This is another pricing model that’s mostly popular among SaaS companies.
The pay-as-you-go model (also known as usage-based in the B2B world) has to do with the extent to which a customer uses particular products or services over a given period of time.
Most DTC brands use this pay-as-you-go model, as subscribers can choose which products they want to subscribe to and will be charged accordingly based on those items. For example, subscribers can elect to subscribe only to Bubble’s Super Clear acne serum or they can also subscribe to a cleanser and moisturizer for the full routine. The price will obviously be adjusted based on the products that subscribers choose.
Prepaid subscriptions, which are often combined with another pricing model, simply enable the subscriber to pay in advance to get access to products for a set period of time. This is an especially great model for any brands that want to offer giftable subscriptions. Take Scott’s Flowers, a brand that allows you to purchase a 3- or 6-month prepaid flower subscription to gift to a friend or loved one without having to worry about paying a fee every month.
Now that we’ve covered the variety of different pricing models, let’s get into the good stuff: pricing strategies. Because baked within your subscription pricing model is choosing the actual cost of your products, which is just as important as the model you select. And yes, we’re going beyond a simple cost-plus pricing strategy, which fails to account for the nuances of consumer behavior and effective retention decisions.
Keep in mind that many brands use a variety of these strategies; in fact, they often intersect with one another.
A big part of setting your pricing strategy is awareness of your competitors’ pricing, and competitive pricing is setting your price directly based on whatever your competitors are doing. Competitive pricing requires monitoring the market in order to position your pricing at or slightly below average. This is a great place to start if you really aren’t sure what price point your product should be aiming for.
One area where competitor pricing falls short is taking into account how your offerings are superior to others currently on the market. That’s where value-based pricing comes in, which considers what consumers believe your products are worth. It’s an especially effective strategy if your product has a particularly unique angle. While this method often results in an attractive price for both you and your consumer, it does require significant market research.
Price skimming is the practice of setting high prices (typically for highly unusual or innovative products) in order to maximize revenue before copycat businesses pop up. As soon as competition intensifies, brands typically lower their prices to compete.
This pricing model is best if you’re paving the way with a new concept and don’t yet have any major competitors. Plus, decreasing your prices after competition begins to intensify will be appealing to your current customers and can be a great way to encourage retention while also ensuring you’re remaining competitive enough to bring in new subscribers.
On the flip side, penetration pricing involves setting low prices to initially gain new customers and acquire market share. Unlike price skimming, this strategy is best used if you’re entering a highly crowded market and are fighting with already-established competitors.
The idea is that after you start to establish a loyal customer base, you can gradually raise your prices. When it comes to promoting customer retention, proceed with caution when utilizing penetration pricing. You have to be wary of this strategy coming off as a ‘bait and switch,’ which could rupture trust and alienate any consumers who came to you specifically for savings.
Marketing and psychology often go hand in hand. There’s a reason we’ve all heard, “And you can have it all for only $9.99!” so many times in our lives.
Psychological pricing specifically aims to use pricing tactics to appeal to our human psychological nature. Per the example above, going just below a whole number with $.99 (also known as charm pricing) can make an item “feel” more affordable while still maximizing revenue for businesses. Additionally, odd numbers are said to drive more conversions.
Emphasizing discounts and highlighting what a consumer would have spent under different circumstances also fall under psychological pricing and can be highly effective at promoting customer retention.
Product bundling is a common strategy used by many eCommerce businesses and is easy to incorporate into any business. Bundles are a group of products that are sold together at a lower rate than if consumers bought each item separately.
Playing off psychological pricing, bundle pricing gives consumers the perception of getting more and spending less. Because of this, the bundling model also encourages subscribers to buy more than they otherwise would have without the bundle. This means subscribers simultaneously spend more money and try new products, which is a win-win.
Using your subscription data can help you identify which products often get purchased together in order to create the right bundles. With 75% of consumers reporting that they’re loyal to companies that understand their needs, this is a great way to promote retention.
Picking the right pricing model and leveraging the right pricing strategies are just where promoting customer retention starts. Discounts are also a crucial method of delighting subscribers and incentivizing retention.
Let’s talk about the best methods to encourage retention with discounts.
And we’ll start off with an obvious one:
We’d be remiss to talk about subscription discounts and not mention subscribe & save. It is truly one of the pillars of the subscription model. Offering real, meaningful savings for consumers who choose to subscribe is one of the best ways to keep your consumers subscribed (and not to mention, it also works wonders for customer acquisition). Clearly displaying these savings on your product detail page is definitely a PDP best practice.
You can also slightly increase savings the longer subscribers stick around, which is a great way to combine your subscription pricing model with your discount strategy. This might start with an initial 10% subscription discount that then turns into and remains at a 15% discount after six months. The longer subscribers stick around, the more they are worth — so these discounts will pay off.
Think of this as a form of tiered pricing, except the tiered options need to be unlocked rather than always being accessible to everyone.
And just a general note regarding your subscribers — they are your most loyal customers. We recommend making your DTC subscription discount the best offering available across all of your channels to ensure you are giving your most valuable customers the VIP treatment and still engaging them on your brand’s site, which is where you have the most control over the customer experience.
Implementing a loyalty program is one of the best, most proven ways to retain your audience. Enable your subscribers to accrue loyalty points with every purchase that they can then exchange for rewards — and yes, some of these rewards can be more substantial discounts than consumers usually get with a subscription.
In L’AMARUE’s case, the more points subscribers earn, the greater the discount they can unlock.
Analyzing your subscription analytics can give you key insights into when your subscriber engagement levels drop.
For example, if you notice that a lot of subscribers tend to churn after three months, this could be a key time to offer a small discount to everyone at the three-month point. Not only will this help prevent churn at a high-risk time, but it’ll also be a pleasant surprise for subscribers who weren’t planning to churn.
You can look for other patterns in your churn data as well, like warning signs that a subscriber might be about to churn. If you notice that 75% of subscribers churn after skipping their orders three times in a row, send a discount to anyone who has skipped their order twice.
Discounts are one of your best weapons for keeping around a subscriber with one foot out of the door — and leaning into your churn data is the best way to identifywhen and how you can implement these discounts.
Similar to analyzing your churn data, asking subscribers why they want to cancel in the first place is another wise way to promote retention.
This way, if someone cites cost as a reason they want to cancel, you can (drumroll please) — offer them a discount!
You can and should also regularly analyze your pause and cancellation analytics. In addition to offering retention actions to individual subscribers, their collective data may signal an overall structural change that may be necessary. For example, if you’re noticing “Product is too expensive” is far and away the most common reason people are leaving, it might be time to revisit your pricing.
Offering discounts centered on holidays, changing seasons, and/or trending topics are all great ways to both acquire and retain subscribers. If you regularly work these perks into your routine, subscribers will always know they have something to look forward to — which is a smart tactic when it comes to retention.
Think along the lines of Black Friday and holiday shopping, Valentine’s Day deals, Mother’s Day discounts, summer promotions, and more. And with Smartrr’s upsell widget, you can easily offer subscriber-only discounts or even access to exclusive subscriber-only items as a way to promote retention.
There’s a reason so many brands provide birthday perks. They’re fun, they make customers feel valued, and they give your audience a reason to stick around (at least until their birthdays).
A simple birthday discount is a low-lift, high-impact way to delight your subscribers and celebrate them on their special days. Another personalized perk that functions as an effective retention action is to provide subscribers with anniversary discounts to mark big milestones in their journey.
These individual perks go hand in hand with offering memberships. Both foster an exclusive, VIP experience and help make each subscriber feel important.
Ultimately, being strategic about your subscription pricing model, product pricing, and discounts will help promote customer retention for your Shopify brand. And don’t forget that it’s never too late to pivot based on results.
Flat rate, tiered, pay-as-you-go, sequential, prepaid, and per-user are all popular pricing models, though some are more popular with DTC brands than others.
Picking the right subscription pricing model for your brand usually begins with asking yourself a series of questions to guide you to the ideal pricing model.
Here are just a few questions to get you started:
Considering these if/then statements should help you land on the subscription pricing model that makes the most sense for your brand.
Competitive, value-based, price skimming, penetration pricing, psychological pricing, and bundle pricing are all popular pricing strategies. Many brands will use a combination of these tactics, and your strategy can (and should) evolve over time.
While there is no one-size-fits-all option and making the right choice will ultimately depend on your end goal and your consumers’ needs, there are a few things to consider when selecting the best subscription pricing model for your business.
There are some standard psychological tactics that tend to work well with pricing in general (psychological pricing), but as a starting point, it helps to begin by assessing the intensity of your competition and the overall market landscape so you can have a good sense of how your product differs from your competition. This will then guide you to decide whether you want to align your prices (competitive pricing), aim lower (penetration pricing), or aim higher (price skimming).
From there, think about the extent to which your brand is innovative, whether you want to prioritize promoting consumer savings (penetration pricing) or the value of your offering (price skimming), and whether consumers might like to purchase a group of your products together (bundles).
Of course, it’s important to know you can always adjust your pricing in response to your subscribers’ engagement and how well your brand is doing, but being intentional with these early pricing decisions will help set you up for success.
Regardless of the subscription pricing model that you choose, it’s wise to leverage discounts in order to retain your subscribers. Offering a ‘subscribe & save’ element to your subscription, promoting a loyalty program, providing birthday perks, and analyzing your churn data to provide discounts at pivotal moments are all ways you can level up your discount strategy.