How Startups Lose Money With Subscription Pricing
From two-sided-marketplaces to on-demand models, there’s a lot of misunderstanding about how subscriptions work
Launching a subscription-based product or service sounds so easy. It’s like instant Monthly Recurring Revenue, just add subscribers.
There’s a problem with subscription pricing models though. A lot of problems, actually.
It’s no secret that consumers are rapidly adopting subscriber models for products and services they used to request on demand. These days, Amazon will sell you a subscription to your coffee pods at a discount to full price. Or you can drive the Porsche of your choice for just $3,100 a month.
On the startup side, service subscription companies are springing up everywhere, sometimes under the two-sided marketplace model, other times as an alternative to traditional service offerings with a no-frills approach to offset the cost and increase the demand.
I’ve got a long history with launching subscription services, from my very first self-founded startup to my most recent self-founded startup, and a few more-well-funded plays in between. A few months ago, I wrote a post detailing how to do a subscription pricing model right. None of that experience came overnight or without plenty of mistakes along the the way.
So let’s talk about my vast experience with doing a subscription pricing model wrong.
Subscription pricing doesn’t work for traditional products and services
If you didn’t click on the link to the post above, let me TL;DR it for you.
A vast number of mistakes get made when a startup just tries to slap a subscription pricing model on an existing product or service. The hard truth is that the offering has to undergo a number of changes — in everything from how it’s transacted to how it’s fulfilled — to become an entirely different product or service.
I get plenty of inbound from startups who are trying the subscription model and failing with it. They discover that the demand isn’t there, the margins aren’t there, and what they had hoped would become a steady pipeline is now even more chaotic as their customers start and cancel subscriptions at a rate equal to or faster than the rate they were booking services or buying products outright.
To mold a product or service to fit a subscription model, the provider has to strip out the least valuable and most expensive elements of that product or service, package the rest completely differently, and then only count on addressing a subset of the traditional customer base.
If any of those things don’t happen, the results will be tragic, and a lot of money will be lost along the way.
Subscription pricing doesn’t work when it underserves demand
Far too many subscription startups are founded on an idea similar to this:
“If people like getting a massage, I mean, if they like it a lot, why wouldn’t they pay less per massage and get a massage every month?”
Even if and when a product or service conforms to the mechanics of a subscription pricing model, there are a bunch of customer demand hoops to jump through to make the subscription valuable.
The success of a subscription pricing model is not based on how much a customer wants a product or even needs a product. It has everything to do with the timing at which they want or need it.
I want my morning coffee. I need my morning coffee. I was lured into Amazon’s subscription model for my coffee pods to save the cash. The first time I needed more coffee and the delivery wasn’t due for a couple days, I cancelled the subscription.
Subscription pricing doesn’t work when it over-serves supply
One of the reasons Teaching Startup works as a subscription model is that it doesn’t matter if you use the product immediately or not. This is why subscription models have always worked for content. If the customer glances at the cover of an issue and it’s something they want to consume right now, it makes them happy. If not, they put the issue in their pile to read later, which makes them happy later.
Back to the Amazon coffee pod example. For products, customers will be happy paying when they don’t need them, to a point, as long as they believe they’ll get value in the foreseeable future. If I’m falling behind on using my shaving blades, that’s fine, I’ll get to them.
Unless I grow a beard, then that subscription is getting axed.
On the service side, there is no forgiveness, and this is something I learned the hard way. Unlike products, services have a a very short shelf life. Your pricing model can include backup plans and reschedule plans that can get really complicated. But even then, the first time a customer goes a month without their massage, they’re far more likely to cancel the subscription than reschedule the massage.
Subscription models don’t work when they don’t remove friction
The key selling point of a subscription is so both sides can set-and-forget. But on the customer side, the subscription can’t just be a product or service that becomes easy when you set and forget, it has to be something that removes pain and friction when you set and forget.
It’s the opposite motivation, which gets misread a lot.
Curation subscriptions, whether it’s curating good plumbers or good investments or good recipes, have a hard time with this, as eventually their value prop works against them when they try to be all things to all people. They go from must-have to nice-to-have, which is the death of any product or service, subscription or not.
Subscription models don’t work when they don’t define value
A free trial is a great way to get customers to understand and conform to the subscription model. It could be a free estimate, a free evaluation, or just free limited use of the product or service.
Here’s the killer. Getting customers to convert from free to paid is actually harder than getting them to convert from nothing to paid.
To counter, the trial has to provide the taste of full value without giving the trial user full value, because when you give someone something for free, you immediately devalue it, and you give them a subconscious permission to waste it.
If you don’t define the line between taste-of-value and full-value correctly, the economics will never work.
Subscription models don’t work when they don’t provide value
That may seem like an obvious statement. Here’s when it’s not.
Often times a subscription pricing model is a lure to both sides because it allows a product or service to be offered at a lower price point. This was all the rage with mobile phones for a while, when in order to get the concept of a flagship phone to go mainstream, the market had to be able to offer a $1,000 device at a $50 price.
And mobile phone subscription models worked, to a point.
But consumers are smarter than that, and as we see the numbering of days of the $1,000 flagship phone, it’s clear that they will only accept punitive contracts and gross overpayment for so long.
And this last mistake kind of summarizes the root of all the mistakes. The customer is always in control, whether they agree to a subscription model or not. If a subscription pricing model has to be propped up or offset in a way that punishes the customer, it won’t take long for the customer to revolt.
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