How Startups Make Money With Subscription Pricing
It’s about fixing leaky pipes, not replacing exploding toilets
Why do some subscription-based products and services take off while others struggle and fail?
The move from standard pricing to a subscription model is tempting for any business. Your customers sign up, put in their credit card, and you get paid every month. Who wouldn’t want to do that?
But while generating revenue with a subscription pricing model is easy, profiting from that same model is incredibly difficult. To make the economics of subscription pricing work, the model has to balance customer needs very carefully against what your company can offer at a static price. If that price is too low, you’ll lose money. If the price is too high, you’ll turn away customers.
I offered my first subscription-based product in 1999 and I launched my most recent subscription-based product two months ago. In every case, I had to reshape my offering to conform to a subscription model that would not only generate revenue, but profits as well.
Here’s how to do that.
An overview of the economics of subscription pricing
I’ve written before on how a startup needs to overhaul their business model to make a subscription pricing model work for their customers.
The economics of standard pricing — where the customer pays per unit, per use, or per hour — change completely under subscription pricing — where the customer pays per period for an allotment of units, or usage, or time.
Profit under a basic subscription model becomes a guessing game of hoping the customer doesn’t consume more resources than they’re paying for. That’s a recipe for failure. When that guessing game becomes an exercise in forecasting demand and then meeting that demand, the business becomes more predictable, but not necessarily profitable.
The way to get to profit is to play the percentages.
Establish your subscription pricing model on the 80/20 rule
Think of the ideal full-service use case for your business — all the bells and whistles…