As online businesses continue to grow, you may be recognizing a pattern – more and more companies offering services online are switching to pay-per-use and subscription pricing models.
We can get pretty much anything we want by purchasing it with just the click of a button these days and often we don’t even need to do that. Most of us have chosen this method at some point, I mean, think about it, you probably subscribe to some sort of online service – Netflix, Spotify, or Hulu?
Subscription models are definitely becoming the norm when it comes to purchasing services online and that’s doubly true for online video distribution services.
Back when it was a product-driven market, it was all about shipping more units. Things have changed with the rise of subscription services.
If you’re looking to offer video distribution services online, this goes for any service really, you want to drive growth by building a long-lasting and trusted relationship with your customers – essentially, increasing customer lifetime value (CLV).
Evaluating prices and packaging is extremely important in driving growth. In order to keep your customers happy so they keep using your service, it’s best to adopt a customized subscription model rather than one-price-fits-all approach.
So, how do you determine the right pricing model?
Strategically, “products” and “subscriptions” are two different entities. In the product world, prices are determined by production expenses and desired profits. While in the subscription world, packaging and prices are set according to customer convenience, enabling companies to unlock new ways for building long-term monetized customer relationships.
With products, there’s “cost plus” pricing. You know how much it’s going to cost to manufacturing your product so you price it to make a profit. If your product is a big seller, you can lower the price and make up for it in volume. Or price it higher if you know your customers will pay a premium.
Fundamentally, pricing is different when it comes to subscriptions. It is basically based on the consumer’s usage. The value a consumer obtains from the video distribution service you provide usually depends on how often they actually use it – are they getting value in the service?
In the subscription world, it’s all about pricing and packaging.
You want to be able to offer the full, or customized parts of, the package. Give your customers the chance to access the videos they want, mobile apps, etc. and you provide a complete billing system so they can enjoy the experience.
So, now it’s time to consider the pricing strategies.
When pricing in the product world, it comes down to the price you charge for the service capabilities and features you offer. But, it’s not that simple when talking about subscriptions because there’s now the added element of time.
What term does your video subscription offer? Monthly? Yearly? Are there different options? Let’s suppose the functionality and use of the product changes during the subscription period, what steps should be taken in such a situation?
You need to check off these strategic growth levers:
- Start with a basic plan with a fixed price.
- When adding new video products, you should consider focusing on how to drive upgrades with additional customer value and experiment with billing frequencies (ranging from monthly, annually, and multi-year).
- Consider exploring add-ons and bundles.
- Gather as much information on customer segments and needs as possible, so you can produce different editions with different feature sets and price points.
- Monitor usage pricing and keep track of what’s working with your customers and what’s not.
Following these check points and considering strategic growth levers will make all the difference. Things like offering promotions during a term will drive customer acquisition. How you offer upgrades, bundle services, or sell new services can help increase customer value. Enabling downgrades and letting customers get only what they actually want to pay for will reduce churn.
There are many different ways to go about pricing. but here are four basic and proven models that will help you get started with your video subscription site:
Pricing Model #1: One-time Rate
A very traditional pricing model with which Netflix started is the one-time rate model. This plan is also considered as the 1 disc-per-person strategy. It is very simple – you offer one customer at a time one price for one product.
Pricing Model #2: Fixed Recurring
This model can be a smart move if you are planning on launching a new service. It is easy to manage because you will be providing one product for one price, and charge on a recurring basis. Then it’s easy to add more products as you go.
Pricing Model #3: Per User / Per Unit
A little more advanced, this model comes down to quantity used or the number of people using the service. The number of units used can be determined by data consumption, while per user depends on how many users have access.
Pricing Model #4: Usage
This is quite a bit more in depth than the other options as it lets customers pay for what they are using and nothing else. If the customer uses more or less of the product, the price will change accordingly.
Everybody likes free stuff, so it should go without saying that offering a free promotion is a quick and easy way to bring in new customers.
You want to gain as many customers as possible while keeping marketing costs down and offering a free trial is a great way to let people see what you can do for them. Once they are happy and see the value in your service, they’re much more likely to start paying for it.
Now, you just have to decide what promotional strategy to use. Free trials and freemium are two of the most popular choices and here’s what they can do:
This is a great way to let your customers try your full service for a specified limited amount of time. Say you offer a 7-day trial that gives them access to all videos and content, they can use the service completely for that time then they either have to stop or they have to buy.
Again, the time is specified, so they know from the start what’s going to happen. If, after seven days, they love the product, then they’re probably going to want to keep it.
Freemium eliminates the time limit completely but the customer doesn’t get the full experience. Basically, they will get a stripped down version that they can use for as long as they want. There’s no commitment on their part to ever purchase your product, but they will have to use a version with limited features if they want the free option.
This is an effective method for driving a lot of new customers immediately. The hard part is trying to get them to upgrade and start paying.
Is there enough value in your premium product? Is that obvious to the consumers?
When choosing a promotional strategy, what will work best really just depends on your business.
As a general guide, B2B and smaller, segmented markets tend to favour the free trial, while B2C and broader markets like freemium.
Results show a higher conversion rate with the free trial option – 10-20% compared to 3-5% with freemium – but you might want to give both a try to see which one works for you.
Either way, you’ll want to make sure there are very clear differences between the free and premium services.
You’ll also want to consider the onboarding experience. Will your users be able to start right away and have access to your videos immediately?
As you go, you will learn more and more about your business model and pricing strategy. Over time, things will fall into place, but do you really want to wait for that to happen? You can speed up the process and get your video subscription site running at full potential right away.
The best way to do this is through testing and iterating. Don’t waste time – make sure your pricing and packaging strategy is optimized now.
Here are some tips to quickly iterate:
- Offer competitive responses to your customers and the market
- Launch new products and features
- Expand to international markets
- Offer marketing promotions or temporary price changes to grab consumers’ attention
- Be flexible with pricing and packaging
The first step is knowing what pricing strategy you want to change. Talk to your customers, get insight from your target audience. What is it that they want?
Listen, then test – a live test, out in the real world. Measure the results.
Always be forthcoming about any pricing changes you are planning to make. A price increase may promise more revenue, but you don’t want to drive away loyal customers in the process.
Your goal is to increase sales, while gaining new customers and keeping your existing users happy and loyal to your company and video subscription service.