One of the most important aspects of developing a subscription revenue model is monetization through value-based pricing.
Patrick Campbell, CEO and Cofounder of Profitwell, discusses the importance of value-based pricing in our current software market, and how business developers can prioritize features and create add-ons to appeal to customers within a value-based framework.
How market saturation is driving down subscription prices
Software products can’t win over customer today with novelty and promises of disruption. Customers already know what they want out of a tool. Business value comes from meeting that demand.
Meanwhile, there is more competition than ever. This is driving software prices down. While you might have been able to charge $100 for your product five years ago, few customers are willing to pay that today.
This market dynamic is completely out of your control. However, you can develop a value-based pricing strategy to help you reach the right audiences and retain your customers.
Why monetization is the core of your business
There are three main growth levers in your business: acquisition, monetization and retention. Monetization and retention have a much higher impact, yet so many companies focus on acquisition.
Monetization needs more attention. Price is just want aspect of monetization. You can also reach different target audiences, adjust basic and premium tiers, and learn what customers will pay for add-ons.
Focusing on monetization allows you to build a stable business model that will retain customers and facilitate future expansion.
How to identify your product’s most valuable features
Understand the value of each of your product’s features, and what your customers are willing to pay for those features. Patrick has a useful 2-by-2 rubric to assess feature value:
- High value and high willingness to pay: This is a key feature.
- Low value and high willingness to pay: This is an add-on.
- High value and low willingness to pay: This is a core feature.
- Low value and low willingness to pay: Trash.
As your company grows and your customers’ needs evolve, you might notice the value of some features will drop. A feature that used to be a premium add-on could become a core feature, for example. Something that customers find valuable now won’t be as valuable to them in the future.
At the core of this analysis is customer research. Don’t assume you know what your customers want. Ask them, and frequently get their feedback.
Start with small changes
As you develop your pricing model, make changes slowly. Measure what you do and what the results are. This will help you better understand the results of your efforts and prevent you from spooking your customers.