Rick Annichiarico

A Comprehensive Guide for Subscription Profit Maximization

Maximizing recurring revenues is a complex, ever-evolving effort that requires constant attention. This evolution is evident in changes to pricing, tiering, and bundling, which have become commonplace in the subscription industry. All these strategies aim to maximize profits and revenue in an ultra-competitive market.

In my ongoing quest to uncover and optimize recurring revenues for subscription brands, I’ve developed a guide to crafting a comprehensive strategy. This guide considers all aspects of subscription revenue optimization, including pricing, tiering, segmenting, cost reduction, user acquisition, and more.

Pricing
Determining the right price for your services is crucial for maximizing overall revenues. Here are the steps to follow:

1. Base Price: Set your base price high to capture your core subscribers. We recommend setting this price according to what the top 20%-30% of your “super-fan” users are willing to pay.

2. Discounting: Prepare discounts to pre-qualified consumers who meet certain criteria. Your competition includes all other services a consumer subscribes to, not just similar services. Pricing your service to drive revenues from everyone willing to pay a profitable price-point will maximize revenues. Consider creating different discounts you deem suitable based on how much they spend on another service or category of services.

3. Discounting Profit Margins: Calculate the lowest price point you can sell your service profitably. Start with your base price and subtract per-subscriber costs, including product costs, royalties, acquisition costs, and a 5% cushion. The remaining number is the lowest price for offering discounts. Anyone willing to pay above this point can be converted.

4. CAC Note: Keep your Customer Acquisition Cost (CAC) as low as possible. Lowering acquisition costs is like raising your price without the risk of churn. Partnerships can help decrease costs and increase profit margins.

Tiering
With your pricing strategy in place, it’s time to figure out your tiers:

Don’t Over-Tier: Create only a few tiers (basic, premium, platinum). Consistenct tiering conventions should be used across all services if possible. Over-tiering can be confusing and lead to fewer conversions and higher churn.

Keep it Simple: Too many options can be overwhelming. Create a basic tier structure and offer personalized prices to your limited tiers based on what other people are already spending money on.

Targeting and Pre-Qualifying
Offer your new tiers by targeting the right audience with the right offers.

Segmenting: Segment your audience based on various factors, especially what other services they are already paying for. This provides insight into what a consumer is willing to spend and the prices required for them to add another service.

Internal Targeting and Pre-Qualifying: If you have multiple brands or services under one umbrella, personalize offers by stacking your services at steeper discounts. As someone buys one service, offer special deals on the others. This method pre-qualifies discounts internally without creating confusing tiers and bundles. It also provides greater personalization for your subscribers and less cumbersome logistics for implementing.

External Targeting and Pre-Qualifying: External targeting largely relies on the same strategy as above. Target consumers for discounts by identifying their current subscription spending. Analyze their buying behavior and tailor your pricing strategies to different "spend" segments.

Micro-Testing: Test different pricing strategies on smaller populations before making broad changes to pricing, tiering, bundles and partnerships. Use platforms that allow experimentation with pricing techniques and segmentation based on actual spending.

Distribution and Marketing
Experiment with different pricing strategies across various marketing and distribution platforms. Here are some strategies:

Platform Utilization: Use steeper discounts on lower-cost platforms. App stores and social media can be expensive but effective for core customers. For incremental subscribers, use cross-promotions and bundling to convert them at lower prices while generating more revenue due to lower acquisition costs.

Minimize Platforms that Churn: Focus on platforms that encourage retention and lifetime value (LTV). High churn platforms may have high reach, but supplement them with lower cost, high retention solutions to maximize profits.

Entering New Markets: Entering new markets can boost revenue significantly. A new market could mean a new geographic region or a new user segment you hadn’t considered before. Cross-promotions run with popular brands in new markets can uncover new opportunities and expand your market effectively.

Bundling: Bundling your services with other brands is a proven method for adding subscribers and improving retention.

1. Traditional Bundling: Be mindful of the risks of cannibalization with existing customers and the logistical challenges. Bundling involves complex negotiations and integration efforts.Use bundling selectively with the right brands and parameters.

2. Cross-Promotion Bundling: Offer your potential customers exclusive discounts on partner services when they join yours, and vice versa. This strategy combines the benefits of bundling with flexibility and fewer complications. Cross-promotion bundling can be implemented with multiple partners easily, opening up new channels that allows you to target the right price, to the right audience, at the right time for less.

Conclusion
There’s a lot to unpack here, and future articles will delve deeper into each aspect of maximizing recurring revenues. For now, remember to:

- Keep your base price high.

- Pre-qualify discounts.

- Maintain simple tiering.

- Utilize low-cost, high-retention marketing and distribution channels.

By following these guidelines, subscription brands can optimize their strategies to drive revenue and maintain a competitive edge in the market.