More than 70% of membership businesses fail within the first two years. There are various reasons for that, and one of them is the pricing of the membership. Perhaps people refuse to buy your membership because you have priced it too high, and it’s unrealistic in the current market. Or it can be because you haven’t communicated the value of your membership effectively.
In this guide, we will discuss different membership pricing models, how to determine the right price for your membership, and tips for success in building a membership business!
Different Membership Pricing Models
The structure of your membership business model usually influences your membership pricing model, but businesses often combine different membership pricing models to create the one that suits their business.
Tiered Membership Model
A tiered membership model is when you offer different membership tiers at different price points with increasing benefits for higher-tier plans. For example, you can price the Basic plan at $29/month, the Premium plan at $79/month, and the Elite plan at $199/month for your SaaS business.
Freemium Model
You can implement a freemium model in your membership by offering a basic version with limited features for free, then upselling to paid tiers for premium functionality. This strategy of providing value for free is an effective strategy to attract members or customers.
Usage-Based Pricing
For service-oriented memberships or platforms where a wide range of services are provided, usage-based is a good model to implement. As your potential members often have different demands, they might only need some of the features your business provides. Usage-based pricing gives them the freedom to pay for only the features they need. Examples are cloud storage, the number of users for the software, and coaching hours.
Value-Based Pricing
Value-based pricing is an essential concept to understand when pricing your digital product. While cost and competition are factors in setting your membership price, the value you provide should be the primary consideration. This model can ensure that you are not underpricing your memberships and maximize your revenue.
Fixed pricing
A less common pricing model that is used by businesses is the fixed pricing model. It’s the opposite of a tiered-membership model, where you only offer one membership tier but offer monthly, quarterly, and annual membership options. It’s a simple pricing model most commonly used in subscription services.
To discover more about the steps involved in pricing your membership, check out this post.
Key Factors to Consider When Setting Prices
Market Research
Performing market research before deciding on your membership price is a crucial step if you know there is a competitor in your niche. The competitor pricing will give you a ballpark of how much you should price your membership. Although it may not be as useful for membership sites where community is the main focus, as what you provide can be highly unique even within the same niche, it can still be a valuable reference.
Don’t just look at direct competitors when performing competitor research; study adjacent markets too. For instance, you can compare membership to both online courses and local workshops to understand the full competitive landscape.
You can also use tools like SimilarWeb to estimate competitor traffic and revenue. Renowned membership sites can price their memberships higher because of their established popularity and reputation. While your membership site might offer similar services, it would be difficult for you to offer the same premium pricing. Doing market research will give you a clearer picture of your optimal membership pricing at the beginning.
Cost
Costs may not be the main factor for membership pricing, but it should still be considered so you’re not operating your business at a loss without realizing it. Costs that you may incur for running your membership business:
- platform fees
- software subscriptions, hosting, and basic operational expenses
- customer support
- content creation
- community management
- transaction fees
- marketing expenses
- hiring costs
Some of the expenses may not be immediately relevant at the start, but as your membership business grows, you will have to factor these costs in and re-evaluate your pricing.
Value Communication
You can price your membership as high as you want, as long as you can justify and communicate the value of your membership to your potential members. The reason why nobody is buying your membership may not be because your membership is not good enough; it may be because you didn’t communicate the value of your membership well enough.
Creating detailed comparison charts or tables is a clear way to help your members see the value of your digital product. Furthermore, when communicating value, tell them how your membership can change their lives instead of just listing their benefits, help them connect the dots, and you will have more people signing up for your memberships.
Common Pitfalls to Avoid in Membership Pricing
Undervaluing Your Offering
There is a relationship between price and the perceived value of a product. Pricing your membership at a lower price can suggest poor quality. Conversely, higher prices are often associated with higher quality or value in the minds of consumers. Many people are hesitant to price their memberships high, thinking that it may scare away potential customers, but pricing too low will only give them the impression that your product is of low quality.
Hence, don’t be afraid to price your membership higher than you initially think, as long as it can be justified by, for example, the value-based pricing model. Plus, it’s easier to lower the prices than raise them, so start higher than you think you should and revise the pricing as you go.
Overcomplicating the Structure
Keeping your membership structure as simple as possible is important. When customers are given too many options, multiple add-ons, and confusing discount structures, it’s likely that they will just give up making a choice. They come to you for a solution and want to make their lives easier, not harder. So, keep your offering structure as straightforward as you can and clearly state the differences between each of them. Using Shopify’s tiered membership structure as an example, Shopify clearly lists the differences between each tier so potential customers can compare them easily. Apart from that, Shopify also includes a note below the membership plan names to indicate who each plan is best for.
Ignoring Lifetime Value (LTV)
If you don’t measure what’s important, you will never search for new strategies to improve it. LTV is an important metric to track in most types of businesses, including in ecommerce and a membership business. It’s significantly more important than initial signup prices, since a high number means a higher retention rate and revenue.
Use this formula: LTV = average revenue per user/churn rate
Average revenue per user (ARPU) = recurring revenue within a period of time/number of members who paid for it
Churn rate = number of members who cancelled your membership within a period of time/total number of members you had at the beginning of that period of time* 100
E.g. Let’s say your membership is renewed annually. 30 members paid for the basic plan of $10, 20 members paid for the advanced plan for $30, and 5 members paid for the professional plan of $80, your total recurring revenue will be $930.
ARPU = $1300/35 = $23.64
Churn rate = let’s say 10%
LTV = $23.64/10*100 = $236.4
Once you know your LTV, you can implement different strategies to improve the number and measure the effectiveness of your strategies.
Choose your membership platform carefully! Different membership site platforms have different strengths and weaknesses, so you want to pick the one that suits your membership business the most. Check out the 6 best membership site platforms and find the perfect one for your business!
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