8000 words of practical information | How to formulate a profitable and sustainable "pricing system" when playing membership?

Nowadays, membership has become the mainstay business model for many products, but the results are not satisfactory. In fact, formulating a sustainable pricing system for members is a rather tricky task. Because companies need to determine "continuous experience" and "perceived value" through two-way evaluation, not just a simple pricing model for products and services.

In today's business world, the membership economy has penetrated into every corner of life and has become a powerful tool for brands to establish deep connections with users. At the same time, the membership "price system" has become a key variable for success or failure, or even a fatal factor.

• A suitable and reasonable membership price system can stabilize and consolidate the relationship between the brand and its members. The key benefit of this relationship is that the company's operating income will be more stable, volatility will be greatly reduced, and predictability will be improved.
• Conversely, if there are no ongoing benefits provided to customers that justify their continued payment of membership dues, the so-called membership model is likely to fail.

However, developing a sustainable pricing system for members is a rather tricky task, as companies need to determine “ongoing experience” and “perceived value” through a two-way evaluation, rather than simply a pricing model for products and services.

Today, let us explore how to formulate a reasonable membership "price system" from four dimensions:

1. 7 potential revenue sources for membership models.
2. The best time to raise or lower prices.
3. The difference between freemium and freebies.
4. 6 common ways to get your prices wrong.

1. 7 potential revenue sources of membership model

When trying to grow a lasting revenue stream, most brands focus on membership models. However, building a membership model with multiple pricing tiers requires creativity, discipline, and rigorous analysis.

Therefore, the first thing is to understand what are the possible sources of income for the membership model?

1. Subscription Model

Since membership can almost be defined as "continuously providing value to members during the period of membership", most membership companies choose the "subscription payment model" .

Especially after the success of Amazon Prime membership and Costco paid membership, the subscription model has almost become the standard for various emerging businesses.

To build a healthy and sustainable subscription model, you need to pay attention to the following points:

1) Classification - provide at least 3 options, this is metaphysics.

Many brands only offer members subscription products at a single price, which lacks differentiation; tiered pricing not only provides companies with greater flexibility and choice, but also caters to the diverse needs of consumers.

Research shows that most people like to choose between multiple options, and three options are ideal because most people tend to choose the one in the middle.

2) Fight for membership upgrade

If membership tiers are divided based on user type (such as students, individuals, and companies), there will not be many opportunities to encourage members to upgrade their consumption.

But in most cases, especially when segmented based on usage patterns and preferences, the factors that drive members to upgrade their consumption can be more clearly identified.

It is very important to continue to publicize the benefits of upgrading to members at lower consumption levels, so that they have sufficient reasons to change their consumption concepts and move to higher membership levels.

3) Pricing criteria: set prices based on the value the brand provides to members.

Typically, subscription models have lower variable costs because they provide members with access to a shared resource, such as content or durable goods. In this case, pricing should be based on the value provided to customers and the cost of alternative products.

However, for some subscription products or services, predicting delivery costs can be difficult because it is impossible to accurately estimate how many people will use the service and usage can vary over time.

Although big data analysis enables companies to better predict actual costs, the most effective pricing strategy for the subscription model is still "pricing based on the value the company provides to members."

When you price by value, you focus on what your members really want , and this pricing method is ideal for both the company and your members.

As members’ needs and perceptions change over time, challenges arise. Companies need to constantly adjust prices and continuously improve pricing to align prices with the value provided and reflect the rationality of prices. This should be a core capability of all membership companies.

Although pricing becomes complicated, this approach ensures the sustainability of the model.

4) Weekly, monthly or annual payment? How to choose the payment frequency!

How often should membership dues be paid? Weekly, monthly, or annually? The only way to find the best payment frequency is to test it—guessing is not the best answer.

For brands, annual membership payments are ideal.

• The benefit is - locking in a longer membership period, members are less likely to quit within a year.
• The downside is that a large one-time payment may cause members to reevaluate their decision. This may cause them to rethink the rationale for their subscription, increasing the risk of cancellation.

The monthly payment model also has its pros and cons.

• The advantage is that many people will not frequently analyze the rationality of their behavior after their initial purchase decision, and the monthly membership fee does not seem high, which reduces the psychological burden.
• The downside is that brands run the risk of assuming that members will continue to recognize the value of their investment and not cancel their membership, when in reality most members are forgetful.
• Additionally, external events, such as credit card expiration or the emergence of better alternatives, may cause members to reassess the value they are receiving and feel they have been cheated, leading them to cancel their subscriptions or even publicly complain about the company.

So, how do you choose the right payment method? It is a good idea to convey the company's "sincere" attitude through supplementary terms:

• Refund policy at any time: Provides the flexibility to refund at any time based on the amount spent.
• Trial period option: It is recommended that members try it for one month first, after which they can seamlessly switch to an annual subscription, and the monthly fee paid can be deducted from the annual fee.
• Annual paid rewards: Provide annual paid super gift packages, such as various additional gift packages for JD PLUS members.
• Transparent and flexible payment options: Clearly encourage pay-per-use, weekly, and monthly payments, with transparent and unified pricing strategies, such as Super Monkey and Leke Fitness.

The key is to design pricing based on a full understanding of user psychology, so that even if members leave, it will not have a negative impact on the brand.

There is something weird about the subscription payment methods of Meituan Bike and Hellobike - they are competing to see what’s worse!

Their monthly fee in a certain city is higher than the national universal card fee; their quarterly usage fee is higher than the combined fee of 3 single months... Obviously, they don't want you to subscribe for a long time, but expect you to open the APP frequently and look for discounts.

Therefore, the members of these two organizations have no loyalty, only interests.

2. Let users choose from a list of services

"A la carte" service refers to special services that members do not need to make continuous purchases.

For example, a bicycle user may occasionally use your product and only need it once, and does not want to purchase it three or seven times; for another example, a user may only want to exercise in the gym once a month to check on his or her health status.

A mistake many companies make is to treat this one-time service as an ongoing service and implement a higher-level, ongoing pricing structure, so that customers are forced to pay a weekly or monthly fee to have a one-time, temporary need met.

Playing this game in the pricing system may seem harmless, but it obscures true consumer behavior, makes it difficult to understand the true needs of key segments, and tricks consumers into looking for loopholes rather than trusting that pricing is fair.

3. Develop peripheral products

Not all brands with a membership model need peripheral products, but subscription models often buy these products to enhance the quality of the service. For example, Skype sells headphones, Apple sells iPhotobooks, and gyms sell shorts.

It is worth noting that the "periphery" is most likely not the periphery, but the real growth point.

In 2021, Netflix launched the online e-commerce platform Netflix.shop to expand into e-commerce and sell IP-related products, including hoodies, T-shirts, and toy boxes with the theme of the "Squidward Games" IP. At the same time, the platform also cooperates with trendy brands and emerging designers to launch many high-premium limited products.

In the same year, Netflix's gaming platform was officially launched. So far, Netflix has released more than 20 mobile games, including "Stranger Things: 1984" and "Asphalt: Xtreme". Among them, "Stranger Things: 1984", which is based on the Stranger Things IP, is the most downloaded game, with nearly 2 million downloads.

Keep is the one that has done the best with its peripheral products. "Every medal has contributed greatly to Keep's success in going public!"

Speaking of medals, similar activities were launched by sports platforms such as Yuepaoquan and Gudong. The gameplay and format were similar, but they were not very popular. Why was it that only Keep revitalized its own economy and played a crucial role in its subsequent success? Some people have summarized the following four points:

1. Good-looking and cost-effective. Rather than a medal, it is a trendy toy or a work of art. It has a delicate appearance, a sense of design and a variety of styles. The form of the medal will also change according to the co-branded object. What's more important is that most medals can be obtained for only 39 yuan.

2. Play with young people. Three quarters of Keep's users are under 30 years old, which directly establishes its youthful attributes, but this is far from enough. Only those who can play and know how to play can truly retain this group. Get along with the young group in a more "crazy" and down-to-earth way.

3. Richer and more complete activities. Offline, there are various city marathons, drama races and special festival activities, such as Valentine's Day and Chinese Valentine's Day, as well as limited-time flash events. Online, there are year-end reports, medal memoirs and medal transformations, giving each medal a specific and exclusive memory, mobilizing consumer emotions in all directions, enhancing stickiness and emotions with users, and making the meaning of the medal go beyond itself.

4. Be very precise about your target consumer group. By understanding the needs and preferences of female users and leveraging the platform's advantages, a series of exquisite accessories were launched online. After receiving a good response, the product is still under design, which is a successful attempt.

——"Every medal played an important role in Keep's success on the market!"

▲ Image source: article "Keep's listing depends on every medal!"

4. Turn partnerships into revenue streams

If there is a product or service that your members need or might want that is not within your business scope but can be provided by another company, then in this case, forming a partnership with another capable company is a good option.

Partners can share revenue or commissions by introducing business to each other or cross-marketing, which is an exchange of interests.

If the company simply uses peripheral products and à la carte services, it must develop members and market to them personally. If a partnership is established, the company will bear much less risk because it does not need to develop products or market them personally.

• For example, hotels cooperate with car rental companies to set up car rental counters at airports and inside hotels.
• For example, Ali 88 members and JD PLUS members offer a dazzling variety of membership services.

The only master example of a company that relies on partnership to make profits is Tsutaya Books.

• In 2003, Tsutaya Books' parent company CCC launched T Card and T Points, hoping to use the points redemption business to connect the points and membership systems of various Japanese retailers.
• At the beginning, Tsutaya Books' T card was only used to facilitate users to purchase and borrow books, and they could use their consumption points to enjoy discount benefits, thereby increasing the bookstore's repurchase rate.
• Next, using the massive “T-card” membership data, Tsutaya Bookstore analyzed users’ consumption behaviors, created user portraits, improved the quality of bookstore product selection, and achieved precision marketing.
• As the scale of operation continued to expand, the number of member data accumulated reached 20 million. We began to actively seek alliances with large supermarkets, restaurants, convenience stores, gas stations, banks, telecommunications and other industries, or exchange resources to promote the T card system to other industries.
• After more than ten years of development, Tsutaya Books' T card has become one of the two major points cards in Japan, covering more than 600,000 stores in Japan for food, clothing, housing and transportation, and accumulating consumption data of 70 million Japanese. At the same time, it has also become the "winning magic weapon" of Tsutaya Books and even CCC Group.
• At the same time, when users purchase in other stores, the T card system will analyze user preferences and accurately push new products. After the order is converted, CCC Group can get a share of the order.
• Today, 20% of Tsutaya Books' revenue comes from retail income such as bookstores, and 80% comes from T-card franchise business.

5. Big Data Aggregation Analysis

Companies often overlook the power of big data aggregation analytics, which is the result of network effects and ongoing relationships.

This data can be in various forms, including salary data, demographic data or behavioral pattern information. The use of big data to track customer behavior has shown incredible momentum. For membership companies, one of the great benefits of big data aggregation analysis is that it can observe member behavior over a long period of time.

Longitudinal data aggregated over a long period of time has various values ​​not only for the company, but also for individual members or other types of organizations.

For example, LinkedIn can collect data about employees at a particular company and then provide very useful company profiles, sharing popular employees and job titles. This is invaluable competitive intelligence.

These data are invaluable to the company and its partners: on the one hand, they can provide additional value to existing users, and on the other hand, they can cultivate entirely new groups and become a new source of revenue for the company.

See the Tsutaya Bookstore case mentioned above.

6. Advertising Revenue

You can also create opportunities to generate revenue by allowing other brands to access your members, but remember that it needs to match your own business and create value for your members.

There are two extreme or wrong approaches:

• One is to avoid talking about it and promise never to resell member information or show members advertisements of other companies.
• One is to continue to push ads to members, regardless of whether you need or have permission.

The right thing to do is to carefully obtain permission and push valuable ads to users when they need them. This is a win-win-win situation.

Imagine that you travel to Nepal and stay at a global hotel chain. The hotel advertises various hiking activities. The providers of these services are not the hotels, but members need the hotels to help screen out companies that can provide quality services.

At the same time, these outdoor suppliers will definitely be paid a certain amount of advertising fees for advertising on hotel premises.

Of course, in general, advertising as a business model has fallen out of favor, but this is due to the rapid changes in technology, not because advertising has failed . After all, advertising is meant to encourage members to discover, pay attention to, and try products, which is a beneficial behavior for all three parties.

7. Free Strategy

In many membership-based companies, fixed costs are high, but variable costs are low, often close to zero. This opens up a wide variety of possibilities for implementing a free strategy.

• The practice of free trials is old, but is attractive in the membership economy because it not only gives customers an experience for a limited time, but also provides a freemium model.
• Membership-based companies are great with freebies, and many of the best ones offer freebies to allow potential customers to learn about and try the product while also creating a community.
• Free membership creates a more cohesive network, which in turn attracts more users, starting a virtuous cycle.
• The same thing works with freemium, where you can offer free options, essentially providing value to your customers on an ongoing basis for free.

There are two points to note about the free strategy:

• Providing services to members for free is not a revenue-generating model in itself, nor can it save costs at all, but it can increase revenue and help the company achieve predictable income.
• Treat "free" as a tactic rather than a strategy.

2. The best time to raise or lower prices

Memberships usually have an implicit assumption that membership fees will remain unchanged over the long term. Therefore, when prices are changed, there is a risk of losing members, because when prices change, members may reconsider whether to continue to maintain their membership.

1. How to increase the price?

Why raise prices? Because it’s usually a goal the company wants to achieve; or because a competitor is charging a higher price and you feel you should follow suit, which is the easiest time to raise prices; or because the cost of creating value continues to rise, you want to raise prices. For example, Netflix decided to raise the price of its service in 2011 in response to the studios’ rising prices.

In order to avoid an adverse rebound caused by price increases, the following two measures can be taken.

• First, the original price can be maintained for existing members, but the price can be raised for new members. This can prevent existing members from canceling their membership, and if existing members cancel their membership and then rejoin, they do not need to follow the lower price, thus enhancing the sense of community between members and the company.
• Second, you can find ways to provide more benefits to members , thereby adding new tiers to the existing price tiers. If members want to enjoy more benefits, they will have to pay a higher price.

If you have to raise the price of existing memberships, be prepared to see a wave of membership churn and negative reviews.

During the 2020 epidemic, Fengchao, which unilaterally announced "charging", was ridiculed and even spurned by the Chinese people. It was not because of the price of a few cents, but because of the rough implementation and failure to choose the time to charge after confirmation from multiple parties.

One way to minimize this impact is to make price increases public and transparent; you can also add or remove services that allow members to order a la carte, because people are generally less sensitive to price changes in single transaction fees.

2. How to reduce the price?

Lowering prices may seem easy, after all, people love discounts, but there are some challenges to keep in mind when lowering prices:

• First, once you lower the price, it’s very difficult to go back to the original price, so make sure you’re making the right choice.
• Second, a price reduction may signal a reduction in the value or prestige of membership.
• Finally, it would be difficult and unethical to lower prices for new members while maintaining higher prices for loyal old members.

However, if your costs have dropped significantly or you are facing competitive pressure, you may need to reduce your prices.

You have to make sure that the price reduction is in your favor. This is important to remember even if you have millions of members, because they have built a lasting relationship with you and expect you to clearly explain the reasons for price changes to them, which is their right.

In 2022, Netflix’s method of price reduction is worth referring to.

In 2022, a survey conducted by the US review website reviews.org showed that nearly a quarter of Netflix users wanted to cancel their subscriptions by the end of the year. Among them, two-thirds of the respondents said that high fees were the main reason, and another third said that Netflix's content was no longer attractive. Among them, 30% of the respondents wanted to switch to other streaming service providers.

In October, Netflix announced that it would launch a low-cost membership package, which would cost about $7 per month, but the programs that users of this package watched would contain advertisements. This was the first time that Netflix added advertisements to its programs.

In this regard, Netflix CEO Reed Hasting explained: "Although I have always opposed complex advertising and advocated simple subscriptions, I respect consumers' choices more."

On October 19, 2022, Netflix released its third-quarter financial report, adding 2.41 million new subscribers (i.e. paying users), exceeding analysts' previous expectations of 1 million and reversing the situation of user loss for two consecutive quarters.

3. The difference between freemium and free gifts

If a membership-based company wants to provide free services to its members, it must ensure that doing so is conducive to generating operating income.

When this free strategy is used properly, it can indeed generate operating income; if not, the profit is zero for each unit of product or service provided, and then you will not be able to increase the number of free products or services.

Almost every company makes money by offering multiple options to its customers, with different levels of membership and benefits for different membership segments.

Many companies make the mistake of arranging options before considering goals. In fact, it is key to think about the business and customer type before defining options and understand what the customer's needs are.

For example, Tencent Meeting and Alibaba DingTalk are two good examples. Unfortunately, they did not integrate membership, a gameplay that can establish belonging.

Generally speaking, the higher the membership level, the more benefits you get . Some of these benefits require the company to pay certain variable costs, such as customer service costs.

Other benefits require no variable costs to the company, but the company can charge a higher fee simply because members find them valuable.

When designing pricing tiers for memberships, consider the following metrics:

First, quantity.

Many members are willing to pay more in order to use more products or services, that is, they want a larger quantity of goods or services.

The difference between this type of member and other members is obvious, and it is easy to convey value to them. This type of customer is also easy to develop from the free trial stage to the paid use stage.

The approach is to let potential heavy users try free services. Then, starting from the indicator of quantity, take the following two measures.

• Increase the amount of content. For example, if a newspaper wants to increase sales, it can provide some free content to such customers, while requiring payment for more valuable content.
• The number of users or accounts. Take Twitter as an example. For many simple functions, users can try them for free, but for more advanced functions, users have to pay.

Second, duration.

Pandora limits free members to a certain amount of time per month, but customers willing to pay (or tolerate ads) can get more time. Tencent Conference does the same.

Third, function.

For companies like SurveyMonkey, Zynga and LinkedIn, paying customers to upgrade their accounts gives them access to more features. For example, SurveyMonkey’s paying customers get access to more sophisticated analytics tools.

LinkedIn has been particularly active in emphasizing that paying members can see who has viewed their profiles, add more keywords in the search process, or contact users outside their personal social circles. When members try to click on the buttons for these advanced features, LinkedIn immediately pops up a payment interface, reminding users that they can only use this feature after paying for the upgrade.

Fourth, service.

The company can provide some additional services to customers, such as consulting services after paying, access to some additional resources, etc. The company can provide interference removal services, such as helping paid members remove ads before playing a video. These measures can make the overall customer experience smoother and more enjoyable.

For example, Himalaya and various video websites.

One challenge many membership-based companies face when offering value-added services is cost , as these premium fees impose certain variable costs on the company.

The company can set a fee schedule for these premium services and let members choose whether to pay. Of course, the company needs to decide whether to bear these costs itself or let users bear them (which will result in a worse user experience).

4. Common Mispricing Methods

Almost every brand with a membership model has made the following mistakes to some extent:

1. Offer Discounts

The key issue with pricing is figuring out how much users are willing to spend initially and how much they are willing to continue paying to get the service.

Pricing discounts must be designed to impact long-term value, that is, to get customers to try the product under the right conditions so they understand the value of the product. Discounts work in the long run.

For example, if members who participate in a weight loss and body shaping program find that they are losing weight, they are willing to spend a lot of money to continue. However, once the weight loss goal is achieved, they may need a bigger discount before they are willing to participate in a weight maintenance program.

2. Forcing members to order more products than they need

Clayton Christensen, a professor at Harvard Business School, warned that disruptive innovation in the market poses risks to brands.

If someone can offer you 10% of the benefits for 3% of your price, that's an example of great value for money.

For example, Skype's model was unique at first, as no other company offered online video calling services. However, after a period of time, companies such as Google and Apple began to offer free online chat services. Skype still had some features that were better than these new companies, but because its competitors offered free service options, Skypey users continued to churn.

3. Pricing based on a fanatic’s mistake

Napster was a wildly popular online music service that gave people a platform to share music online. The only problem was that it was illegal. Eventually, Napster was forced to stop sharing. But by then, the company had become synonymous with free digital music downloads in the eyes of music lovers.

4. Pricing too low or starting out free

If you price your product too low at the beginning, people will get used to the low price. When you raise the price later, you will have to provide customers with more significant value and a reasonable reason for them to pay higher membership fees.

Once you teach your customers that they deserve a good price, it’s hard to unlearn that lesson, especially when leveraging a membership model.

5. Pricing too high initially

Although it is easier to lower prices than to raise them, if the price is set too high at the beginning, it will be difficult to change people's perception of the brand and win back customers once the price is lowered in the future.

For example, "Online Medical Q&A" is a very good idea. Different from other platforms, its answers are all from real doctors, basic questions can be answered for free, and members can find doctors who can answer questions 24 hours a day, 365 days a year for just $99 a year.

6. Offering too many options and discounts

There is good evidence that offering customers three options works best; too many options can overwhelm people, while too few options can make it difficult for them to find the right one.

But sometimes, once you start dividing your customers into multiple segments, you get multiple uses. Just by creating options using volume, services, and features, there are so many permutations that it’s tempting for companies to offer hundreds of options.

Take the mobile industry as an example, we can roughly understand what can happen when there is too much choice. T-Mobile did the opposite, increasing its market share and gaining the trust of consumers by simplifying its service plans.

Thanks to unstoppable social trends and evolving digital technologies, membership economy and membership model have become one of the core methods for sustainable development of new businesses. A clear, transparent, acceptable, profitable and highly scalable pricing system is particularly important.

Amazon Prime membership, Netflix membership, Tsutaya Bookstore T-card, Costco membership, Sam's Club membership... This is a long list of businesses that make profits from membership.

If your membership model is not profitable, please check your "pricing system"!

The core content of this article comes from "Membership Economy".

Author: Brand Ape

Source: WeChat public account: Brand Yuanchuang (ID: brand-yuan)