Price Your Membership For High Profitability By Setting Goals Midway Between Your Own Desires To Earn Big, And Those Of Your Members To Spend Small.
Market benchmarks of pricing for membership fees do tell you what price is good to charge, and both competitive and profitable. They tell you the state of the customer, and his spending alacrity on membership subscriptions. But still, there’s nothing like good business sense and intuition to decide on your membership fees pricing.
This is because no two membership sites are exactly alike and their owners don’t have the same expertise and authority that decides their commanding rates.
The trust you build in your target audiences as a thought-leader is what determines the volumes of your membership – and all membership sites earn from volumes of customers rather than from setting high profit margins on subscription fees.
At Solohacks Academy, we believe you must first consider your business financials and the profitability of your membership, and your product and offering. You must review your competitors, and your market and your audience profile. But then you must put all that aside, and evaluate your own stature and the purchasing power of your audiences. Somewhere, midway, is your sweet spot for price.
1. Know that there are many ways of pricing membership fees, so choose your strategy
There seem to be many ways of pricing memberships – as you’ll discover when you look at some of the well-known sites. The simplest way most people price is to stay in a rough range of $29 to $49 per month. The annual subscription option is usually priced at 10 months’ subscription value. That would be in the $299 to $499 range. But there are two other types of models too.
In the second model, the membership site will quote a one-time payment of, say, $997 for a lifetime of access. A third model also exists, where they may let you pay, say, $49 per month for 6 months – and thereafter you have lifetime access. These types of pricing plans, that take money upfront, know that sooner or later people will leave. So, they try to secure your interest in their membership at least for six months.
How many tiers of pricing should you offer? And what should you offer for every tier that makes the pricing level seem worth it? This is a question that affects the way you price, because you have to think of not one standard pricing but a set of pricings. Experts believe you should not have more than three tiers of pricing. Don’t confuse the customer with too many options.
The thumb rule you should follow is that even your basic tier should be profitable for you. So work on the lowest tier pricing first, before deciding on incrementing the next higher tiers. In terms of offerings, here is an ideal format:
- The lowest tier must involve less of your personal time and more “passive income” self-help content.
- The next higher tier could involve your time but for basic things like customer care and forum presence.
- The third tier can include group sessions – like webinars, masterminds, Q&A sessions or workshops – that demand more of your time.
You, and your personal involvement, are the extras people get when they opt for higher tiers of your membership.
2. Learn what “anchor pricing” is – use it to smart advantage for your membership fees
Very often you’ll find that membership sites set extremely high prices for their topmost level of membership. The price actually would be prohibitive (even if they seem to offer a lot for it). But do these levels of memberships sell? No, they don’t. And neither does the entrepreneur care. These are “anchor prices”.
“Anchor prices” help to signal to customers that even the lower-priced offerings of the site will be of a certain premium level. When you create your anchor offer, you set the expectation of quality in the mind of your customer. But you know that they will only buy your lower-priced membership. This is actually a common marketing tactic. A kitchen gadget maker will first show you his $5000 model, to get you to buy what he then shows you – the $500 model.
There is one other way to use anchor pricing. If you have, say, 5 separate courses, it may help the customer to know that individually the prices of each may be $25 per month – but if a customer signed up for all five together he would get a total monthly outlay of only $75 per month (i.e. 5 courses at the price of 3 courses).
The psychology behind the anchor pricing idea is that people see pricing relatively – in comparison with another price. Having multiple membership tiers with some exorbitantly priced helps in quickening the purchasing decision because it offers an instant evaluation-by-comparison chart. Similarly, having an individual price for courses, and showing the combined-purchase discounted price, would also offer a comparison reference point.
3. Membership sites earn through volumes of customers and not by margin pricing
There are a lot of costs involved in membership site creation and management. These include product research and development costs, sales and marketing costs, and general administrative costs. Even if you pare down costs, you aren’t going to profit massively from the subscriptions of individual customers. But the volume of customers you have at any given time will determine your profitability.
As a business owner, you have to know what your costs are per month. Only then will you know how many customers you need to maintain per month, despite the likely churn. The math is simple enough. See what the average customer spends per month on membership. Decide what your target revenue per month is, if it must cover all costs plus a good profit. Divide your revenue target by your average spend per customer … to know how many customers you’ll need to hold per month.
A big challenge to basing your profits on volumes of customers comes from the churn factor in membership sites. Churn is an inevitable part of any subscription business. Memberships sites need to first accept this truth and then develop strategies to reduce churn – because to dream of completely stopping churn would be foolhardy.
What is churn exactly? It is defined as the “percentage of members you lose every month from your enrolled members”. Let’s say you have 100 members on your site, and there is a churn (loss) of 10% of your members every month. That would leave you with 90 members for the next month. Then 10% of those may go away, leaving you with 9 members less. If you want a profit, you have to find more new members than the numbers going away. And it costs 6 times more to find new members than to retain old ones from going away.
Membership site owners swear by the “5% or less churn rate rule”. They believe that if we can keep the churn rate at 5% or somewhere below that, we can somehow sustain our businesses. The costs of finding new members will be easier on our pockets, and the loss to earnings from members going away can be bearable. In fact, the lower the churn percentage you maintain, the more profitability you can see from your business, despite the costs of getting new members.
4. Get to know the average pricing model in your industry before you use or discard it
According to the latest Online Membership Industry Report compiled by The Membership Guys there are some interesting benchmarks of market size and pricing for memberships that could help you. They say:
- 49.12% of memberships are making 6 figures per year – with 5.26% making 7 figures.
- This rises to just over 60% for memberships over 3 years old making 6 figures and drops to 31.82% for memberships less than 3 years old.
- However the percentage of “younger” memberships reaching 7 figures is actually higher – with 9.09% making over a million dollars a year in revenue, compared to just 2.86% of older memberships.
- 44.64% of business to business (B2B) memberships charge between $25-49 per month, with 23.32% charging $50-99.
- 43.04% of business to consumer (B2C) memberships charge $25-$49 per month, with 22.78% charging $15-$24 per month and 21.52% charging $1 to $14 per month. Only 12% charge more than $49 per month.
Two things are clear from this data:
- One, charging high doesn’t always add to revenue, Instead, charging lower and getting more customers gives you higher profitability.
- Two, at the high end of the earning scale, how long your membership site has been in existence is a probable factor in how much you can earn, maybe because you have earned enough trust to price higher. But on the flip side, younger business are rising faster than older ones to give them a run for their money, probably because they are dealing in niches that are hot, emerging, in-demand trends.
5. If your model is B2C or B2B, you have to charge your members quite differently
What are B2C and B2B models? B2C stands for Business To Consumer, whereas B2B stands for Business to Business. In other words, is your target audience full of direct customers (as with a membership site for healthy cooking) or is your target audience full of other businesses (as with a membership site for restaurant kitchen management)?
Charging membership fees for both these types of target audiences can be a whole different ball game. The reasons why direct customers become your members is very different from why business-owners become your members.
Mostly, membership-site owners market their sites and prices differently too. For example, if you were aiming to attract a B2C audience, you may justify the “costs” of membership to them. On the other hand, if you were trying to convince B2B customers, you may try to highlight the “investment” value of becoming a member.
Businesses hope to gain more money by spending money with you, whereas direct customers don’t see further earnings from becoming members. They see the non-money benefits of your site – like increasing learning, getting entertainment, making a connection with like-minded people, following up on a passion or hobby, etc.
When businesses seek to make more money by spending money as an investment with you, it’s easier for you to charge them a higher price and justify it. You cannot often do that with B2C customers. Experts say, the average cost of a B2C membership tends to be between the $19 to $49 mark, while B2B memberships are more costly and are priced anywhere from $49 to $79 per month. These are just averages so don’t take them too seriously. You still have to do your homework on an ideal cost that’s palatable to your particular audiences, which also gives you a profit.
Either way, remember one thing: whether its B2C members or B2B members, they are all seeking to solve some problems or achieve some goals by joining your site. No one joins a membership site just for a lark. If you can locate the exact need which drives them to become members, you can decide how to price your membership fees – depending on how urgent and large that need is. Spotting the right need and its compulsions, and being able to offer exactly what the customer wants, is the best way to determine optimum pricing.
6. What experts say on monthly subscriptions versus annual or one-time pricing
A lot of membership site owners keep toying endlessly with the question of whether they should charge on an annual or one-off model, or as monthly subscriptions. In fact, why do you need to choose one or the other, why not do both?
For example, here are three ways below that marketers use to charge both one-time or annual and recurring fees:
- One model is to charge an upfront joining fee (that is about 3 months fees approximately) and then charge on a month to month basis. The upfront fee is not reimbursible, so that the site owner will surely get at least 3 months’ earnings from the member, because he risks exposing the full library of content exposed he has to the member, from the very start of the membership.
- Another model is to charge a monthly subscription for the first year or two, and thereafter make it possible to continue with a one-time fee for a lifetime membership. This model makes it easier for customers to make a joining decision because they only pay monthly subscriptions at first. The marketer then changes their plan to a lumpsum lifetime membership as a reward for their loyalty as members.
- A third model is to decide to charge a lumpsum fee for membership, but offer a subscription plan as a trial for a month or two. During the trial period, members don’t get access to the full membership site, but get a limited set of content only. When they decide that they have evaluated the value of the trial and want to become full members, they can pay the lumpsum and continue. If unsatisfied with the trial, they can cancel. The marketer limits his content exposure to those unwilling to join as full members past the trial stage.
As you can see, there is no one-size-fits-all kind of pricing strategy for membership sites. It all depends on how you want to charge your customers, how they prefer to pay, and how much content exposure you want to risk putting before them if they want to pay as subscriptions versus lumpsums or annual payments. From your side, you have to do your math to see if you make more money (especially cash flow) from subscriptions or one-off payments.
7. How membership pricing is an interplay of your personal brand and content brand
In the digital world, you will notice that when you talk of your brand you actually imply two kinds of associated ideas: your personal brand and your content brand. You have to assess both these brands for their competencies and trust factors – first separately and then together – before you decide on pricing of memberships.
Your personal brand is reflected in the authority you can command. People gauge your personal brand by checking out what kind of thought-leadership, trustworthiness, expertise and authority (i.e. total caliber) you personally exhibit. They try to evaluate where your personal brand comes from, and what values it may have as an extension of your self. Your personal brand will enhance your product brand if you are seen as “authentic, credible, and genuinely dominating in your niche”.
Your product brand is your membership site and its content. The quality, depth, and breadth of your content, as well as its innovativeness and practical value, are simultaneously evaluated by members when they juxtapose your content brand against your personal brand. If they see coherence between who you are (your personal brand) and what expertise you offer (your product brand), the pricing seems worth it to them, because the product is an extension of all that you represent as the owner of that content.
On the other hand, if the content you have has been, say, written up by freelancers, and doesn’t ring true as your own output – if it’s too variegated in its tone, and too up-and-down in its quality – people soon sense that your personal brand is not entirely present in your product brand. The dissonance makes people uncomfortable to pay the price that your authority commands, because there is a sense that the product is not as authoritative as they would expect from you.
When pricing your membership, don’t assume that people only value your physical presence on your site. They also value your subliminal presence in all the content you purport to have created. You can price memberships high if you believe your product is truly a reflection of your own brand equity. If you can’t vouchsafe that, and your content creation is outsourced, go easy on the pricing. Don’t over-promise on the basis of your personal brand, while under-delivering on your content brand.
8. Beware – the first digit of your price could make or break your pricing strategy
Do the different digits in your membership price tag count for anything in the potential customer’s mind? You bet they do. Now, you may already know this, but there’s a huge debate between people who say your price should always end with the digit 7 (as in $17, $27, $57, $97.77), while others swear it should end with the digit 9 (as in $19, $29, $59, $99.99). I never understood why till I read this little gem from a pseudo-psychology magazine: “In Western society, seven is a lucky number, but it also looks like a lot less than a full number to the naked eye.”
But while the debate rages on about whether your pricing should end with the number 7 or 9, there are others who say, it’s not about the last digit of your price at all. For example, if the price of your membership is $97 and not $99, more people are not going to trip over their shoelaces trying to grab at your membership.
On the contrary, it’s the first digit of a price tag that matters more, they say. This means $19 sounds much better than $20, because the number “1” sounds smaller visually than the number “2” (even though the actual difference is just $1). For this same reason, if your membership price originally was set at $37 per month, it would not be more attractive at $32 (that’s $5 less) … instead, if the original price was $34 and it’s dropped (by the same $5 difference) to a new price that is $29, it would be a big deal to the consumer because the digit “2” sounds smaller than the digit “3”.
In the final analysis, all this means you should worry less about the last digit (whether it should be 7 or 9) and worry more about the first digit of a price tag, where the psychological difference really does affect the attractiveness of the offer.
Where do all these marketing “pricing rules” come from, you may ask. Well, I am told that these are the time-tested findings of hard-fighting salesmen, who have over years tested various pricing options down to the last dollar and cent – and come to some “insights” into what works and what doesn’t. By now, many hundreds of marketers have followed this advice without a murmur – and prospered. So who are we to question what sounds like hoary marketing traditions and truths? Just go with it, I’d say, unless you have a better and newer theory on pricing digits – and show me the research to prove your theory.
9. When should discounts be stated in absolute numbers and when as percentages
There seems to be an unwritten rule in marketing (well, much written about!) that you should always show off the bigger number if you are discounting a price you have previously applied to your product. And that rule also governs membership fees. What exactly does this rule mean?
Let’s take an example. Let’s say your original price of membership was $200 per month. Now if you apply a 10% discount, the discount in dollars would amount to $20, right? Which sounds better? To say that you have cut 10% or to say you have cut $20? The dollar number looks bigger (i.e. 20) in relation to the discount percentage number (i.e. 10). If the discount sounds bigger in dollars than in percentages, use that dollars number. Say, “Our membership now costs you $20 less.”
Let’s take another example. Let’s say your original price of membership was $50 per month. Now if you apply a 20% discount, the discount in dollars would amount to $10, right? Which sounds better? To say that you have cut 20% or to say you have cut $10? The dollar number looks smaller (i.e. 10) in relation to the discount percentage number (i.e. 20). If the discount percentage number sounds bigger than in dollars, use the percentage number. Say, “Our membership now costs you 20% less.”
Does this psychology work? Those who have tried it swear by it. If I too wear my marketer hat, I think I would believe this dictum, for it sounds logical that people would think a bigger-sounding number reflects a bigger discount.
But if I wear my consumer hat, I think I would always prefer to know the dollar amount rather than to be left to calculate what 20% discount of $666 is, for example. Anything that makes life easier for the customer is better, I should think. And delaying a buying customer (by making him stop to calculate percentages) may take the buying flush of energy out of him. Anyway, the jury is out on this one!
10. Learn to use an add-on to make the original membership fee sound just right
A Knowledge Commerce professional I know always has two variants of his membership plans. One variant has no extra mentoring inputs. The other variant includes 20 hours of phone mentoring with added cost. When the two options are placed side by side, customers invariably choose the membership plan without mentoring.
This is because there is a sentence saying members can add on the mentoring option later too. That makes the no-mentoring variant of the course seem like an excellent starting value. So, think about what you can offer extra as a way to make the original costs look smaller in comparison.
Experts sometimes call such add-on products as “decoy products” meaning they are there simply to make the other option look less expensive and therefore attractive. But I think the term “decoy” is wrong because it gives the marketer a feeling that people may never choose the option with the decoy. In fact, you have to ask yourself: “If some people ask for both the membership and the mentoring, am I ready to offer that, and what will it take out of me? Will that decoy idea drain the profits out of my membership charges because the costs of offering the decoy product are too lopsided, and the decoy product will not be profitable on its own?”
Your offer has to ensure that both the membership and the add-on are viable and profitable, without one neutralizing the profits of the other. Also, don’t think that just because you are offering “mentoring” as an add-on there are no costs involved. Is your time not equal to money? If you had that extra time, could you not create more products that can earn more money?
So What Are Your Thoughts? Do Share!
This post is incomplete without your input. The community of Knowledge Commerce solopreneurs would feel galvanized to hear from you … so do share your thoughts on this topic with us, in the comments field below this post.
This post is part of a series that elaborates on “How To Create A Membership Site Online For Knowledge Commerce“.
Other related posts you may like to read are these:
- How To Create A Membership Site … 10 Quality Ideas
- How To Choose A Membership Model … 10 Smart Options
- How To Launch Your Membership Site … 10 No-Fail Tips
- How To Mix Your Membership Site Content … 10 Must Haves
- How To Improve Your Membership Retention … 10 Easy Ways
- How To Handle Customer Service In Memberships … 10 Savers
- How To Measure Membership Metrics … 10 Ideal Indicators
- How To Grow Successful Membership Sites … 10 Vital Traits