In Lesson 1 in this series, we discussed all about membership perks and how to create the best perks relevant to your customers. Once your membership perks are decided, the next step is to decide how to price the perks, or the store membership.
The price of memberships is a key factor that can make or break the membership model’s success. Some memberships offer perks such as free shipping, discounts, early access to sales, community events, offline benefits in store, etc. priced at a low fee. Some other retailers might offer the same perks at a high membership price.
Pricing is a huge factor that determines customer membership sign ups. And customers’ decisions are often connected with the overall brand experience, too. Do customers find value in a membership plan priced at a certain price?
Pricing memberships correctly isn’t as easy as it seems. We’ve learnt this through our experience working with leading ecommerce brands and helping them with memberships.
In this lesson, you’ll learn:
- The different payment models
- How to price memberships
Before you start figuring out the price of your memberships, you should know the different types of pricing models you can choose from.
One-time payment is when you charge a lump-sum price at once. For example, a one-time fee to join an online community. One-time pricing is most suitable when you do not have to provide ongoing products/ services or support.
A recurring payment model is when you take payments on a monthly, quarterly, half-yearly or yearly basis. This model is suitable when you provide continuous access to products, services and support. For example, Amazon prime annual membership.
A hybrid payment model would be when you offer both – one-time and recurring payment options. The difference would be that you’d probably offer a discount if members are paying upfront.
How to price memberships so as to provide maximum value to members and revenue to your business
Evaluate the on-ground value of your perks
Whatever perks you offer in your memberships, they are a cost to your business. For example, store credits, loyalty points, free shipping, discounts, support and services, etc., are all costs for your business. And, it’s a must to calculate these costs early-on, as they would be a key input for your member pricing. Only when you add up the relevant costs, would you be able to determine how much it would cost you to be able to offer them to customers, over the validity period. Based on that, you can decide how to price your membership plan.
Many businesses choose to offer memberships at a lower price at the time of launching and increase it later. You could do so too. However, in that case, you wouldn’t want to price your memberships lower than the actual on-ground value of your perks.
A few key questions to ask when thinking through pricing is,
- Do customers see value in your membership?
- Is the price of your membership reasonably valid (from your customers’ point of view) for the perks offered, or is it overpriced?
- Would offering a bit lower price mean more volume and hence, better overall revenue (through customer loyalty and higher wallet share) for you?
Once you get a sense of what kind of value your membership will offer customers, you can set the price accordingly.
Evaluate how it benefits the customers
Most membership plans offer discounts and deals to customers on every purchase they make. Among other perks, are services related to products they buy, special events, etc.
When you determine the membership pricing, you should evaluate how it benefits your customers.
- Does your membership pricing really bring value to customers?
- What would the purchases cost to customers, without the membership perks?
- What would the purchases cost, with the membership perks?
- Is the membership price too high for the perks you offer? Or is it lower than the value customers draw from being members?
Calculate your profit margin
Once you evaluate the above two factors – the value of your perks and benefits to customers – the next step would be to calculate the profit margin!
The profit margin that a brand wants to have from memberships model, depends on a few factors:
- Does the brand really want to earn money through memberships? Or is the membership program designed to strengthen customer loyalty and retention?
- For some brands, membership fee is the main revenue generator. In such cases, it’s critical to maximize profit margins.
Calculate your pricing floor limit
Next, calculate your monthly per-member cost. You should know the lower limit of the pricing you want to base your memberships on. This is the price below which, the membership model no longer makes an economical sense to you.
To calculate your pricing floor limit, you should consider two types of costs:
- Variable costs: these are costs that would keep changing based on factors such as transaction processing fee, commissions, etc. These costs would keep changing based on the number of members, transactions, etc.
- Fixed costs: these are costs that are fixed, meaning, you would incur them no matter the number of members you have. For example, advertisement expenses, salary, content expenses, software charges, etc.
To calculate this price, you can work with projected numbers based on your own business research. You could also base this price based on your competitors’ membership pricing.
Take inspiration from your competitors’ membership pricing
One way to determine pricing would be to look at how your competitors have priced their membership plans. This is an easy method, because you know your competitor has already implemented it, and it seems to be working.
However, you’ll have to find plans that are similar to your offering in terms of perks, validity, etc.
Make a not of the all these aspects:
- Member benefits
- Monthly price
- Annual price with discount if applicable (based on promotional offering, upfront payments, etc)
- Approximate membership size
Next, consider these questions:
- Will your membership be more valuable than your competitors?
- Will you be able to make more money through a higher volume of customers even if you price the membership lower than your competitor?
- Are you planning to price it higher than your competitor because your plan offers more value?
Set the price, based on the answers to the above questions. But remember this, once you set your price, you should be able to adjust your price if the need arises.
Here’s a look at memberships, perks and pricing of two competitive ecommerce brands:
Apply cost + profit margin strategy
One of the most common ways to determine pricing is to simply calculate the cost of your membership to your business, and add a profit margin to it. This is one of the simplest ways to price membership plans.
However, there are a few factors that you might not be able to ascertain or take into consideration – for example the member volume your store will get. The number of members has a direct effect on your revenue and earnings.
Moreover, if you have more than one membership plan, it might get complicated to keep a track of earrings from different plans.
Create your membership pricing
Different brands offer different membership plans. Some have just one standard plan for all customers, while others have different plans – with different validity, perks, etc, for different customer segments. Some also offer tier-based memberships.
Here’s how you can determine pricing for different plans:
- Consider your entire customer base
- If there’s a wide range of customers, segment them into different tiers/ categories
- Create different membership plans for different customer segments
- Offer different perks in different plans
- Offer different validity periods or payment models
- When you offer different validity periods, make sure to offer relevant discounts for each period. For example, a member paying annual fee at one go should be offered more discount than a member paying for a six months membership
Measure and optimize your membership and pricing
While a large number of consumers feel that subscriptions and memberships are the future of ecommerce, these models do have some drawbacks.
One of the biggest challenges of membership plans is fatigue. After a point, customers can get bored of the same perks. This may lead to a higher churn rate. It’s possible that you aren’t adding new members and your member community is feeling saturated. This too might make members leave. And that’s why ecommerce brands need to invest a lot of effort in keeping memberships alive.
The best way to retain customers and continue gaining new subscribers is to constantly measure and optimize your memberships.
This includes your pricing strategy as well. For example, you could add new perks, tweak current offerings, or remove some perks that members aren’t utilizing, etc. This could have a direct effect on the pricing of your membership, too.
A lot of brands offer free memberships. And that’s because their membership goals might not include direct revenue from memberships.
Some of the key goals and benefits of memberships are: building a community, understanding customers better, customer engagement, generating customer interaction, etc. Brands that aim for these goals, could offer free memberships.
A case study of a free membership – NikePlus
One of the best examples of a free and successful membership is NikePlus. Members sign up for free, enjoy special rewards, advice and experiences from the brand as well as their partner brands.
Personalized trainers, audio-guided runs from athletes, free shipping, priority checkout and members-only shopping hours at stores are some other perks offered to NikePlus members.
This membership model is all about getting to know customers by tailoring content relevant to their interests. NikePlus also works across Nike’s other apps, which means there’s more engagement and interaction.
Why it works:
- It’s free
- The perks are tailored to customer interests
- The brand keep coming up with new perks and ideas
- Nike uses data to improve memberships
- The brand has a members-only floor in some stores
- Their model is focused on driving loyalty, not points
The memberships trend in online retail is still at a nascent stage and is going to keep evolving. And as competition increases, retailers would need to come up with well thought through membership models and pricing.
If you need help with membership pricing, reach out to experts at Appstle for a consultation.
In the next lesson, we’ll discuss how to keep membership customers engaged so that they find continued value in your memberships.
AppstleSM builds end-to-end membership solutions that help businesses increase customer loyalty and profitably scale business.
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