App Subscription Pricing 101

TL;DR is right here, and the longer story about Alarmy's subscription is below

• Pricing has the biggest business impact.

• Understand the relationship between pricing-related factors (Value > Price > Cost).

• For early adopters, benefits matter more than price.

• You can vary your acquisition strategy based on price.

• Value should feel 10 times greater than Price, and when pricing, increase it gradually by 5% until you lose 20% of your customers.

Starting Alarmy's subscription 🚀

Our subscription service utilizing Alarmy's premium features originally started for iOS in November 2019.

After that, we launched globally alongside Android in May 2020.

Roughly speaking, our quarterly growth looked like this. (We managed to hit our worried-about $100K MRR goal reasonably early.)

Alarmy's recent subscription status 🤔

It's been about a year since our global launch.

The subscription team is sprinting ahead today with these four main metrics.

• Trial CVR

• Trial to Paid

• Churn Rate

• ARPPU

Especially in the early days after the global launch, we focused heavily on Trial CVR, which is related to the top of the funnel. Actually, it's still a metric we continue to focus on today.

Because of this, we end up running a lot of Trial CVR-related experiments targeting early users at the top of the funnel, and we continue to learn from these experiences with early users.

As each quarter passes, we've started caring more about backlog items related to bottom-funnel metrics as well. And in 21Q2, we even included the ARPPU metric in our OKRs.

Pricing is so hard🌮

Pricing was always this burdensome thing we tended to avoid touching due to vague preconceptions and fear. It became something we just set and left to ferment, like making kimchi.

Since the subscription team were pricing newbies, we did some research and stumbled upon some great pricing content.

It was YC's Kevin Hale Pricing 101. (I probably need to watch it 10 times…)

Rather than teaching skills you can use the moment you finish listening, I saw it as a lecture that conceptually summarizes the fundamental things you should know about pricing.

In this post, I want to summarize and share the great lessons I learned from Pricing 101.

Early in the lecture, he covers the importance of pricing,

and the following slide highlighted its importance well by showing the business impact in numbers.

If we assume resources are spent to increase each area by 1%, monetization had the biggest impact in terms of business impact. You can see that the return from monetization at 12.7% is much larger than the returns from improving Acquisition and Retention by 1% (3.32% and 6.71%, respectively).

Listening to this, a brilliant PM I know flashed through my mind. When launching a service, they would reverse-engineer the price needed to hit the break-even point within a certain period, and I remember the business impact being outstanding almost every time they launched.

Pricing principles 💡

When pricing a product, you usually need to consider two more factors.

Those are Cost and Value, and you need to know their relationship with Price. The "Price Thermometer" is exactly what represents that relationship.

This "Price Thermometer" was the biggest help in forming my concept of pricing.

Here, Value is the value perceived by the user, Price is the product's selling price, and Cost is the expense required to provide the service.

The gap between Cost and Price can be perceived as the incentive to sell,

and the gap between Value and Price can be perceived as the incentive to buy.

(This means that the larger the incentive to buy, the easier it is to persuade the user.)

Then how do we set the price?

You can set it based on Cost, or you can set it based on Value, and the lecture emphasized doing Value Based Pricing.

He mentioned that Value Based Pricing also has the advantage of giving you opportunities to experiment while adjusting the incentive to buy.

To put it simply again, you should determine the price in this order.

• Figure out the Value,

• Set the Price lower than the Value,

• And make sure the Cost is less than the Price.

Examples of bad pricing 🙅‍♀️

He said that if you misunderstand the relationship between the three factors mentioned in the pricing principles above (Value, Price, Cost), you'll end up setting the wrong price.

The typical scenarios look like this:

• When the price (Price) is too low

• When production costs (Cost) are too underestimated

• When the product's value (Value) isn't well understood

• When focusing on the wrong customer

I understood that each scenario is complex rather than completely independent,

for example, if you underestimate the product production cost (Cost) and set the product price (Price) too low because "you get what you pay for," there are many cases where you can't cover the user acquisition cost (CAC).

Another reason for getting pricing wrong is misjudging the value of the problem the current service is solving. If you undervalue it too much, the low pricing problems mentioned in the previous example can occur, and if you overvalue it, problems can arise because the price is set higher than its actual value.

And the last scenario is focusing on the wrong customer. Let's look at the chart below first.

Looking at the chart, startups are usually in the first two stages of the Sales & Profit Cycle. At this point, the people who primarily react to the product are early adopters.

Early adopters have a higher tendency to make purchasing decisions based on the benefits the product provides rather than the price. So they have different tendencies from most people who buy products based on the existing price. Therefore, if you price based on them, you might end up with the wrong pricing.

Optimizing price 🏋️‍♀️

Price optimization is nothing special.

You just need to find the point where Price X Quantity (= revenue) is maximized. In the graph above, you ultimately just have to find where the area of the rectangle formed by price and quantity is the largest.

The formula is also very simple. You just find the highest value for Revenue and you're done.

The 10, 5, 20 rule

The rule Kevin empirically found to be good in the lecture is the 10, 5, 20 rule.

For 10:

• Value should give off the feeling of being about 10 times the Price.

• If they bought something for $10, it should provide the value of feeling like $100.

For 5 and 20:

• If you are already offering a paid product, he suggests starting to practice pricing little by little.

• Start gradually raising the price by 5%, and keep increasing it until you lose 20% of your customers.

Going forward 🤞🏻

Through the pricing lecture, Alarmy's subscription team has also established our own pricing-related direction.

Broadly speaking, we have short-term and long-term plans,

and the short-term plans are:

• Finding the optimized price through price testing

• Testing not just product pricing, but also decoy products...

The long-term plans are:

• Segmenting user needs to provide higher Value

• Providing personalized features tailored to those segmented needs

That's what we are planning.

Want to work with us? 🙋‍♂️

We're looking for PMs, engineers, and designers to work with Alarmy's subscription team.

Coffee chats are always welcome, so please email me at jason@delightroom.com.