I've been thinking about this from the perspective of Customer Lifetime Value (CLV). Charging a one-time fee based on historic CLV data, IMO, has three advantages: 1. Customers perceive the indefinite nature of recurring payments more expensive than a one-time fixed fee, 2. I'll have more cash upfront, and 3. I'll make more from customers that might have unsigned up long before the average CLV point.
I'm seeing this behavior especially for addons. When customers are paying a recurring fee for the main app and the costs of addons add up, they seem to prefer a fixed one-time fee (not necessarily equal to the CLV).
That said, there was a recent blog post about how one HNer dramatically increased his revenue by changing his pricing model. Rather than charge for features, he adopted a few tiers of service, each one targeted at one type of customer's use case.[1] I don't know your exact situation, but that might be worth trying as opposed to configurable add-ons. In general, speaking in the language of use cases resonates with the buyer more, and is more likely to result in a purchase.
You're doing pricing wrong then. If product A creates $300/month in value and you charge $50/month for it, and the user needs addon a for $15 and creates $8 in value and addon b for $35 a month but creates $20 in a value a month you're better off charging $150 a month for the package that has those addon features.
Maybe I'm unusual, but I just shelled out $350 for a smartphone in order to save myself 50% off of my phone bill by using a prepaid service.
When I decide whether or not to purchase or subscribe to something, I do the math to figure out which is cheaper in the long run. That being said, if the price difference is negligible and all else is equal, I would probably opt for a recurring payment.
You're unusual (no offense, so are most/all HN readers). The vast majority of smartphone buyers with a choice choose the subsidized (more expensive LTV) phone.
In any case, my thinking goes like this: If I had to buy SEOmoz in one lump sum for rest of my life the value of the product to me is probably close to $5000. That's what I'd pay for a lifetime subscription just for MRFS.
I can either pay $5,000 (hypothetically) and have it forever, or slowly enter in at $99 a month. If I cancel within 4 years I win, if I cancel after 4 years SEOmoz wins.
From my experiments 1 is definitely false. Customers often are willing to pay $50/month for several years when they wouldn't pay a $500 one-time fee.
This goes back to the concept of reducing risk. Customers are very risk-averse, so things like charging a lower monthly fee or offering a money-back guarantee will often give you a significant increase in sales.
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I've been thinking about this from the perspective of Customer Lifetime Value (CLV). Charging a one-time fee based on historic CLV data, IMO, has three advantages: 1. Customers perceive the indefinite nature of recurring payments more expensive than a one-time fixed fee, 2. I'll have more cash upfront, and 3. I'll make more from customers that might have unsigned up long before the average CLV point.
1. Customers perceive the indefinite nature of recurring payments more expensive than a one-time fixed fee
This is, for better or worse, exactly the opposite of how customers actually think.
I'm seeing this behavior especially for addons. When customers are paying a recurring fee for the main app and the costs of addons add up, they seem to prefer a fixed one-time fee (not necessarily equal to the CLV).
Good data, thanks.
That said, there was a recent blog post about how one HNer dramatically increased his revenue by changing his pricing model. Rather than charge for features, he adopted a few tiers of service, each one targeted at one type of customer's use case.[1] I don't know your exact situation, but that might be worth trying as opposed to configurable add-ons. In general, speaking in the language of use cases resonates with the buyer more, and is more likely to result in a purchase.
[1]: http://www.extendslogic.com/business/what-i-learned-from-inc...
You're doing pricing wrong then. If product A creates $300/month in value and you charge $50/month for it, and the user needs addon a for $15 and creates $8 in value and addon b for $35 a month but creates $20 in a value a month you're better off charging $150 a month for the package that has those addon features.
Maybe I'm unusual, but I just shelled out $350 for a smartphone in order to save myself 50% off of my phone bill by using a prepaid service.
When I decide whether or not to purchase or subscribe to something, I do the math to figure out which is cheaper in the long run. That being said, if the price difference is negligible and all else is equal, I would probably opt for a recurring payment.
You're unusual (no offense, so are most/all HN readers). The vast majority of smartphone buyers with a choice choose the subsidized (more expensive LTV) phone.
Wow. That's interesting. I'm sure you probably have data validating this but how does anyone explain it?
Is it because a recurring payment implies they only have to pay as long as they are using the product?
Take SEOmoz for example. I subscribed to them for a while.
I used it for the website: http://http://metalranchandfarmsigns.com/, which on average before Google killed me made $200 - $300.
In any case, my thinking goes like this: If I had to buy SEOmoz in one lump sum for rest of my life the value of the product to me is probably close to $5000. That's what I'd pay for a lifetime subscription just for MRFS.
I can either pay $5,000 (hypothetically) and have it forever, or slowly enter in at $99 a month. If I cancel within 4 years I win, if I cancel after 4 years SEOmoz wins.
I cancelled in a few months.
From my experiments 1 is definitely false. Customers often are willing to pay $50/month for several years when they wouldn't pay a $500 one-time fee.
This goes back to the concept of reducing risk. Customers are very risk-averse, so things like charging a lower monthly fee or offering a money-back guarantee will often give you a significant increase in sales.
See my reply above to patio11.