Shopify Ecosystem

The Ins And Outs Of Membership Pricing

the-ins-and-outs-of-membership-pricing

Memberships: the final frontier of the subscription landscape.

If you haven’t already heard the good word, memberships are a phenomenal way to bring a recurring billing component to your revenue model, even if you think subscriptions are not for you.

Hey, I get it — some business models aren’t able to capitalize on a subscription component without making major changes to their infrastructure, inventory, resources, etc. But memberships — ahh, virtually everyone (B2B or B2C) can support those.

We’re all already familiar with memberships, right? Your gym works on a membership model and so does Netflix (and if you’re not a member of one, surely you’re a member of the other). Customers pay money at some regular interval to get something — access to gated products or services (MasterClass is a good example), curated products (Birchbox), or another set of perks (discounted pricing site-wide, free shipping, exclusive access, etc.). 

Memberships are easy to implement and get started with because there are several “entry level” structures that you can build on down the line. They’re also easily understood on the customer side because it’s such a standard concept. (Read: little to no consumer education required. Yay! We love that.)

There are lots of things to consider when you’re thinking about adding a membership program to your ecommerce business — too many to cover in one blog post, although I do dive into quite a few on an upcoming episode of the Hit Subscribe podcast. What we’re discussing today, though, is pricing — and with it, value, since the two are inextricably linked.

Let’s jump in!

The basics of setting up a membership program

Establishing value

My number one piece of advice to merchants putting a membership plan together is to make it as compelling as possible. Have a value proposition that’s so good, it’s a complete no-brainer for the customer to say yes.

“Value” is a benefit vs. price analysis, and merchants can manipulate both sides of the seesaw because both sides are within their control: they can raise or lower the price, and they can increase or decrease the perks. Value is the balance of the two.

When benefits and price are balanced, the customer’s thought is likely to be “Maybe” or “I’ll consider it”, because a relatively equal price to benefits ratio = acceptable value.

When benefits outweigh the price, the customer’s thought is “ABSOLUTELY YES GIMME!” or “Damn, it’ll be like losing money if I don’t do this…” because a higher benefits ratio = tremendous value.

In the misguided scenario where price outweighs the benefit, we’re probably getting a “Meh no thanks, not worth it” response (higher price ratio = poor value).

Memberships as a loss leader

In many cases, reducing the price to get a more favorable ratio is easier than trying to increase the benefits. You might even consider making the price so low ($10 seems to be a sweet spot, anecdotally) that you’re losing money on the surface…because, yes, believe it or not, memberships can actually function as a loss leader.

Why?

Because if your program is set up cannily, you’ll more than make up for it in the future with: 

  • higher AOVs (if one of your member perks is site-wide discounts or free shipping, for example)
  • higher repeat customer rates (members tend to be a more engaged consumer set, and will come back more often to browse and buy)
  • reviews and referrals (again — your membership program should be so awesome that members can’t help but turn into raving fans, spreading the good news) 
  • valuable data (raving fans are much more likely to participate in surveys, focus groups, product beta testing, etc.)

Specifying price

Sorry to reply with the always unhelpful “it depends”, but it’s true! How much you should charge for a membership program will depend on several things:

  • Your current average order value
    • The cost of a membership should be roughly in line with the AOV of your store.
  • How many membership types or tiers you plan to offer
    • Each tier will need a different price point, relevant to the benefits of each tier
  • The value proposition you plan to center the membership around
    • I think membership programs should garner only one of two responses from the customer: “HELL YES!” or “No.” A lukewarm response to the value proposition can only increase churn.

Billing frequency

Price and billing frequency need to adapt in tandem with one another. Consumers will expect to pay more upfront for an annual plan than a monthly plan, but it’ll need to be worth it.

The billing frequencies you choose will also need to make sense for you as the merchant. For instance, annual memberships are attractive because it’s a higher influx of cash, sure — but if one of your goals is to diversify your revenue stream by adding a recurring billing component, is offering only annual memberships really going to accomplish that?

There’s another aspect of billing intervals to consider too. You know the retention phrase, don’t you? “What have you done for me lately?” 

Generally speaking, the more frequently you bill the customer, the more robust and active your membership program needs to be.

Every time that charge hits their card, the customer is going to wonder if it’s worth it. Continuing to say “yes” should be a no-brainer, so avoid these pitfalls:

  • Lack of engagement from the member 
    • If they haven’t taken advantage of the perks of their membership in a while, they’re less likely to want to continue. Having a membership program with several touchpoints gives the user multiple opportunities to engage.

  • No retention strategies in place to ameliorate low engagement
    • Email and SMS marketing, social media, and benefits that change each month (such as new product drops) are just a handful of tools you can leverage to keep members engaged.

  • Poor value proposition
    • All the engagement strategies in the world won’t matter if your membership program’s UVP isn’t strong enough in the first place.

Example time

We recommend having a minimum of two different membership options for customers to choose from, but the golden number in most cases is three. Each should be priced differently, and one should be on a different billing frequency than the other two. 

For example, here’s a fictional membership program for an apparel company:

Here we’ve got three different price points with two different billing options (monthly or annually). The value increases in tandem with the price:

  • BABY
    • A dollar-to-store-credit ratio of 2-to-1

  • NORMIE
    • A dollar-to-store-credit ratio of 2.4-to-1; a minimal increase, but now with free shipping and a free gift with the first purchase (incentive for the customer to come back relatively soon and make another purchase!)

  • VIP
    • A dollar-to-store-credit ratio of 2.75-to-1, free shipping, an upgraded gift, and two value adds that cost you (the merchant) nothing 😉 

The monthly option gives members the flexibility to take it month by month, but the annual option offers the most “bang for the buck.” The Baby tier is the easiest to say “yes” to, because it’s an approachable price point and offers attractive value.

Limiting yourself to three different offerings reduces the paradox of choice within consumers, while still giving them enough options to feel like the one they choose is the right one for them.

A Note On A/B Testing: As tempting as it may be to test membership price points, if you have any kind of active “community” as part of your model, proceed with caution, friend. People talk, and if members find out that someone else got a sweeter deal than they did around the same time, that’s sure to leave a bitter taste. 

Although there are several moving parts to consider at the start (many more than we’ve been able to go into today), membership programs are another tool for turning onesy twosy customers into raving brand devotees with increased AOV and plenty of repeat business. Just make sure the price is right: consider your program from a consumer’s perspective. 

  • Does it provide irrefutable value when compared with the cost? 
  • Are there enough options in billing frequency that any customer will feel like they have a program tailored to them (without creating a significant burden of choice)? 
  • Are you consistently iterating to provide new perks and attractive opportunities for engagement to justify that repeated cost? 

Nail those points and watch that recurring revenue rise. 😎

Happy selling!


GUEST AUTHOR:

Grace Everitt is the CEO and Creative Director of Tako Agency Tako Agency was founded out of a love for beautiful and intelligent design and are passionate about delivering a customer experience that inspires delight, both to our clients and their end users. They design, develop, and optimize Shopify Plus websites and Mobile Apps for some of the fastest-growing brands.

Special thanks to our friends at ReCharge Payments for their insights on this topic.
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