There’s no area more contentious than pricing. How your price your product seems to be one of the hardest decisions companies make, requiring the involvement of as many people as possible and complex models. In reality, designing an app monetization strategy can be straightforward if you begin with the end in mind. I’ll show you how in this post.
My goal for this post is to keep things simple. Pricing is one of those areas where complexity just creeps in like fog at night. It’s also important to understand that we are talking about exclusively app monetization strategy.
The B2B world embraces opaque pricing hidden behind “get in touch with sales,” but that’s not the right approach for consumer products. Pricing at this level should be straightforward and crystal clear.
One of the best examples of this is Spotify. They have two plans: a free and a premium plan. The premium plan then has a further option for a family and student plan. I particularly like their free plan because it provides access to their app to anyone who wants to use it. If you don’t mind the ads and limitations, you can listen to as much music as you want.
If you’re willing to upgrade, the premium plan gives you full control over your music, offline downloading and lets you potentially share it with your family. I’m sure Spotify could figure out multiple plans based on specific features, but they have kept their pricing simple for a reason: it works.
Another example is Slack. This is technical a B2B product, but it also belongs to a new batch of “consumer B2B” products. Their pricing is a combination of simplicity and opaqueness. Their first two plans are clear and provide options for different segments. They do have a third plan behind a “contact sales,” but most companies will be fine with the Standard or Plus plan.
Slack also touts a “Fair Billing Policy” where you only get charged for what you use. This is a great way to ensure customers get flexibility as their teams grow and shrink and size. It’s a simple addition that might cost Slack revenue but earns them goodwill and could even impact long term retention.
Companies can use pricing to tell a story to their customers. Let’s go back to Spotify. Their story is quite simple. You can start for free, and you’ll get a few ads in between songs. You will have limited functionality, but you can start listening to music right away. There are millions of songs at your fingertips for free!
If you ever want more, you can upgrade to our Premium plan. You can choose your songs, download offline content, and more. This is the next step in your music journey. For a select few, you can share your love of music with your family.
Customers can see themselves in this story and select a pricing plan that makes sense for them. Pricing plans can also encourage specific behaviors. Being able to download music is helpful, but it’s also a way to increase retention and stickiness in the product.
Moving platforms is quite tedious if you have to redownload your music, make new playlists, and find your favorite songs. This is the power of pricing.
Think about what is the story of your ideal customer user. Some questions to spark your ideas:
The answers to these questions will start to determine your pricing plans and what should be included in them. Let me show you the three models that you can choose from in the next section.
In my experience, there are three major strategies when it comes to pricing: one time payments, subscriptions, and in-app purchases. Each option is self-explanatory, and you could even combine multiple models into one product.
For example, you can occasionally buy Angry Birds for $0.99, but they also in-app purchases. We also see this with console games like Start Wars, where you purchase the game for a one-time payment of $50, but you will then have options to buy other expansions and items within the game.
There are two questions to answer here before choosing a model:
These questions might not always align with the same answer, but they should be pointed in the same direction. You’re trying to maximize LTV while also look for long-term retention.
I also want to mention the concept of barriers. You’ll sometimes hear people say that payment is a barrier to adoption. If a game is free, it’s more likely to be downloaded than a game where you have to pay upfront. Both approaches work, but which one is right for your product?
This is where the Retention & Barriers matrix can come in handy. You will see a 2 x 2 chart showing two dimensions: natural retention and barriers in the image below.
If a product tends to have good retention, e.g., insurance, Slack, or Amazon, you should decrease the barriers. You want as many people to start using the product because the retention itself will capture customers.
However, if a product has poor natural retention, e.g., such as mobile games, food delivery, or gyms, you want to increase the barriers. It doesn’t matter how many people get in if you lose most of them. Instead, you want to create commitment as early as possible.
I had a client that offers training in-person and online. They have focused exclusively on acquisition, but their retention isn’t as high. In their case, they could consider increasing the barriers to achieve a higher commitment from first-time customers.
Don’t break your head overpricing. There’s no need to spend months debating the pricing model. Do your due diligence and then test it. Pricing is one of the easiest things to A/B test. You can try different models, different dollar amounts, and other features.
You want to start this testing as soon as possible because it takes time to see the true impact of pricing changes. The short-term impact in terms of new customers or revenue is excellent, but you’re also interested in long-term retention.
Make sure your data is set up correctly for this kind of testing. You want to be able to see the results of the A/B tests on revenue and be able to cohort experiment users to track their long term retention.
Sometimes pricing can be based on goodwill and “good enough.” The Same Harriss Waking Up is an excellent example of this. They have a freemium model with simply upgrade pricing. However, if you can’t afford the app, you can email them for a free account for one year, no questions asked.
This is a simple addition to their pricing, which encourages goodwill even among the customers who pay for the app. You could try these kinds of ideas through A/B testing.
Don’t get caught up in everything you could do. Focus on what is best for your ideal user and how pricing can be used to guide their behaviors. Once pricing is good enough, move on to other things.