In part 1 of this series, I suggested going with your gut when it comes to pricing your membership levels. If you don’t have a strong gut feeling about pricing, you should run through the methods below to educate yourself more and come up with a gut feeling.
Even if you feel you have your price nailed, you’ll learn something by going through the exercises and may feel even stronger about your pricing… or maybe you’ll expose a weakness you hadn’t considered.
In the examples below, I use our membership levels at Paid Memberships Pro. These are actual numbers and projections that we’ve had at one point. Before coming up with our final pricing, we ran through each of these methods, using what we learned along the way to come up with our initial pricing structure.
I propose three questions/methods for coming up with your price.
- How much do you want to make?
- Time and materials x margin.
- What’s the value of a membership to your customers?
I will go into #1 below. #2 and #3 will be covered in follow up posts.
Method 1: How much do you want to make?
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Our goal with Paid Memberships Pro is to replace our consulting income so we can focus on this business full time. We’ll make about $150k in our consulting business this year. How many standard, managed hosting, and VIP hosting plans will we have to sell to do that same level of business.
We have to start somewhere. Because we “just got started” and have been tracking downloads of our free plugin and selling entry level memberships for $10-19/month, we have some data to make some estimates about the demand for our software and how many memberships we might be able to sell.
Right now, we’re seeing about 300 downloads per week of the plugin. Some of these “downloads” are actually upgrades, but it gives us a week to week number that we can track.
So far, for about every 100 downloads, we see about 1.5 users sign up for a support account at $19/month*. We’re hoping have a 1-to-20 ratio of support members to hosting members, and a 1-to-10 ratio of hosting members to VIP members.
Assuming no growth in plugin downloads (conservative I think since we’ve done no marketing for the plugin yet), we’ll get 15,600 downloads in one year. That would mean 234 support members, about 12 hosting members, and one or so VIP members.
We’d like each level to do roughly the same amount of business in terms of sales. So $50k for support memberships, $50k for hosting memberships, and $50k for VIP memberships.
Let’s do some division. $50k / 12 = $4167 / 234 members = $17.80 per month.
For hosting accounts: $50k / 12 = $4167 / 12 members = $347.24 per month.
For VIP members: $50k/ 12 = $4167 / 1 = $4167 per month.
Let’s round those numbers off to $20/mo, $350/mo, and $4000/mo.
What have we learned?
Remember, doing this is more about what you learn than the actual numbers you get. You don’t want to just use these rates without further thinking. So what have we learned?
- The prices suggested by this method are higher than our initial gut feeling. If we want to meet our goals, we’ll have to charge more.
- The VIP level is especially high, meaning that we need to either increase the conversion rate there, charge more (and offer more service), or reconsider this as a product offering.
In the next article, I’ll run time and materials x cost calculations to come up with pricing levels and combine that information with our results here. Stay tuned.
* Initially support memberships we’re $10/month. In November, we raised that rate to $19/month and saw an initial drop off in conversions. However, total revenue stayed the same (and we had few support requests). We’re now seeing 1.5% conversions from downloads to memberships again.
More on Pricing
Read the entire series on pricing.