Pricing models online: one-time, subscription and freemium

What you will learn

• How one-time, subscription, freemium and tiered pricing differ in cash flow and risk
• How to calculate expected subscription revenue per customer when some customers cancel
• How to check whether a freemium model pays for its free users
• Basic German rules for showing prices and running consumer subscriptions (general orientation)

Explanation

How to set a price level (cost-plus, value-based pricing and discounts) is covered in the business basics course. This lesson is about the pricing model: how and when the customer pays.

The main models

• One-time price: the customer pays once, for example €240 for a course with lifetime access. You get cash early, but you must find new buyers every month.
• Subscription: the customer pays regularly, for example €19 per month, for as long as they stay. Revenue is more predictable, but each customer can cancel. MRR (monthly recurring revenue) is the total of all monthly subscription fees; ARR (annual recurring revenue) is MRR × 12.
• Freemium: a basic version is free forever and a paid version adds features. The free version is a marketing channel, but free users still cost money (hosting, support).
• Tiered pricing: two to four packages, for example Basic €29, Standard €59, Premium €119. Tiers let customers choose their level and make the middle option look reasonable next to the top one. This effect is called price anchoring.
• Usage-based pricing: the customer pays per unit used, such as per download or per booking. Fair for the customer, but revenue is harder to forecast.

Expected subscription revenue

Churn is the share of subscribers who cancel in a period (lesson 12 goes deeper). If monthly churn is constant at c, a new subscriber is expected to pay for this many months within a horizon of n months:

Expected paid months = (1 − (1 − c)n) ÷ c

Multiply by the monthly price to get expected revenue per subscriber. Compare it with the one-time price. Remember that a lower entry price often persuades more people to start, so compare revenue per visitor, not only per customer.

Freemium check

Monthly freemium result = paying users × price − all users' serving costs. The free-to-paid conversion rate (paying users ÷ all users) decides whether this is positive. If it is low and serving costs are real, freemium can be a loss-making giveaway.

Annual plans

At €19 per month, a year costs €228; an annual price of €190 is a discount of €38, or about 16.7%. You receive cash up front and lose fewer customers during the year.

German rules (general orientation)

• Prices shown to consumers must be total prices including VAT (value added tax), under the Price Indication Ordinance (Preisangabenverordnung, PAngV). When you advertise a price reduction, the reference price must generally be the lowest price of the last 30 days.
• For consumer subscriptions, German law limits long tacit renewals: after the initial term, a contract may in general renew only for an indefinite period that the consumer can cancel with at most one month's notice. Online subscriptions also need a clear cancellation button. Lesson 11 covers the legal basics; check current rules or ask a lawyer for your specific case.

Worked example

Hypothetical example: a language teacher compares two models for a video course over a 24-month horizon. Option A: €240 one-time. Option B: €19 per month. Assumptions: monthly churn 8% for option B; 1,000 sales page visitors; 2% buy option A, 4% start option B because the entry price is lower. VAT, payment fees and refunds are excluded.

1. Expected paid months (B): (1 − 0.9224) ÷ 0.08 = 10.81 months
2. Expected revenue per subscriber: 10.81 × €19 = €205.40 (rounded)
3. Per customer, A wins: €240 versus €205.40.
4. Per 1,000 visitors: A = 20 buyers × €240 = €4,800. B = 40 subscribers × €205.40 = €8,216.

The result depends entirely on the assumed conversion and churn rates. If B converted only 2.5% (25 subscribers), it would bring €5,135, close to A. Test with real visitors before you switch, and note that A gives all the cash at once, while B spreads it over two years.

Common mistake

Practice activity

Hypothetical: you sell a set of spreadsheet templates. Option A: €150 one-time. Option B: €15 per month with 10% monthly churn. Use a 12-month horizon. On paper: (a) calculate expected paid months and revenue per customer for option B; (b) what share of visitors must start option B so that B earns as much per visitor as A, if 2% of visitors buy option A?

Key takeaways

• The pricing model decides when cash arrives and how much risk you carry, not only how much you earn.
• Expected subscription revenue = monthly price × (1 − (1 − churn)n) ÷ churn.
• Compare models per visitor, because cheaper entry prices often convert more people.
• In Germany, show total prices including VAT and follow the rules for consumer subscriptions.

Next step

In the next lesson you learn how customer service, reviews and retention keep customers buying after the first purchase.