Subscription models – why is the cheapest non-free tier so much?

Question

Apologies, I'm sure this has come up many times but I've noticed that a number of sites/services (usually which have free tiers) will start their cheapest paid tier at more than $5 a month. Is there any specific logic to this?For example, the monthly fees for:- Reddit Premium - $5.99 - Evernote - &pound;5.99 ($7.39) - YouTube Premium - &pound;11.99 ($14.80) - Experian Credit Check - &pound;14.99 ($18.50) - Microsoft (Office) 365 Personal - &pound;5.99 ($7.39)Whether these services are worth the money is not my question - but is it not profitable to offer a e.g. $2 monthly tier (in general, not for these sites in particular)? On Patreon (different I realise) $1/$2 supporter tiers do seem more common so there are obviously people who would pay $1 a month for something but wouldn't pay $6 a month. Which is what I'd expect.

brudgers · Accepted Answer

Two users at $2/month is not as profitable as one user at $4/month because there is an overhead per user.
Obvious ones like the fixed portion of a credit card transaction fee.
Less obvious ones like customer support.
And of course segmenting the market between customers with money and the extremely price sensitive is a proven business strategy.

antifa · Answer

I thought this was going to be about SaaS/PaaS type stuff. I've seen a lot of free tiers that seemed generous for pre-launch work, but instead of charging me $1/month for a dollar's worth of usage over the free tier, they have cliff based pricing where exceeding the free tier pushes you off into $25/month plan, then the next cliff is $75 or $500. Or worse, they adverse $X per "seat" with small letters saying minimum 5 seats.These are products or services I genuinely want to pay for, but if my usage is essentially only the first $1 out of the required $25, I'm going to just use a $5 VPS for the same or higher specs.

keiferski · Answer

Call it the "willing to get my wallet out" amount. People willing to spend any money for something will be willing to spend $5-6, at minimum. Charging only $2 is just leaving money on the table.

ljf · Answer

My assumptions:Paid tier users come with costs, they want support and queries solved quicklyBy making the cost small (2 cups of coffee a month) but not tiny they actually encourage users to use and value the service (how many free tools have you neglected over time?)They want the slightly richer customers to take their base packages as they will be more likely to buy the expensive packages in the future.

speedgoose · Answer

I&rsquo;m just guessing, I don&rsquo;t want to conduct a scientific study on this topic, that:- $5 per month seems very cheap to IT people in USA.- they think that if someone is willing to pay, $2 or $5 dollars makes no difference to the customer because it&rsquo;s so little anyway.I wonder how these companies do their market studies.

paulmendoza · Answer

Price sensitive users are also the worst customers. They complain the most, want discounts, want the most support even though they are paying very little and then want refunds or dispute charges.