Some news: After this post I’m going to be rebranding B2B Pricing Insights to B2B Growth Insights. Over the last few weeks there have been a lot of new subscribers from marketing and product so will be focusing on a slightly broader array of topics.
Now, onto the article…
What happened?
My girlfriend has recently moved jobs and started working on a client project for a beauty and fragrance brand. Although it's not part of her actual role, she got curious about finding tools to improve her team’s workflows.
Naturally I wondered whether Midjourney would be able to generate on-brand creative assets so I popped over to the Discord and went through the process to re-subscribe.
As I went through the payment flow, the pricing page looked very familiar to a lot of B2B SaaS pricing pages. 3-4 tiers to increase average order value and better accommodate for different types of users from curious novices to power users.
But then I noticed they made the same mistake so many SaaS companies do - offering an annual discount as a percentage off, in this case 20% for paying upfront for 12 months.
Don’t get me wrong. Incentivising annual plans is the smart move, users on annual plans have far far better retention rates, an issue especially important for consumer generative AI products. But there’s definitely room for optimisation here.
If you’d like the research report I built from which these graphs were taken from just reply to this email and I’ll send you the PDF (original value $7,949).
What’s the best way to discount?
Percentage discounts underperform compared all other offer types
Customers respond way better to free items/ free extra months (e.g. 2 months free) or dollar amounts off
Whilst it’s a little hard to think about what sort of free item Midjourney could give even $X off performs significantly better (19.48% took the $XX off vs an equivalent percentage discount where only 8.59% of users took the offer)
The reason behind this is that % based discounts are less tangible in customer’s eyes, leading to a reduced sense of value
The other disadvantage of discounting is that it will lead to more price sensitive and high churn users. If you can instead add value rather than reducing the price you get to generate a significantly higher LTV
How Could Midjourney Improve its Pricing
(1) Test Precise, Non-Rounded Discounts
Following up on the recommendation that Midjourney should be offering a $30 off their Annual plan they should have a keen look into using precise, non-rounded discounts. What does this mean?
✅ Get $7.70 off
❌ Get $8 off
Whilst the latter is clearer a better offer research from last year (Jha, Biswas, Guha, & Gauri, 2023) shows that the $7.70 actually increased purchase intent by 18%!
The reason for this is that by using a precise discount, you cause customers to think the discount will change soon and thus are more likely to take the opportunity while the offer is still available.
So - instead of offering 20% on their Annual plans we can stack all these learnings and instead offer a precise discount in $X off format. Result: $23.70 off vs 20%
(2) Experiment with Deeper Discounts on Annual Plans
This is a bit of a nuanced suggestion. For most SaaS software providers this would be a no-brainer. Companies that have a higher % of customers on Annual plans see a dramatically lower customer churn rate.
It not only locks you in for a minimum of 12 months but it gives users additional time to get to an ‘a ha’ moment or find value in the product, build up deep switching costs and completely migrate over their workflows. This is something that is incredibly difficult to do with a PLG product where you have a monthly rolling subscription.
For an AI product like Midjourney specifically, it could be even more impactful. A lot of their signups are likely low-intent "tourists" drawn in by hype, coming to check out the product because of a recommendation they saw in a newsletter, tweet or TikTok video.
This has meant that the conversion rates for these companies have been significantly lower so a steep annual discount could compel them to commit.
The only disclaimer to add however is that these are very cost intensive businesses to run and so Midjourney may not actually feasibly be able to afford offering a 30-40% discount on the annual plan because of their gross margins.
If you’d like the research report I built from which these graphs were taken from just reply to this email and I’ll send you the PDF (original value $7,949).