Insights — Channel Creation & New Revenue Streams — 3 min read
How to Price a Recurring Service: Beyond Cost-Plus
Pricing a recurring service is not the same as pricing a project. You aren't just covering your costs; you are pricing the transfer of risk and the guarantee of an outcome.
In short
To price a recurring service, start with the 'Value of the Alternative' (what it costs the customer if the problem isn't solved) rather than your internal costs. Use three-tier pricing (Good/Better/Best) to anchor the value, and ensure your 'floor' price covers the cost of both delivery and churn. Successful pricing also includes 'escalators' that allow you to adjust for inflation or increased usage without needing to renegotiate the entire contract.
The most common mistake in Channel Creation is underpricing the recurring offer. Many business owners look at their cost to deliver the service, add a standard markup, and call that the price. In a transactional model, this might work. In a recurring model, it's a recipe for disaster. It fails to account for the cost of customer retention, the risk of inflation, and the sheer value of 'having the problem solved forever'.
Pricing a recurring service requires a different lens. You aren't selling hours; you are selling an outcome, a reduction in risk, or access to expertise. If your price doesn't reflect that value, you are leaving significant margin on the table and potentially positioning your service as a low-value commodity.
The Three Pillars of Recurring Pricing
1. The Value Pillar (Price to the Outcome)
If a managed IT service prevents one day of downtime that would cost the customer £50,000, then charging £2,000 a month is an absolute bargain. If you priced that same service based on the two hours of work it takes your team to run the updates, you might only charge £200. Always price to the outcome, not the activity.
2. The Risk Pillar (Price for the Transfer)
A recurring service often involves you taking on a risk that previously belonged to the customer (e.g., the risk of a machine breaking). You must price for that risk. If there is a predictable chance of a major repair being needed every year, your subscription price must reflect that actuarial reality, plus a margin for taking the headache away.
3. The Retention Pillar (Price for the Lifetime)
In a subscription model, the cost to acquire the customer is often only paid back after several months. Your pricing must ensure that you reach the 'break-even' point quickly enough, while still keeping the lifetime value (LTV) high. Your pricing must account for the expected rate of customer turnover to ensure long-term sustainability.
The Power of the 'Middle Tier'
Offering a single price point is a mistake. It forces a 'yes/no' decision. Offering three tiers creates a 'which one?' decision. The middle tier should be your 'target' — the one designed to be the most attractive for most customers. The top tier exists primarily to anchor the value of the middle tier, making it look like a sensible compromise.
The Evans Opportunity Engine helps businesses validate these tiers with real potential customers, ensuring that the 'market-clearing price' is identified before the service is launched.
Could your business support another route to revenue?
Evans Channel Creation identifies, validates and builds additional revenue channels from capabilities a business already has — B2B to D2C, D2C to B2B, product to service, recurring revenue or partners — and says so plainly when a channel should not be built. Programme from £1,995 + VAT per month over six months.
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