More companies are turning to a recurring revenue businesses model as a way to enable smoother, more predictable revenue streams. And while the model promises to do just that, there remains a problem: many companies have not optimized subscription pricing, causing many companies to lose revenue.
The cost of an incorrect pricing strategy
Economic theory says the right price is the absolute maximum that the customer is willing to pay. This principle sounds simple, but it is notoriously complicated to put into practice since the maximum price will vary from customer to customer. In a recurring revenue model, the consequences of underpriced goods and services are even more pronounced, as lost revenue compounds over time.
Consider, for example, the launch of a content streaming service from a sports network. The company has adopted a simplistic pricing model which offers unlimited access for a fixed monthly price. While this “all-you-can-stream” model works for an initial launch and quick customer acquisition, it often does not maximize the revenue opportunity for total addressable viewers. A Forrester Research report titled “Best Practices: Pricing Strategies for B2B Digital Services and Subscription Products” confirms that this simplistic pricing plan limits revenue opportunity.
Subscription Pricing: Chart from March 2017 Forrester Research report titled Best Practices: Pricing Strategies For B2B Digital Services And Subscription Products
As illustrated above, simplistic pricing tends to undercharge customers who are heavy users of the service. Further, flat-rate pricing prevents the organization from growing revenue as the customer derives more value from the service and expands their use.
For instance, in our streaming example, a new customer may be willing to pay $7/month for an initial subscription. However, over time, as their usage increases, it may be possible to upsell the customer on additional features and benefits or premium content—perhaps increasing the monthly charge to $12. By creating multiple tiers of service, the company is able capture value at both the upper and lower ends of the spectrum. The $5 monthly price increase, in our example, boosts the organization’s total revenue by up to $60 per year, per customer. Multiply this by the serviceable addressable market (SAM), and the difference could amount to hundreds of thousands or even millions in additional revenue.
Flexibility in packaging is the secret to subscription pricing
The above example highlights the role that packaging plays within the subscription strategy. The organization’s ability to package service offerings to address a diverse range of customer needs and preferences allows the organization to set subscription pricing based on the value that the customer hopes to derive from the service.
This means breaking down products and services at what we refer to as “the atomic level.” For the sports entertainment company, this may include the following content categorizations:
- Varying levels such as collegiate, minor or major league
- Individual teams
- Timeframes, such as the playoffs
- Game-based model or pay-per-view events
Once the organization starts thinking about products/services at a more atomic level, they will realize greater flexibility in how they can arrange various elements into distinct offerings. This not only grants the organization a larger target market for net-new customer acquisition, but also forges natural pathways for digital upsells and cross-sells. It can even create hybrid offerings that mix digital and physical goods. For example, our media company may see an opportunity to sell exclusive fan gear, memorabilia or equipment to different subscriber segments.
While the example we chose is a streaming service, the same strategy applies more broadly to any organization looking to build a recurring revenue business. In fact, this principal is one of the key attributes of our Continuous Customer™ model. We consider the ability to mix and match products/services into unique packages the key to deepening the customer relationship and maximizing revenue.
Enabling packaging and pricing flexibility across the organization
While flexible packaging introduces a great growth opportunity, it is not without its challenges. As the organization expands and diversifies pricing and packaging options, operational complexity skyrockets. We refer to this as the subscription business paradox: initiatives that drive recurring revenue growth can become the very things that diminish business performance.
To illustrate this concept, we’ve mapped the customer journey into a five-stage maturity curve.
As seen above, the key takeaway for organizations is that growing top-line recurring revenue in more sophisticated ways requires more advanced operational capabilities. To capture upsells, cross-sells, one-time purchases, renewals, and even downgrades or pauses in service, the right technology, processes and people must be in place to support the continuous customer relationship. For example, the organization may find that it needs a customer success function to help combat churn. For many businesses, a mere one percent increase in retention can have a significant positive impact on the business.
GETTING STARTED ON FLEXIBLE PACKAGING AND PRICING
We’ve seen clients quadruple their revenue by revisiting their target market, refining their customer segments, and enabling their organization for flexible packaging, which in turn allows them to maximize their recurring revenue via value-based subscription pricing. During these engagements we have developed tried-and-tested playbooks to help organizations design a frictionless methodology for packaging goods and services to support a recurring revenue model. To learn more about how your organization can optimize subscription pricing, contact us.