The Secret to Subscription Pricing
Jeff Wissink shares what Navint has found to be the secret to establishing value-based subscription pricing, and it may surprise you.
Whenever we work with clients on their recurring revenue businesses, the topic of subscription pricing inevitability comes up. What is the right price to maximize revenue, attract new customers, or reduce subscription churn?
In a recent discussion with Peter Zotto, the Chief of Staff of the subscription pricing experts ProfitWell, he said the majority of SaaS companies out there today don’t really know the right way to price their SaaS products. Often companies look at their competitors and do a feature/functionality comparison, but that approach assumes the competitors have priced their products correctly for the market. Cost-plus pricing is difficult when your marginal cost of an additional sale of a digital good approaches zero. Economic theory says the right price to charge is the absolute maximum that someone is willing to pay, but this is, of course, highly theoretical and hard to put numbers around. The concept of pricing based on value is great in theory, but how do we put this into practice?
A Streaming Service Story of Subscription Pricing
Given Navint’s focus on recurring revenue companies, not surprisingly, we have many clients in the media and entertainment industry. We often find that these companies have launched their streaming services with a very simplistic pricing model—unlimited access for a fixed monthly (or yearly) price.
For illustrative purposes, let’s use a hockey streaming service. (Disclaimer: I’ve chosen hockey because my son plays the sport. This is a made-up service but is based on real clients’ use cases.) The hypothetical “Slapshot.tv” streams hockey games, from the youth level through to the professionals. For $100 per year, hockey fans can subscribe to Slapshot.tv and receive all the hockey programming that is served through this content distribution channel.
While the “all-you-can-stream-for-one-price” model works for an initial launch and quick customer acquisition, we find that it doesn’t maximize the revenue opportunity for total addressable viewers. A March 2017 Forrester Research report titled Best Practices: Pricing Strategies For B2B Digital Services And Subscription Products confirms for us what we’ve found and illustrates how simplistic pricing limits revenue opportunity. “Simplistic pricing undercharges customers who benefit most from your products” and “flat-rate pricing prevents you from growing your revenue from a single customer over time, as the customer expands its usage of your services.”
In our example, raving hockey fans might pay much more for the unlimited access, say $299/year. The occasional viewer might not pay $100/year for the unlimited service, but they might pay $19 to watch the Stanley Cup finals. By capturing value at both the upper and lower ends, your revenue increases by $218, from $100 to $318. Multiply this by your serviceable addressable market (SAM), and we are talking an increase of hundreds of thousands, if not millions, of dollars.
On the surface, this has the appearance of a pricing strategy conversation. But if you go a layer deeper, the conversation is actually about strategic packaging
Flexibility in Packaging Is the Secret to Subscription Pricing
The ability to package your service offerings to diverse customer wants and desires allows you to set subscription pricing based on the value that the customer hopes to derive from your service.
For Slapshot.tv, this could mean breaking down content by:
- varying levels such as collegiate, minor leagues, and major leagues
- individual teams such as the Chicago Blackhawks, Wolves, or even my son’s team, the Chicago Stallions
- timeframes such as the playoffs
- game-based such as a pay-per-view
Once you start thinking of your products/services at a more atomic level, you have the freedom to combine elements into distinct offerings. This not only gives you a larger target market for net-new customer acquisition, but you can also create natural pathways for digital upsells and cross-sells and even create hybrid offerings mixing digital and physical goods. For example, perhaps there is an opportunity to sell exclusive fan gear, autographed game pucks, or even hockey equipment to different subscriber segments.
While this example is a streaming service, the same strategy applies much more broadly to any industry looking to build a recurring revenue business. The ability to mix and match products/services into unique packages aligned to the Continuous Customer™ pathway deepens the customer relationship over time, and unlocks the opportunity to maximize revenue for your business.
Enabling the Organization for Packaging and Pricing Flexibility
Most organizations that begin recurring revenue business—whether it’s a brand-new startup or an established company transitioning from a more traditional, transactional model—start with simplistic subscription pricing and packaging. A $100/year subscription is very easy for Slapshot.tv to administer. There are no upgrades, downgrades, and no add-on services or one-time purchases. The operational infrastructure can consist of a garden variety ERP and payment processing capabilities, and the process is to hit the credit card once a year. That is all Slapshot.tv needs to manage this subscription.
But as you expand and diversify your offerings as we’ve described above, a funny thing happens. You can start to drive operational complexity and cost into the business. We refer to this as the subscription business paradox: initiatives that drive recurring revenue growth can become the very things that threaten diminished business performance. We’ve mapped this journey onto a 5-stage maturity curve for scaling recurring revenue companies.
The key point here is that in order to grow your top-line recurring revenue in more sophisticated ways, you also need to have more sophisticated operational supports in place. To capture upsells, cross-sells, one-time purchases, renewals, and even downgrades or pauses in service, subscription management technology needs to be in place, as do the proper people and processes to support the continuous customer relationship throughout the customer lifetime. For example, you may find that you need a customer success function to help combat churn. For many businesses, a mere 1% increase in retention can have a significant positive impact on the business.
We’ve seen companies 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.
We have many conversations with executives who are facing this challenge of transition from a simple recurring revenue business to one that is more sophisticated. We know the warning signs of stalled recurring revenue growth, and more importantly, we have the tried-and-tested playbooks to help you design a frictionless methodology of selling and modifying customer relationships across the customer lifecycle and throughout the entire business operation. Give us a call or shoot me an email at email@example.com. We are happy to help.