Pricing for a Subscription Business

1. Building Innovative
Subscription-based
Businesses
BUS-185
Lecture 3: Pricing for a Subscription
Business
Martin Westhead

2.  Strategic Pricing
 How to think about pricing
 Subscription Pricing models
 Tools of the Trade
 Pricing model tips
 Ning’s Price Story
 Managing Change

3. Strategic Pricing
“The Strategy and Tactics of Pricing”
Nagle, Hogan, Zale

4. How not to price
 Cost-plus pricing
 Costs plus margin (fair price)
 Customer-driven pricing
 What does customer think its worth?
 Market share-driven pricing
 Set price to drive market share targets

5. Strategic Pricing
 Objective: profitability
 Holistic approach
 Product definition
 Differentiated benefit -> “fair” premium price
 Creative revenue collection to reflect value
 Varying price to use fixed costs optimally
 Mitigate aggressive competitors and buyers

6. Three Principles of Strategic Pricing
 Value-based
 Prices should be set and changed to reflect value
 Proactive
 Anticipate disruptive events
 Customer negotiations
 Competitive threat
 Technological change
 Develop strategies in advance to deal with them
 Profit-driven
 Success is defined by earnings
 Not revenue vs competition

7. Strategic Pricing Pyramid
Price
Level
Pricing Policy
Price and Value
Communication
Price Structure
Value Creation

8. Value Creation
Product Cost Price Value Customers
Customers Values Prices Costs Products
Product-Led
Customer-Led

9. Price Structure
 Simple: price per unit
 $ per gallon
 $ per month
 Add complexity to value-segment customers
 Each segment derives different value
 Airline tickets pleasure vs. business
 Ryanair
 €5 print ticket, €20 stroller, €3 front of line
 6 extra seats by removing 2 of 3 toilets on 737
 C.E.O plan to charge for the bathroom
 Add complexity to establish reference price

10. Price and Value Communication
 Justify prices in terms of value
 Ads: “I am a Mac”
 Sales process: 10-15% revenue increase
 Search Goods vs. Experience Goods
 Specific and general differentiation respectively
 Psychological vs. monetary benefits
 Implicit vs. explicit
 Stage in the buying process
 Value to price

11. Pricing policy
 Customer price resistance caused by
 Product not offering expected value
 Customer does not understand value
 Price too high relative to value
 Customer learned: Resistance => Lower prices
 Pricing Policy
 Rules or habits for varying price
 Empower sales team to hold price but offer deals
 E.g. unbundling features, lowering SLA etc.

12. Price Level
 Pricing objective
 Skimming, neutral, penetration
 Price/Volume trade-offs
 Estimating Response (Price sensitivity)
 Experimentation
 Intention surveys
 Structured inference
 Incremental implementation
 Simulation

13. Concepts: “Fair” price
 Public perceptions
 Dark ages: merchants hung for exceeding “just price”
 Today: criticism, public boycotts, regulatory issues
 Oil companies: “gouging” after Hurricane Katrina
 Disney World: expensive, profitable, acceptable
 Beer test – friend to buy beer:
 Grocery store $1.50
 Resort hotel: $2.65
 Sellers motivation
 Necessities vs. luxuries
 Key lesson:
 Set regular price high and discount
 Instead of adding charges

14. Concepts: Reference price
 Reasonable price for a product
 Benefit of adding a top tier price point
 Shifts reference price up
 Explicit reference price
 “Was $1000, Now $799”
 “Their price $1000, Our price $799”
 Order of price presentation

15. Subscription Pricing Tools
Hints and tips

16. Pricing models
 Recurring payment
 Billing Period
 Term
 Fixed Charges
 Tiered plans
 Add-on Plans
 Advanced vs Arrears
 Usage Based
 Credits and Virtual Currency
 Trials and Discounts
Tools of the Trade

17. Pricing Model tips
 Simplicity
 Reflect customer value
 Don’t be afraid to charge high prices
 RamitSethi,PatrickMcKenzie"Why Your Customers Would
Be Happier If You Charged More.”
 Let customers sample the value
 Trials, Fremium
 Discount your long term pricing
http://chargethru.com/profiles/blogs/6-tips-for-choosing-the-right-pricing-model

18. Price presentation tips
 End With a 9
 Shorter Prices Look Less Expensive
 $49 looks a lot more appealing than $49.00
 $1,000 looks more expensive than $1000
 Anchor Your Price
 "The best place to sell a $500 pen is next to a $10,000
pen.”
 Offer Multiple Choices
 3 versions: bare bones, choice, VIP
 Always Be Testing
http://www.quora.com/How-should-one-go-about-pricing-their-software-product

19. Ning’s Pricing Story
Goldilocks and the Three Price Points

20. Freemium Ning

21. Subscription Ning

22. Price Change

23. New Top Tier

24. Usage based pricing

25. Managing Change
 Netflix
 $8B market cap loss
 After announcing price change
 Opps!
 Subscriptions are relationship focused
 Ning 3 changes
 Strong customer community
 Foster customer supporters
 Manage communication
 Message value

26. Further Reading
 Pricing Parade
 Secrets to Innovative Pricing and Packaging

27. Guest Lecturer
Andy Woods
Product Manager, Zuora

28. Exercise 1: Choose a business
Next Week
 Discussion Forum on ChargeThru
 Choose a subscription business:
 A start up or established
 Digital or non-digital product
 Real or speculative
 Innovative use of subscription
 Presentation to the class on:
 Outline of the business model
 Why did you choose it (what’s innovative)
 Details about their use of subscription