When developing pricing and packaging strategies for a subscription product, it's often tricky to balance contrasting objectives. Maximizing acquisition, increasing revenue, boosting retention… it's hard to do all these things at once.
According to Jonathon Grant, Senior Director at Simon-Kucher, taking a customer-centric approach to pricing and packaging allows you to minimize these trade offs. For Grant, what it really comes down to is differentiation.
In summary:
- Customer-centric pricing and packaging is important as it allows you to minimize the trade-offs between different objectives
- Driving acquisition often comes down to understanding the role of different features of your premium product, including ‘leaders' and ‘fillers' while avoiding divisive ‘killer' features
- You should triangulate differences that exist in willingness-to-pay and reflect these in your pricing
- When it comes to retention, you need to think about both the risks and the opportunities present among existing customers
1. How can you use pricing and packaging to drive acquisition?
The goal: use customer insights to truly understand the role of different features in your premium packaging
Features that make up a premium offer can be classified into 3 roles:
- The leader benefits: the high value features that drive purchase. You don't need to include too many of these in a single package. This is the burger in your fast food bundle
- The filler benefits: the medium value, inoffensive features that contribute to the overall value of a bundle. The drink and fries
- The killer benefits: what you don't want to include! In the fast food example, this could be a coffee. Some people might want to buy a coffee with their fast food bundle, but including it would actually reduce the bundle value for the average customer
> Also on the subject of pricing: 8 tips for acing your pricing strategy
Case study: what to include in a subscription bundle
Grant referenced some customer research carried out with a news subscription publisher in the UK to illustrate this idea.
In this example:
- The leader features were the unlimited articles, ad-free experience and access via different platforms
- The fillers were the podcasts, archive access and ability to gift articles
- The killers were the premium newsletters
These outputs were then used in the redesign of the publisher's packaging structure to reflect the differences in value of the different features. For example, the leader features were those that became the key differentiators between packages.
2. How can you use pricing and packaging for maximizing revenue?
As with acquisition, maximizing revenue from a customer-centric standpoint is about differentiation. Specifically, pricing reflects differences in willingness to pay between different groups of customers.
You might already have introductory discounts, save offers or win back strategies in place. These are examples of price reflecting different value perception and willingness to pay across your subscriber ecosystem.
The ecosystem consists of prospects who would consider your product, who turn into trialists at trial conversion rate, then into subscribers at the pay-up rate, some of them aren't retained and turn into lapsed subscribers, and then some of these will come back into subscribers again via win back efforts.
Case study: different willingness to pay between subscribers
To put this into context, below is data from work done to examine how to migrate a large subscriber base on legacy prices towards the current headline price. Targeted pricing research enabled Grant and the team to model the likely impact of different prices on the renewal rates of different customer cohorts.
On the graphs: each block is the renewal index at a different price point, and the lines are relative revenue index.
You can see that there are very different reactions to prices between the two cohorts, especially at the upper end. This also illustrates how it's important to think about the trade-offs between maximizing revenue and maintaining volume. For instance, in cohort 2, there is a revenue gain between $15 vs $20, but the volume trade-off is also significant.
> News media: determining the optimal price for your subscription product
3. How can you use pricing and packaging to drive retention?
Using pricing and packaging in a customer centric way to drive retention involves building an understanding of both the risks, but also the opportunities within your customer base.
There are two sides to retention to consider and define: the risks and opportunities
Ideally, you should be able to identify which customers are most at risk of churn and what actions (or lack of actions) this usually involves. Having that early warning system allows you to put preventative measures in place, such as save offers or using this information to influence decisions on who is moved in price increase programmes
The other side of the coin is the opportunity, which customers are going to be most receptive to upsell efforts, are likely to purchase additional products or services if you offer them.
Case study: propensity model for retention
The example that Grant shared involved work on building a propensity model for a subscription business, both in terms or propensity to churn and propensity to be upsold to.
Some of the customer-level model inputs that were used included tenure, current product tier, product usage, number of products in the portfolio purchased, how they were acquired, where they were based, etc. Using historical data, they built out churn risk and upsell opportunities to give a clear picture of where the focus should be in terms of customer retention.
To conclude, by developing a customer-centric pricing model, you can effectively balance acquisition, revenue and retention goals.
