Pricing is a key lever for revenue and profitability growth, and so an essential strategy to master. Mather Economics' recent webinar revisited pricing fundamentals, sharing the foundations of acquisition, retention and renewal pricing models and the mistakes to avoid. This article shares best practices from this webinar with the addition of other valuable strategies from other sources.
The key takeaway: think holistically about your pricing decisions across the customer lifecycle, focusing on Lifetime Value.
The foundations
Before making any pricing decisions, assessing your current level of pricing maturity will allow you make the optimal pricing decisions for your context, taking into account:
- Your strategic/organizational goals – such as higher LTV or growing your digital footprint
- Where your pricing priorities lie in the subscription lifecycle – acquisition, retention, renewal
- What kind of analytical approaches you apply to pricing so far – maybe you look at the competition, customer value, acquisition costs, etc.
- The execution requirements and timeline – for instance, who will execute this pricing strategy?
- Success criteria and performance tracking for this pricing project – KPIs, and what reporting is needed
The pricing maturity curve
This is where the pricing maturity curve comes in. First coined by the EPP Pricing Platform, the Pricing Maturity Model differentiates businesses on how developed their pricing principles are. Mather adapts the original 4 stages into 3 for the publishing industry, with each level proposing ‘next steps' to further develop your pricing model.
- Pricing as a project: simplified, high level pricing approach. Often based on rules such as making a certain profit margin. No consideration of customer value or personalized pricing at this stage. Organizations at this level also keep track of their pricing using data visualization tools such as PowerBI or Excel.
🎯 The goal if you're at this stage: try to better understand what you're worth to the consumer. This can be achieved through research and surveys. Also, these businesses should start to think about software specifically for pricing analytics.
- Pricing as a process: at this level, the company has a standardized process for their pricing, may have dynamic pricing and are selling products for prices that take into account multiple factors. For example, data on competitor prices, research and surveys inform them of value perception.
🎯 The goal if you're at this stage: automating the mundane tasks, putting your knowledge from previous steps to use.
- Pricing as a system: here, pricing is no longer a simple task but an entire system. Algorithms, AI and machine learning generate value-based pricing, where pricing is adapted to lifetime value.
🎯 The goal if you're at this stage: controlled testing and continuing to improve dynamic pricing algorithms
> You'll also enjoy: 8 tips for acing your subscription pricing strategy
Lifecycle-focused pricing approach
Given that pricing plays a variety of roles throughout the lifecycle, with one stage impacting the next, your pricing strategy can be thought of as a form of domino effect.
Go to market pricing communicates your value proposition, which impacts acquisition volume, churn and renewal pricing opportunity. As Mather stress, by focusing on the entire subscriber lifecycle, you ensure all efforts are working together in harmony.
The solution: put LTV as your north-star metric to define offer pricing that is LTV maximizing, something that naturally takes into account the domino effect of pricing
1. Acquisition pricing
There are 2 types of acquisition pricing: list price and promotional price.
List price: the stated value of the subscription that is known in the market – here you should consider what's the lowest price it could be based on your costs, but also what is your strategic imperative, revenue goals and value proposition
How do you determine optimal list price?
- Cost-plus: pricing based on current or desire operating margins
- Competitor: priding relative to those of your competitors (but quite a basic option, not very beneficial for communicating the value of the product over competitors)
- Value: pricing based on the perceived worth of the product based on surveys, modeling, etc.
Promotional price: the introductory price that the majority of your new subscribers will come in on, used to persuade readers to convert
Best practice: always show the list price even when a promotion is available to highlight the perceived value of the product
The goal of promotional pricing is to drive and sustain new start volumes
Key levers to consider:
- Discount amount
- Term length
- Billing frequency
- Renewal incentives
- Trials
How to think of LTV when considering acquisition pricing:
- What is the purchase price?
- Acquisition costs
- Term length
- Retention probability
- Renewal pricing opportunity
For instance, below is data from a publisher who found that a lower introductory offer actually gives them a higher margin in 2 years and allows them to acquire more new subscribers. This is what Mather call an LTV-maximized pricing strategy.
2. Retention pricing
Retention can be woven into your acquisition strategy to drive long-term subscriber relationships, increase willingness to pay in the future and gage the impact of a price increase.
Of course, traditional retention tactics should be employed (onboarding, personalization, proactive churn management, etc) but these can also be used to inform your step-up pricing.
One publisher referenced in Mather Economics' webinar developed a subscribe score based on over 75 subscription and engagement inputs to understand the churn-risk for subscribers transitioning off promotional prices.
This score was then used to segment subscribers into 3 churn risk groups, informing targeted step-up pricing.
Overall, personalization is the most effective way of maximizing revenue and retention rates. This dynamicity should be based on behavior and engagement metrics such as time on site, web visits, newsletter engagement, and recency. Keep in mind that the greatest influences on pricing sensitivity can vary from market to market even within the same brand.
3. Renewal pricing
The goal here is to preserve and grow ARPU over time, and the best way to do this is through a targeted, value-based price increase, which is even more feasible given the data you now have on this user.
As Matt Lindsay, CEO of Mather Economics, shared in another webinar with Recurly, 80% of pricing-related churn comes from 20% of your subscribers. Targeted pricing strategies are therefore essential to mitigate the higher churn risks among this segment of your subscriber base.
For instance, below is an example comparing a 10% price increase across the board vs. a 5%, 10%, and 15% targeted price increase to 100,000 subscribers paying $50 monthly.
With a one-size-fits-all price increase of 10%, you can expect to have 4,000 subscribers churn, representing $200,000 a month in lost revenue and about $2,400,000 in annual loss revenue. Just from this price change alone.
With targeted pricing however, you can reduce price-related churn by almost half, reducing the lost monthly revenue to $100,000 and the annual loss to $1,200,000.
Common pricing strategy mistakes to avoid
- Overlooking the cost of production
- Ignoring changing market conditions
- Underestimating the power of promotions to drive sustainable revenue growth
- Applying a one-size-fits-all approach that neglects subscriber willingness to pay (and stay)
- Setting and forgetting your pricing
Above all, as you navigate the dynamics of subscription pricing, remember that the worst mistake of all is to do nothing and allow your pricing strategy to stagnate. Embrace an exploratory mindset, promote agile, data-driven experimentation, and prioritize Lifetime Value as a guiding principle. Utilize robust A/B testing to identify optimal approaches, investing in your pricing maturity to sustain and diversify revenue streams long-term.
The second edition of Mather's webinar, Maturing Your Pricing Strategy for Sustainable Growth, is happening on May 2nd. Sign up is here.
