Building InnovativeSubscription-based

BusinessesBUS-185

Lecture 3: Pricing for a Subscription Business

Martin Westhead

Strategic Pricing How to think about pricing

Subscription Pricing models Tools of the Trade Pricing model tips

Ning’s Price Story

Managing Change

Strategic Pricing“The Strategy and Tactics of Pricing”

Nagle, Hogan, Zale

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

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

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

Strategic Pricing Pyramid

Value Creation

Product-Led

Customer-Led

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

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

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.

Price Level Pricing objective

Skimming, neutral, penetration

Price/Volume trade-offs

Estimating Response (Price sensitivity) Experimentation Intention surveys Structured inference Incremental implementation Simulation

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

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

Subscription Pricing ToolsHints and tips

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

Pricing Model tips Simplicity

Reflect customer value

Don’t be afraid to charge high prices Ramit Sethi,Patrick McKenzie"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

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

Ning’s Pricing StoryGoldilocks and the Three Price Points

Freemium Ning

Subscription Ning

Price Change

New Top Tier

Usage based pricing

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

Further Reading Pricing Parade

Secrets to Innovative Pricing and Packaging

Guest Lecturer

Andy WoodsProduct Manager,

Zuora

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