Building Innovative Subscription-based Businesses: Lecture 3
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Building Innovative Subscription-based Businesses: Lecture 3



Pricing for a Subscription Business

Pricing for a Subscription Business



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Building Innovative Subscription-based Businesses: Lecture 3 Building Innovative Subscription-based Businesses: Lecture 3 Presentation Transcript

  • Building InnovativeSubscription-basedBusinessesBUS-185Lecture 3: Pricing for a SubscriptionBusinessMartin 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 PyramidPriceLevelPricing PolicyPrice and ValueCommunicationPrice StructureValue Creation
  • Value CreationProduct Cost Price Value CustomersCustomers Values Prices Costs ProductsProduct-LedCustomer-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 DiscountsTools of the Trade
  • Pricing Model tips Simplicity Reflect customer value Don’t be afraid to charge high prices RamitSethi,PatrickMcKenzie"Why Your Customers WouldBe Happier If You Charged More.” Let customers sample the value Trials, Fremium Discount your long term pricing
  • 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 $10,000pen.” Offer Multiple Choices 3 versions: bare bones, choice, VIP Always Be Testing
  • 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 LecturerAndy WoodsProduct Manager, Zuora
  • Exercise 1: Choose a businessNext 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