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Pricing Strategy: How To Win With Subscription Pricing Models

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http://bit.ly/PricingStrategySlide This presentation is focused on your pricing strategy and how to drive massive revenue growth. Zuora and our partner Simon-Kucher do lot of events together – pricing is always one of the most popular topics, because it’s such an important strategic lever. Pricing is even more important for subscription businesses – We’ll discuss why. We’re fortunate to work with a lot different types of subscription businesses and we learn about their subscription journeys – this is the content that we want to share with you. http://bit.ly/PricingStrategySlide

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Pricing Strategy: How To Win With Subscription Pricing Models

  1. 1. Your Pricing Strategy: How to win with subscription pricing models
  2. 2. Joe Andrews, Sr. Director Marketing @andrewsjoe Matt Johnson, Managing Partner @PricingGeek
  3. 3. Agenda 1 The shift to recurring revenue 2 3 4 Pricing strategies to drive growth How to achieve pricing power Insights from global pricing study 5 Q&A © All content copyright of Zuora and Simon-Kucher and Partners, 2014
  4. 4. WE NOW LIVE IN SUBSCRIPTION ECONOMY 6.8 BILLION Potential subscribers on mobile, social, web 80% OF CUSTOMERS are demanding new consumption models - The Economist 2014
  5. 5. TODAY’S CUSTOMERS ARE IN CONTROL They are informed They buy their way They are connected 70% of customers are through the buying cycle before they contact you 6.8B potential subscribers on Mobile, Social, Web 80% of customers demand new consumption models The Economist 2014
  6. 6. THEY HAVE NEW EXPECTATIONS immediate fulfillment on-going value personal real-time memorable services
  7. 7. Immediate fulfillment Instant & continuous value Personalized control Multi-channel, any time, any device Memorable customer moments 1 WINNERS ARE DELIVERING THE SUBSCRIPTION EXPERIENCE 2 3 4 5
  8. 8. Delivering the Subscription Experience requires a different approach: A different pricing and go-to-market strategy An increased focus on loyalty and adoption A new approach to revenue growth A completely new way to measure success
  9. 9. THREE LEVERS TO DRIVE SUBSCRIPTION GROWTH Acquire New customers Increase Value of your customer Reduce Churn 9
  10. 10. Product world Subscription world vs. 10
  11. 11. THE MOST IMPORTANT TOOL YOU HAVE IS PRICING AND PACKAGING Infinite pricing options It’s all about fast Time-To-Market Ability to quickly iterate and evolve your pricing strategy
  12. 12. INFINITE PRICING OPTIONS… THE CHALLENGE – WHERE TO FOCUS AND START? Company launch Single product Simple monthly pricing International growth Multiple currencies Regional pricing Product expansion Add-on products Product bundles Pricing optimization Pricing tiers Usage + overages A/B testing Revenue enhancement Product upgrades Billing frequencies Complexity Business Maturity
  13. 13. www.simon-kucher.com Pricing for subscription businesses Where are we today and what next? Matt Johnson 100 View St. Mountain View, CA 94041 Tel. (650) 691-3315 Fax (650) 641-4317 e-mail: matt.johnson@simon-kucher.com
  14. 14. Who we are: Simon-Kucher & Partners at a glance Global presence since 1986 27 offices worldwide 720 associates Revenue 2013: £126m Amsterdam Beijing Bonn Boston Brussels Cologne Copenhagen Dubai Frankfurt Istanbul London Luxembourg Madrid Milan > 2,000 projects in last three years Best consultancy in marketing and sales* 1 Simon-Kucher & Partners 2 Boston Consulting Group 3 McKinsey & Company Munich New York Paris San Francisco Santiago de Chile Sao Paulo Singapore Sydney Tokyo Toronto Vienna Warsaw Zurich Internationally recognised experts "world leader in giving advice to companies on how to price their products" Source: German manager-magazin Aug 2007 & 2011 / Institute für Management und Beratung; Survey among 264 top-managers; Maximum 500 points "…the world's leading pricing consultancy…" Peter Drucker "... in pricing you offer something nobody else does." "pricing strategy specialists"  Pricing excellence  Growth and competitive strategies  Product portfolio (re-)design  Customer relationship and customer value management  Sales strategies and sales channel optimisation Strategy > 400 Sales > 500 Marketing > 500 Pricing > 1,000 14
  15. 15. What we do: Extensive experience with clients in the subscription economy B2B SaaS Media & Telco Transitioning to SaaS Consumer Internet Source: Simon-Kucher & Partners 15
  16. 16. Global Pricing Survey: A minority of companies achieve pricing power Total Pharma, biotech/medtech Consumer goods Financial services Automotive Transport/logistics Low pricing power High pricing power* 6… 35% “Pricing Power” assessment * High pricing power is the ability of a company to fully/almost get the money it deserves for the value it delivers Source: Simon-Kucher & Partners Global Pricing Study 53% 47% 30% 27% 19% 47% 53% 70% 73% 81% Only 35% are able to get the prices they deserve! 16
  17. 17. Global Pricing Survey: Pricing power has strong impact on profits Average EBITDA of last three years (index) Source: Simon-Kucher & Partners Global Pricing Study 2012/2014 133 100 Companies with high pricing power All others “Pricing power” increases profits by 33% 17
  18. 18. Pricing power: The single most important business lever "The single most important decision in evaluating a business is pricing power.“ "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business." "The extraordinary business does not require good management.“ Warren Buffett Source: Warren Buffett in an interview with FCIC, May 2011 18
  19. 19. How do Telecom, Internet, Media and Entertainment (TIME) rate on the “Warren Scale”? Net price changes in the past year 66% Source: Simon-Kucher Global Pricing Study 2014 (TIME n=80, All else n=1494) 37% 16% 45% Average TIME Price increase Price decrease TIME companies 19
  20. 20. Why are TIME companies unable to raise prices? Have you experienced higher price pressure? 92% 89% 85% 80% 64% 60% Maximum Average Cause or symptom? Minimum Is your company currently engaged in a price war? 71% TIME 46% TIME 20
  21. 21. The real reason is a culture and acceptance that prices simply ‘go down in our industry’ Lowering prices is a natural trend in our industry Regulatory pressure (prices influenced by political play) Low-price competition (e.g. new entrants or importers attack us in our market) We compete on low prices We offer a commodity product Cost decreases that we need to pass on to our customers Customers are becoming more professional in the procurement process We needed to achieve our market share or volume growth targets Customers are more informed about prices than ever Customers have the negotiation power to ask for more discounts 18% 12% 11% 5% 0% -4% -5% -5% -6% -14% Reasons for price pressure (TIME compared to average) 21
  22. 22. What can be done? Launch new products and change customer perceptions! *Top 5 options to escape oppressive market conditions, Multiple responses possible Source: Global Pricing Study 2014 35% 33% 47% 47% 77% Share of respondents* Introducing new, innovative, or differentiated products Changing the way customers think about price and value Reducing our variable or fixed costs Changing mindset and confidence in our ability to implement higher prices Strengthening marketing functions to support value communication 22
  23. 23. Prerequisite: Think about monetization from day one * Less than five years old Source: Global Pricing Study 2014 Global Pricing Study 2014_Simon-Kucher & Partners Share of new products* that meet profit targets 20% 40% Pricing considered only at time of launch Pricing considered throughout the development process This thing called ‘price’ is really, really important. I still think that a lot of people under-think it… You have a lot of companies that start and the only difference between the ones that succeed and fail is that one figured out how to make money, because they were deep-in thinking through the revenue, price, and business model. I think that’s under-attended to generally. Steve Ballmer CEO Microsoft 2000 – 2014 Pricing power 23
  24. 24. Key success factor for the "Best“ companies: C-level involvement/guidance is top priority in pricing What is your top priority in pricing? Multiple responses possible Source: Global Pricing Study 2014 Innovation, value, and price management is a C-level objective and a crucial success factor at the "Best" companies… Its not so much about tools and methods but about a culture of monetization and an organization that reflects that Leadership & strategy: Clear directions, guidelines and owner-ship from C-level executives in pricing Organization: Clear pricing roles and responsibilities in middle management Skills: Improved sales skills and awareness Processes: Increased dedication to pricing Tools: Superior tools and methods Global Pricing Study 2014_Simon-Kucher & Partners 68% 34% 33% 25% 17% 39% 26% 29% 19% 17% Best Rest 24
  25. 25. The way forward: Pricing success factors Source: Simon-Kucher & Partners  Pro-active attitude to monetization; do not accept conventional wisdom that prices can only go in one direction  Avoid price only competition and price wars Monetization culture and mindset 1  Executives provide clear strategic guidance and make these objectives a top priority  Intense focus on customers and on value permeates corporate culture Innovation, value and price management as C-level issues 2  Innovation process fully integrates marketing and pricing throughout, from ideation right through to launch  ‘Making money’ cannot be an afterthought Continual focus on marketing and pricing 3 25
  26. 26. Top 10 pricing programs among subscription businesses Pricing Transformation  Use systematic process to identify opportunities to drive greater adoption, revenue, ARPU, profit  Quantify and prioritize business cases  Align on roadmap for tactical implementation & value capture Monetization/Pricing Strategy  Evaluate new potential business/pricing models, (esp. transition to SaaS)  Identify optimal pricing and product portfolio strategies  Evaluate competitive positioning, identify white spaces, prioritize target markets & channels Packaging & Pricing Optimization Maximize customer lifetime value with packaging & pricing by…  Driving cust. acquisition  Exploiting differences in customer needs & WTP*  Encouraging up- & cross-sell  Improving retention Mobile Strategy Determine how mobile best drives packaging & monetization strategy  Design mobile channel/ offerings and pricing to extract full lifetime value: on-board, upsell, retain  Minimize cannibalization of other revenue streams Demand Generation  Evaluate & improve effectiveness of promotions  Strengthen value messaging through better personalization & targeting  Enhance lead generation & prospecting processes Online Sales Dialog Drive conversion & upsell:  Facilitate product & needs discovery  Ease product selection  Create call to action  Encourage upsell & cross-sell  Utilize consumer psychology Retention & Churn Management  Identify key drivers of churn (predictive modeling)  Increase customer delight and engagement  Optimize save strategies and win-back offers  Assess needs & options for a loyalty program Sales Force Effectiveness  Improve value selling and negotiation skills  Enhance key account management & negotiation approach  Design effective incentives & peer pricing  Provide relevant pricing guidance for Sales Customer Segmentation  Determine differences in customer behaviors & needs and key drivers of willingness-to- pay  Classify distinct and actionable segments  Design packaging, pricing, & messaging to align with segments Pricing Process/ Perform. Measurement  Formalize best-in-class pricing processes  Ensure all key pricing activities have owners with clear accountability  Design performance measurement & tracking to improve visibility and decision making 26
  27. 27. Case Study: All customers don’t “think” alike! $10 item $200 item Fee Structure % Selecting 3.5% + $0.15 flat fee $0.50 Flat $ fee 5% Flat % fee Indifferent Respondents were presented with the following breakeven scenarios (all fee calculations come out to be the same): Source: Simon-Kucher project experience; numbers and client industry anonymized Fee Structure % Selecting 3.5% + $3 flat fee 5% Flat % fee $10.00 Flat $ fee Indifferent For smaller transactions, consumers preferred simplicity / transparency ($0.50); 1.00); For larger transactions, consumers preferred a the more most complex complex fee fee structure structure Project Example: Internet PPU 27
  28. 28. Case Study: The right structure is critical! 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Source: SKP project 2012 Approach Project Example: SaaS  Research showed that the entry package met large percentage of customers’ needs  As a result, we reduced value of entry package to better align with existing price point  New features were added and existing features shifted to premium tiers to justify higher prices Before re-design: May 2012 After re-design: August 2012 Plus (55%) - $39 Advantage (7%) $349 Plus (24%) - $39 Deluxe (32%) - $79 Deluxe (48%) - $99 (Price increase) Elite (12%) - $149 Elite (21%) - $199 (Price increase) 0% May August % of new subscribers New tier # of new subs 1,524 1,313 -14% Average MRR per $66 $124 88% new subscriber MRR from new subscribers $100K $162K 62% 28 Simon-Kucher Capabilities Briefing 12
  29. 29. Case Study: Anchoring can change price perception! Subscriptions: Pick the type of subscription you want to buy or renew. Options & results: Group 1 Option Price in US-$ % of people choosing Source: Dan Ariely, Predictably Irrational, New York: Harper Collins 2008, p. 1-6 option Economist.com subscription only $59 68% Print + economist.com subscription $125 32% Average revenue per subscriber $80.12 Options & results: Group 2 Option Price in US-$ % of people choosing option Economist.com subscription only $59 16% Print only subscription $125 0% Print + economist.com subscription $125 84% Average revenue per subscriber $114.44 68% 32% 16% 0% 84% 29
  30. 30. 30 Discussion / Q&A 30

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