As cost accountants will tell you, determining the real cost is not trivial. More importantly, deciding on the price is so much more difficult because, in addition to the physical factors of cost and profit, price is subject to psychological factors, some of which are out of your company’s control. The best companies can do to have control over these psychological factors is to do a good job of branding. And to get the branding right, companies have to know how to develop the right underlying corporate image and positioning strategies.
In short, creating a brand image of the product that is impossible, or extremely difficult, to copy is the key to having control over your pricing strategies.
What is subscription pricing?
In the subscription-based pricing model, customers pay on a regular basis for a service or product. Subscription pricing is different than pricing for traditional products, as pricing is often based on the length of the subscription, making longer subscriptions the cheapest options.
Why companies go wrong about subscription pricing?
Deciding how much to charge your customers shouldn't be taken lightly, and yet many companies simply don't give it enough thought. In fact, companies spend an average of only ten hours each year on their pricing.
This happens for a number of reasons, such as pressure to acquire new customers instead of optimizing the value of those they already have, a lack of knowledge on how to price, failure to invest in collecting customer data, and many more.
But even if you spend double that amount of time on your pricing strategy, if you're not also avoiding the following mistakes, you could be charging less than you should.
How do you determine value and price?
There’s no way around it. You have to talk to customers and do some research to get accurate pricing. Patrick Campbell, CEO of Price Intelligently, put it well in a GrowthHackers AMA:
You should not be afraid to talk to your customer about pricing. It’s not a secret you’re going to charge them at some point, and acting like it is a secret is doing you and the customer a disservice, because they need you to stay in business if they’re going to get long term value out of the business.
The other reason it’s so important is that the ONLY data source that’s going to tell you what your value is, is your customer. No one else, no formula, no workaround, is going to get you to this answer, so just go head first and ask them.
However, you can’t just ask your customer, “What would you like to pay for this?” (Well, you could, but the Pay What You Want strategy is a whole other article.) Instead, a variety of research techniques have been developed and used over the years. Here are four popular ones:
- Gabor-Granger technique
- Van Westendorp Price Sensitivity Meter
- Brand Price Trade-off
- Conjoint Analysis and Discrete Choice Analysis.
Ryan Farley from LawnStarter mentioned that getting on the phone with customers and gauging reactions to prices worked well in the beginning:
I’ve found it best to do pricing experiments over the phone—the qualitative feedback you get can be just as valuable (if not more) than an A/B test.
Trying to sell someone on a premium package at a higher rate, then hearing “that sounds pretty reasonable” or “you’re out of your mind for trying to charge that much” is super valuable, especially when combined with all the other qualifying questions you ask.
Sure, these phone sales cost time and money. But it’s an example of doing things that don’t scale to figure out what does.
That said, if you’re in an established market, these four techniques are popular and effective:
Gabor-Granger Technique
The Gabor-Granger Technique is a simple technique based on asking people the likelihood of their purchasing a product at different prices.
To simplify it, the technique involves asking a series of questions like, “Would you buy [product] at [price]?” The price then goes up or down depending on the response to the first question. The series continues 2–3 more times, until the consumer won’t go higher or lower.
Use this technique to figure out the maximum price people would pay and to see the optimal price based on the number of people willing to purchase, as well as the maximum revenue.
Van Westendorp Price Sensitivity Meter
In the Van Westendorp Price Sensitivity Meter, respondents are asked four questions:
At what price would you consider the product/service to be priced so low that you feel that the quality can’t be very good?
At what price would you consider this product/service to be a bargain—a great buy for the money?
At what price would you say this product/service is starting to get expensive—it’s not out of the question, but you’d have to give some thought to buying it?
At what price would you consider the product/service to be so expensive that you would not consider buying it?
In this way, it’s more indirect and can determine price elasticity as well as an accurate range of effective pricing for a product.
According to GreenBook, this strategy is often used during new product development, and can help determine which pricing strategy is best:
Whether a client is contemplating an aggressive entry price strategy or a premium skimming approach to price, the van Westendorp PSA can help determine which strategy is best. Established brands will use the PSA model to guide pricing for re-positioning or other pricing decisions, often as input to a test market.
Brand Price Trade-off
Brand Price Trade-off is a statistical technique to measure your relative “brand value” or “brand equity.” Basically, it does this by modelling the relationships between your brand and the price it commands relative to other brands and the prices they command.
More than other techniques here, it answers how much your market is willing to pay for your brand in relation to similar products from other competitors—which makes this a competition-based pricing technique.
According to B2B International, “It is suited to categories where products and services are relatively similar to each other, and where brand is a strong determining factor behind decision-making.”
To reiterate, use this is product categories with little differentiation and where brands make a huge impact on pricing.
Conjoint Analysis and Discrete Choice Analysis
Conjoint analysis is a statistical technique used in market research to determine how people value different attributes (e.g., feature, function, benefits) that make up an individual product or service.
The discrete Choice analysis is similar. The difference is that in conjoint analysis, respondents evaluate the product configurations independently of each other, whereas with discrete choice analysis, they consider the options simultaneously.
The purpose of both is to “yield a measure of the relative importance of each attribute, and a measure of the strength of influence of each level of each attribute.”
This is how GreenBook explains it:
Perhaps the most commonly-performed simulation today is to calculate an attractiveness rating for each of all possible product configurations, and then sort the configurations by their attractiveness ratings. This allows us to identify the most preferred configuration (of all possible). In addition, if price is one of the attributes, and cost information is available, the most profitable combination of features can be identified.
These techniques have wider applications than just pricing but can nonetheless determine the values of certain product attributes and inform pricing.
Subscription pricing plan tiers
Nathan Barry described a huge mistake he almost made—having “only one price for your product.”
As he explained, you should price based on value, but the value derived by two sets of customers can be totally different. On that same note, he relates the study by about beer prices with different tiers.
In the study, researchers first offered participants two beers: premium beer for $2.50 and a bargain beer for $1.80. Roughly 80% chose the more expensive beer.
Next, a third beer was introduced—a super-bargain beer for $1.60. Now, 80% bought the $1.80 beer and the rest the $2.50 beer. Nobody bought the cheapest option.
In that case, the seller actually lost revenue through bracketing because they bracketed down the price.
However, the third time, they removed the $1.60 beer and replaced it with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number the $1.80 beer, and around 10% opted for the most expensive $3.40 beer.
Some people will always buy the most expensive option, no matter the price.
A glance at the Netflix business model
Netflix is changing the way we consume traditional media. From series like Stranger Things, Narcos and Black Mirror Netflix have been able to become a titan of the media industry, with more than a hundred and fifty thousand members across the globe.
With three simple subscription plans (basic, standard and premium), Netflix has been able to become a multi-billion-dollar unicorn with more than a hundred fifty billion at the time of this writing.
Business segments
The business segments are the are of the business that has a different financial logic and thus requires a separated strategy.
As of 2017 Netflix revenues were over $11 billion, with a staggering growth compared to just 2013, when the revenues passed $4 billion.
If we look at the global picture, you can see how Netflix has more than 117K subscribers worldwide.
The company has three business segments:
Domestic streaming: revenues from monthly membership fees for services consisting solely of streaming content to our members in the United States.
International streaming: revenues from monthly membership fees for services consisting solely of streaming content to our members outside the United States and Domestic DVD: revenues from monthly membership fees for services consisting solely of DVD-by-mail
Netflix Other competitors
Netflix isn’t the only streaming company now; it has to compete with other services available on the internet like Amazon Prime, Hotstar, Hulu etc. This increases the marketing expenditure for Netflix in order to stay at the top.
Marketing expenditures primarily include affiliate payments, advertising, and the first-month-free account for every new customer.
How does Netflix work?
Netflix uses a Content Delivery Network or CDN to transmit and store TV shows and movies. CDN solves a problem of higher latency and bottleneck by utilizing multiple servers to cover many geographic areas of the world.
This enables us to watch online content without slow buffering at the ease of our home. Netflix is gaining popularity because of the following four elements
This enables us to watch online content without slow buffering at the ease of our home. Netflix is gaining popularity because of the following four elements
• Fixed Reasonable Price
• Compatibility
• Original Quality content
• A huge amount of database for movies and TV shows
Netflix has some traditional business actors worried at a specified point. The way it’s changing our entertainment industry and TV, People moved from linear TV (in which they just watch what is streaming) to On-demand movies/Tv Shows.
Netflix brought together many creators and distributors together on the same platform and finally, with the release of original movies available on the day of release, Netflix started turning movie theatre businesses against it.
Netflix has some traditional business actors worried at a specified point. The way it’s changing our entertainment industry and TV, People moved from linear TV (in which they just watch what is streaming) to On-demand movies/Tv Shows.
Netflix brought together many creators and distributors together on the same platform and finally, with the release of original movies available on the day of release, Netflix started turning movie theatre businesses against it.
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