Introductory offer, bundling are important considerations in subscription pricing strategy

By Matt Lindsay

Mather Economics

Atlanta, Georgia, USA


Pricing strategy for digital and print products is top of mind for many news media companies.

We at Mather Economics would like to share 14 points on subscription pricing strategy, analytics, and tactics you should consider as you make decisions about these issues.

1. There are three pricing decisions to make with subscribers: acquisition offers, end-of-promotion transition to regular rates, and annual renewal increases. These three areas of a pricing strategy should be aligned to maximise overall lifetime value. The level of personalisation that is optimal increases as the customer moves from acquisition to renewal.

2. Pricing rule management is an essential part of pricing strategy execution. Pricing rules determine the eligibility of customers for price changes, constrain pricing actions by setting floors or ceilings, and guide customer service agent actions.

There are several factors at play when deciding on the most appropriate pricing strategy.
There are several factors at play when deciding on the most appropriate pricing strategy.

3. Pricing strategy and tactics should be dynamic and respond to changing market conditions and business objectives to maximise expected revenue. As demand for your product fluctuates due to seasonality, macroeconomic factors, or market conditions, the goals and tactics for each category of the pricing decision need to adjust in concert with each other.

4. Active management of customer rates is needed to maximise long-term expected revenue and operating margins. The complexity of rates within your subscriber base will naturally increase over time, even if you have standard acquisition offers, step-up rates, and renewal increases. Also, customers manipulate pricing and customer service policies to remain on introductory rates, or customers may be inadvertently overlooked for increases.

5. Customer surveys and other direct market research are better at estimating relative customer preferences across products, bundles, and features. They are less effective at estimating customer price elasticity. A/B and multi-variate testing are better at measuring price elasticity but are constrained by what can be tested in-market.

6. Econo-metric models are better at estimating price elasticity than machine-learning models due to their relative strength in measuring causality among variables, such as price changes and renewal propensity. Moreover, econo-metric models use economic theory as a guiding framework, which is helpful in the optimisation of pricing. Machine learning and AI models are often better at predicting purchase or stop propensity since they identify patterns in data that are not easily detected.

7. Increasing average rates through strategic renewal pricing actions is usually the best approach to increasing lifetime value for subscribers. Targeted renewal increases can significantly reduce price-related churn, which improves the revenue yield from pricing actions. Extending terms at lower rates for new subscribers can increase lifetime value, but testing is needed to optimise the price and term combinations.

8. Product bundling is an effective pricing tactic that entices customers to purchase more of your products together than they would separately, often improving retention.

9. Defining the right metrics is vital for optimising pricing strategies and tactics. Historical subscription metrics often used for advertising audience measurement are not ideal for subscription sales and marketing efforts, including pricing tests.

10. A/B and multi-variate testing are very effective at measuring price elasticity outside the range of historical prices and offers, where there is no data available for modeling. Sampling for target and control groups is an important factor in effective testing.

11. Strategically positioned prices for each product can steer more customers into the subscription product or bundle that is most profitable for publishers or aligns most closely with the publishers’ long-term goals.

12. The optimal introductory offer varies depending on the market for each product. Factors such as conversion rate, promotion period, rate growth, and retention are necessary for evaluating the effectiveness of introductory offers. We recommend using a two- or three-year lifetime value calculation for comparing acquisition offers.

13. How subscribers respond to price changes is a function of customer characteristics, the level of price increase, and the pricing action’s nature. The response to price changes is non-linear, with many customers reacting to the notification of the price change and not the increased amount. For this reason, a price increase should be significant enough to justify the risk of losing these marginal customers.

14. Engagement is not a good proxy for price elasticity. We have found that very engaged customers will have a larger response to a price change than moderately engaged customers. We recommend including non-engaged customers in price changes rather than excluding them to avoid “poking the bear.”

These topics are important to consider carefully as you develop a pricing strategy for your organisation.

About Matt Lindsay

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