Pricing Strategy: How To Win With Subscription Pricing Models

Your Pricing Strategy: How to win with subscription pricing models

@andrewsjoe

Joe Andrews, Sr. Director MarketingMatt Johnson, Managing

Partner @PricingGeek

1 The shift to recurring revenue

2

3

4

Pricing strategies to drive growth

How to achieve pricing power

Insights from global pricing study

Agenda

5 Q&A

© All content copyright of Zuora and Simon-Kucher and Partners, 2014

are demanding new consumption models

6.8 BILLION

80% OF CUSTOMERS

Potential subscribers on mobile, social, web

- The Economist 2014

WE NOW LIVE IN SUBSCRIPTION ECONOMY

They areinformed

They buytheir way

They areconnected

of customers are through the buying cycle before they

contact you

70% potential subscribers

on Mobile, Social, Web

6.8Bof customers

demand new consumption

models

The Economist 2014

80%

TODAY’S CUSTOMERS ARE IN CONTROL

personal real-timeimmediatefulfillment

on-going value

memorable services

THEY HAVE NEW EXPECTATIONS

Immediate fulfillment

Instant & continuous value

Personalized control

Multi-channel, any time, any device

Memorable customer moments

1

WINNERS ARE DELIVERINGTHE SUBSCRIPTION EXPERIENCE

2

3

4

5

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

Delivering the Subscription Experience requires a different approach:

Acquire

New customers

Increase

Value of your customer

Reduce

Churn

THREE LEVERS TO DRIVE SUBSCRIPTION GROWTH

9

Product world

Subscription world

vs.

10

Infinite pricing options

Ability to quickly iterate and evolveyour pricing strategy

It’s all about fast Time-To-Market

THE MOST IMPORTANT TOOL YOU HAVE IS PRICING AND PACKAGING

Company launchSingle productSimple monthly pricing

Revenue enhancementProduct upgradesBilling frequencies

Product expansionAdd-on productsProduct bundles

Pricing optimizationPricing tiersUsage + overagesA/B testing

International growthMultiple currenciesRegional pricing

Com

ple

xit

y

Business Maturity

INFINITE PRICING OPTIONS… THE CHALLENGE – WHERE TO FOCUS AND START?

www.simon-kucher.com

Where are we today and what next?

Pricing for subscription businesses

Matt Johnson

100 View St. Mountain View, CA 94041Tel. (650) 691-3315Fax (650) 641-4317

e-mail: [email protected]

Source: German manager-magazin Aug 2007 & 2011 / Institute für Management und Beratung; Survey among 264 top-managers; Maximum 500 points

Who we are: Simon-Kucher & Partners at a glance

Global presence since 1986

> 2,000 projects in last three years

Best consultancy in marketing and sales*

1 Simon-Kucher & Partners

2 Boston Consulting Group

3 McKinsey & Company

We were ranked #1 in last 2 surveys

27 offices worldwide 720 associates

Revenue 2013: £126m

AmsterdamBeijingBonnBostonBrusselsCologneCopenhagenDubaiFrankfurtIstanbulLondonLuxembourgMadridMilan

MunichNew York

ParisSan Francisco

Santiago de ChileSao PauloSingapore

SydneyTokyo

TorontoVienna

WarsawZurich

Internationally recognised experts

"world leader in giving advice to companies on how to price their

products"

"…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

Source: Simon-Kucher & Partners

What we do: Extensive experience with clients in the subscription economy

B2B SaaS Media & Telco

Transitioning to SaaS Consumer Internet

15

Total

Pharma, biotech/medtech

Consumer goods

Financial services

Automotive

Transport/logistics

65%

35%

Global Pricing Survey:A minority of companies achieve pricing power

* High pricing power is the ability of a company to fully/almost get the money it deserves for the value it deliversSource: Simon-Kucher & Partners Global Pricing Study

High pricing power*

Low pricing power

“Pricing Power” assessment

53%

47%

30%

27%

19%

47%

53%

70%

73%

81%

Only 35% are able to get the prices they deserve!

16

Global Pricing Survey:Pricing power has strong impact on profits

Source: Simon-Kucher & Partners Global Pricing Study 2012/2014

133

100

Average EBITDA of last three years (index)

Companies with high pricing power

All others

“Pricing power” increases profits by

33%

17

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

Source: Simon-Kucher Global Pricing Study 2014 (TIME n=80, All else n=1494)

How do Telecom, Internet, Media and Entertainment (TIME) rate on the “Warren Scale”?

Average TIME

66%

37%

16%

45%

Net price changes in the past year

Price increase

Price decrease

TIMEcompanies

19

Minimum

Maximum

Average Cause or symptom?

Why are TIME companies unable to raise prices?

Have you experienced higher price pressure?

Is your company currently engaged in a price war?

71%

89%

92%

85%

TIME

TIME #1 industry for intentionally starting price wars!

46%

64%

80%

60%

TIME

20

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

The real reason is a culture and acceptance that prices simply ‘go down in our industry’

18%

12%

11%

5%

0%

-4%

-5%

-5%

-6%

-14%

Reasons for price pressure (TIME compared to average)

21

*Top 5 options to escape oppressive market conditions, Multiple responses possibleSource: Global Pricing Study 2014

What can be done? Launch new products and change customer perceptions!

33%

35%

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

* Less than five years oldSource: Global Pricing Study 2014

Prerequisite: Think about monetization from day one

Global Pricing Study 2014_Simon-Kucher & Partners

20%

40%

Share of new products* that meet profit targets

+100%

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 BallmerCEO Microsoft 2000 – 2014

Pricing power

23

Multiple responses possibleSource: Global Pricing Study 2014

Key success factor for the "Best“ companies:C-level involvement/guidance is top priority in pricing

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

What is your top priority in pricing?

68%

34%

33%

25%

17%

39%

26%

29%

19%

17%

Rest Best

24

Source: Simon-Kucher & Partners

The way forward: Pricing success factors

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

mindset1

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 pricing3

25

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

Top 10 pricing programs among subscription businesses

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

Source: Simon-Kucher project experience; numbers and client industry anonymized

Case Study: All customers don’t “think” alike!

Respondents were presented with the following breakeven scenarios (all fee calculations come out to be the same):

Fee Structure % Selecting

3.5% + $0.15 flat fee

$0.50Flat $ fee

5%Flat % fee

Indifferent

Fee Structure % Selecting

3.5% + $3 flat fee

5%Flat % fee

$10.00Flat $ fee

Indifferent

$10 item $200 item

For smaller transactions, consumers preferred simplicity / transparency ($1.00); For larger transactions, consumers preferred the most complex fee structure

For smaller transactions, consumers preferred simplicity / transparency ($0.50); For larger transactions, consumers preferred a more complex fee structure

Project Example:

Internet PPU

27

Source: SKP project 2012

Approach

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

May August0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Plus (55%) - $39

Plus (24%) - $39

Deluxe (32%) - $79

Deluxe (48%) - $99

(Price increase)

Elite (12%) - $149

Elite (21%) - $199

(Price increase)

Advantage (7%) $349

% of new subscribers New

tier

# of new subs 1,524 1,313 -14%

Average MRR per new subscriber

$66 $124 88%

MRR from new subscribers $100K $162K 62%

Simon-Kucher Capabilities Briefing 12

Case Study: The right structure is critical!Project

Example: SaaS

28

Case Study: Anchoring can change price perception!

Source: Dan Ariely, Predictably Irrational, New York: Harper Collins 2008, p. 1-6

Options & results: Group 1

Option Price in US-$

% of people choosing

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

Subscriptions: Pick the type of subscription you want to buy or renew.

Avg. revenue per

subscriber: +43%

68%

32%

16%

0%

84%

29

30

Discussion / Q&A

30