The Economics Of Subscription Prices

Netflix Canada announced a price hike to its platform and it’s a pretty hefty one.

A whole three dollars.

Jumping from the traditional $10 bucks a month, the regular Canadian consumer will have to pay $13 for the same service and an additional three if they want the upgraded version.

The price hikes are still substantial to most people, but it’s still the cheapest on the market. The other competitor in Canada is Bell Aliant which charges $20 a month for their video streaming service. Other competitors are joining in as well, however, they have yet to build a product for that. We won’t see those until next year.

But it’s still worth understanding these pricing structures as entrepreneurs as more and more companies opt for subscription-based pricing. Furthermore, if you ask some of those CEOs of those companies specific questions around pricing, you’ll get mixed answers.

Ask about how price controls demand of a product and each executive should be able to answer clearly.

Ask them about how pricing affects how consumers consume their product specifically and you’ll be hard pressed to get an answer. That or you’ll get a half-assed one.

In the end, most managers never consider how much people will consume in their pricing. It’s a massive oversight in cost.

Of course in startups, it’s hard to figure out an appropriate price if you’re launching something. But it’s in those situations where it’s important to establish some groundwork. Not to mention being flexible with pricing as you get actual data.

So what price is the most appropriate?

And how should you go about price hikes and price adjustments for your company?

The Psychology Of Consumption And Pricing

The answers aren’t that simple.

First of all, consumption is an important part of a product or service. Consumption is behind peoples attitude of returning a product or asking for a refund or cancelling a subscription. Furthermore, consumption is behind peoples attitude of being a loyal and dedicated customer to you too.

And the best way to summarize the consumption relationship with people is this:

The more someone uses your product or service, the more likely they’ll repeatedly buy it.

We know this because there has been extensive research proving that higher consumption equals higher sales. In one study, researchers ran tests for people who went to the gym. Those who worked out four times a week were more likely to renew month after month compared to those who worked out only once per week.

Some of the big reasons for that is because the more people go, the more the company has to build a relationship with that customer. Building relationships is key to any business, especially when companies are modelling after subscription-based products or services where numbers count.

But that formula can get a little wonky when we consider price psychology.

And it’s in this instance where a lot of companies screw up on.

The big reason for that is that companies have worked hard in masking their actuals costs. They do this through a variety of pricing practices such as bundles, advance sales, and season tickets or passes.

And that can harm companies, but especially with subscription-based stuff.

Because of the sunk-cost effect:

A consumer will use a product until they get to the point where they’ve gotten their monies worth.

They do this in order to avoid the feeling that they may have wasted their money.

And while subscription-based products have better means of retaining a customer (i.e. the constant reminder to pay every month versus a one-time payment), what you set the price to is still critical.

You want to make sure people use your product enough that they get their monies worth but also use it enough to continue buying.

And that becomes harder if you’re masking costs and using promotions all the time. That’s because discounts and lower prices reduce pressure from buyers to use your products or services. So companies will find that while their sales will increase in one month from those efforts, they’ll get massive drops in the following months.

On top of this, their method of payment can be a factor as well. People who pay using cash see the physical money going away and thus feel more financial pain. On the other hand, using a credit card or debit card is easier as you don’t really see the transaction. Merely a few presses of buttons, tapping or a signature. This also affects peoples commitment to consumption.

So How Should You Price?

I won’t be giving you precise figures but based on what we know right now there are some key things to keep in mind.

First, you want to make sure that you are timing payments properly. Research suggests that people are more committed to something after every payment. That’s all because of the sunk-cost effect.

Second, use psychology to link payments to benefits. In the example of price bundling — the practice of lumping everything into one price — instead opt for unbundling prices. In other words, list every item and highlight the prices for each product or service. That way people know how much they’re paying for each one and know exactly what they’re getting.

Thirdly, the price needs to be balanced. What I mean by this is that it’s high enough that people will use the product or service enough that they feel they’ve gotten their monies worth but also enough that they’ll continue using it in the month after. You can also use this to keep in mind when hiking prices.

Pricing Matters

This is an age-old conundrum in the business world and managers and executives have spent much time thinking about attracting customers. But all of that is half the battle. In the end, retaining customers is more important and the best way I can convey that is through an example one of my business teachers gave long ago:

Imagine that you’re a grocery store and you lost a few regular customers to a competitive brand. Tell me how much you think you’ve lost in sales. Many of you would think you only lost the one sale to that competitive brand right? Wrong. You’d have lost that sale, but you’ll also be losing every subsequent sale from that customer every time they pick your competition over your store.

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Entrepreneur, positive-minded. I used to say a lot, now I do a lot. Documenting my growth. Support me on Patreon: http://bit.ly/2pIEPFR

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