There’s no question that the subscription economy is here to stay. However, balancing the competing requirements of acquiring, monetising and retaining customers comes with inherent trade-offs. Greg Harwood, director of pricing specialist Simon Kucher & Partners, explains how to avoid the pitfalls.
Pioneered by start-ups and backed by venture capital, the subscription model has penetrated a wide variety of industries from video streaming (Netflix, Hulu) and news (The Economist) to file sharing (Dropbox) and beauty (Birchbox). Even consumer giants such as Unilever are getting in on the action with their $1 billion investment in the Dollar Shave Club.
All subscription businesses face three goals in the pursuit of recurring revenue growth: the desire to acquire more customers, the desire to monetise customers through higher prices; and the desire to retain customers by reducing churn. Sounds like it should be easy. For example, businesses aiming to monetise through increased prices face the challenge of implementing these increases without suffering a drop-off in new customer acquisition rates or a rise in churn of their loyal customer base.
Today, Netflix provides a textbook example of a company that has evolved to successfully beat the subscription trade-off. However, it was not always such a subscription success story, and perfecting its pricing strategy has been a long journey. Back in 2011, Netflix restructured its pricing, unbundling streaming plans from the traditional DVD business and increasing the price of the combined offering from $9.99 to $15.98 a month. The public reaction was overwhelmingly negative. Netflix lost 800,000 subscribers in the third quarter of 2011 alone. Since then it has worked to systematically transition from a single streaming option to the multi-tier offering with which we are all familiar today.
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