A friend recently asked me what pricing skills I thought they should look for as they transition from a traditional business to a subscription.
There are two types of pricing skills, quantitative and qualitative. Qualitative pricing skills focus on how buyers use price to make decisions and how they perceive the value of the product. Quantitative skills focus on metrics like win-loss statistics and scatterplots of price dispersion. Great pricing people for any product type have both sets of skills.
The biggest difference between subscription and traditional businesses is that non-subscription businesses focus almost exclusively on winning new customers. This makes sense because customers regularly make new purchase decisions. In subscription businesses, managers must also focus on keeping and growing current customers. It’s a complete mind shift.
From a pricing perspective, for quantitative skills, the metrics change completely. Lifetime Value (LTV) likely becomes one of the most important metrics. Customer Acquisition Costs (CAC) also drive key decisions.
For the qualitative skills, pricing and product teams still have to understand the buyers’ journey and how they develop their perception of value. But in subscriptions, they now must understand the customers’ experience after the purchase and how buyers learn the real value of the subscription. Customers who don’t get value will likely churn. One interesting insight is customers buy based on perceived value, but they stay or upgrade based on actual value.
As to packaging, the goals are very different. Both subscription and traditional businesses should be familiar with good, better, best (GBB) plus options, but the purposes are different. Non-subscription businesses use GBB to influence the buyers’ decisions. Most buyers are uncertain and afraid to make a mistake, so they buy the one in the middle. The Good product captures very price-sensitive buyers, and the best captures more from people who are not price-sensitive. In subscription businesses, GBB is used as a tool for expansion. The goal is to get a buyer to buy into the platform with the free or good package and, over time, move them up to the better or best. Again, it’s a mindset shift.
The pricing and packaging decisions are crucial for the success of any product. The key difference is traditional businesses typically only care about winning new customers. In subscription-based companies, keeping and growing customers are equally if not more important. Pricing and packaging decision must be made considering the entire business model.
What do you see as the different pricing and packaging skills necessary for these two business models?
Now, go make an impact!
