In our previous post in this series, we discussed the importance of reducing the friction that occurs during the subscriber lifecycle in order to promote and support continued revenue growth. We focused on free trials as a way to reduce sign-up friction in that post.
But friction at sign-up is only one touch-point in the subscriber lifecycle. In order to extend the lifetime of your subscribers, you must look for and reduce points of friction throughout their entire lifecycle, from engagement through retention.
In light of Netflix’s recently announced pricing changes last month, this seems a good opportunity to talk about price increases as a point of friction.
When we talk about pricing changes, we are referring specifically to:
An increase in the price of an existing plan or package
A decrease in what is included in the plan or package, while the price remains the same
In both of the above scenarios, the cost for a product or service has increased relative to the subscriber’s perceived value of that product or service.
For subscription businesses, developing a strong relationship with subscribers is one key to maintaining loyalty and, thus, a higher lifetime value. A subscription business must ensure that it is providing value, in particular, value that exceeds the price, at least in the subscribers’ perception if not in fact. Indeed, we think of this as the ‘holy grail’ of subscription commerce. If at any point, a subscriber comes to believe that the balance in that relationship has shifted and the value no longer exceeds the price, this can introduce a point of friction, which can result in churn.
On top of that, competition in industries utilizing the subscription model is fierce and is only intensifying. If your subscriber perceives they can get the same thing for a lower price (or a different price structure that has the same effect) they will do so.
Therefore, it’s critical for a subscription business to handle any change to the price of its existing subscriptions in a manner that preserves trust and which maintains the balance between the subscriber’s perceived value and the cost of the subscription.
When your business decides to make a pricing change (and yes, we are saying “when” rather than “If” because you should be iterating on your pricing strategy as your product or service evolves), the following are a few best practices to keep in mind.
Study customer motivation
Study and ensure you understand the elements of your product or service that your subscribers value. What elements are core to subscriber retention, and which elements are “nice to have”? This research will help guide your decision on which plans or items you raise prices on and which you preserve as-is.
Communication is key
Notify your subscribers well in advance of any price increases. Once the changes are implemented, ensure that you SHOW subscribers the value of the increase or other pricing changes: what are they getting out of it? Why are you doing it? Be honest to maintain trust with your subscribers.
Consider price cuts or other incentives for longer contracts
Depending upon your goals for the price changes—which should be well defined before considering any changes—you might be able to get creative with offering price increases AND decreases as the same time. In particular, if you raise prices on your monthly plan(s), consider offering a yearly plan that offers a price cut incentive in exchange for that year-long retention. The subscriber gets a deal on the product, and you get a longer commitment and more opportunity to upsell your subscriber.
Make small, frequent changes
Are there products your subscribers no longer purchase at full price because they know you will likely discount those products shortly thereafter? If this is the case, then you’ve conditioned your subscribers’ purchasing behavior by offering discounts too frequently. This same principle of conditioning can also be applied to price increases. If you make smaller, iterative price changes, your subscribers are a lot less likely to balk at them, and you provide yourself more flexibility to try out various approaches and evaluate their impact.
In order to appropriately evaluate the impact of your pricing changes, you need to track certain key performance indicators. This will be the topic of our next post in this series.