What Apple and Netflix Understand About Optimal Subscription Pricing
By: Robbie K Baxter
Tags: Subscription, Business, Bundling, Pricing, Technology

What Apple and Netflix Understand About Optimal Subscription Pricing

What to keep in mind before setting a price for a recurring revenue bundle

Photo: NurPhoto/Getty Images

Last week, Apple announced Apple One, a new subscription service that will bundle its various existing digital subscriptions in three price tiers ranging from $14.95 to $29.95 a month. Microsoft, meanwhile, rolled out a subscription offering for its new Xbox consoles, allowing gamers to pay a monthly fee of $24.99 or $34.99 for a console and access to its Ultimate Game Pass rather than pay the $299.99 or $499.99 to own the console outright.

Right now there’s an explosion of products pivoting to subscription services, but pricing them requires just as much art as science. Here are 10 things that smart companies know about pricing subscriptions.

Keep it simple. New billing platforms and digital tools have opened up a range of possibilities when it comes to pricing. You can create multiple pricing tiers or layer in micropayments, onboarding fees, usage charges, extra services, and one-off purchases, just to name a few. But in smart subscription pricing, restraint is key. If your pricing gets too complex, your customers are going to worry that they might not choose what’s best for them, and they’ll need to spend a lot of time and effort making the decision. That makes it harder for them to relax and trust that you will anticipate and meet their needs on an ongoing basis. Tiers come later. According to data from Zuora and McKinsey, the most successful companies have one product or less per million dollars of revenue. In other words, when you’re just getting started, one subscription offer is enough. I’ve had clients come to me before they launch with complex pricing grids indicating multiple offerings optimized by usage, features, service level, and other elements to have something for everyone. You are much better off launching with a single subscription offer, optimized for a very specific group. Then, as you learn, you can layer in more benefits to attract and serve additional segments and maybe refine your pricing to include multiple tiers or another layer of pricing complexity, such as usage. If you start with multiple offerings, that risks confusing the market and distracting the team. Subscriptions can serve many functions for your business. Disney, Apple, Amazon, and Netflix all have streaming content subscriptions. On the surface, they might all look similar, but if you understand the business models of these companies, you’ll see that their streaming content subscriptions serve different purposes. For Netflix, the subscription is the core product and a primary source of revenue. For Apple, subscriptions are a way of deepening the customer’s engagement with Apple hardware, the App Store, and other parts of the Apple ecosystem. Disney’s subscription is a way to stay connected with fans across many channels, including TV, movies, and theme parks. And Amazon pretty much gives away its streaming content with Prime subscriptions as an added benefit to the headline offer of free two-day shipping. If your subscription is a marketing tool, make sure you consider its value as a marketing tool in addition to the direct revenue it drives. Think beyond attracting new subscribers. Price for engagement, expansion, and retention. Most of the time, when you’re pricing a product or a service, your primary goal is to get the customer to buy. But with a subscription, the moment of the transaction is only the starting point for revenue, not the finish line. You want to price in such a way that customers want to stay and maybe even expand the relationship by upgrading or buying additional services or bringing in their network. It doesn’t matter if your low introductory pricing attracts a lot of new subscribers if you can’t keep them for the long term. This is especially true if new subscribers are unprofitable in the short term — for example, if the acquisition costs or onboarding expenses are higher than the first-period payments. Your subscription’s value proposition has to go beyond price. Remember that anyone committing to paying on an ongoing basis expects at least a small discount for their loyalty. While savings alone might attract some early subscribers, it is an easily replicable strategy and doesn’t offer any unique or emotional benefit. If you launched your subscription with cost savings as the main value proposition, use that as a starting point, but explore other, more emotional and differentiated sources of value to layer in over time. Market research can take you only so far. Market research can tell you which offer someone might find more attractive or what offer they’re likely to click on, but it doesn’t provide insight on how frequently they’ll actually use the subscription or how long they’ll stay. Engagement and churn are key metrics for understanding the success of the subscription. Many organizations focus too much on the offer that will get a buyer to buy and not enough on what will get the right buyer to buy, stay, and recruit their friends and colleagues. Pricing by usage can work, but only in some circumstances. Early in my career, I advised a company that provided tools for market researchers. It had a single offering and a fixed price — something around $50 a month. Pretty quickly, Fortune 500 companies started using the subscription. These companies could afford to pay a lot more than $600 a year and were using the subscription to reach millions of people. The organization quickly realized that it wasn’t capturing its fair share of the value it was creating and adjusted its pricing to charge more based on usage. It eventually optimized pricing by the number of seats in the organization using the subscription, the number of people being reached using its tools, and by the features being used. Then the company added a layer of features around a corporate dashboard that could track and manage usage of the subscription across the enterprise. It learned and adapted quickly, but it would have been hard for the company to anticipate from the start exactly how the product would be used and how best to price it. For larger companies, and especially those in the B2B space, it can be useful to charge more to companies that are using the subscription more heavily, but on day one, that’s not the most important thing to focus on. Companies like Slack and Asana gain widespread adoption by making it easy and cheap for small teams to start using their product, before selling to the larger companies. Hiding the cancel button will cost you in the long term. I’ve heard many CFOs brag about increasing customer lifetime value (CLV, a key metric in subscription businesses) by adding complexity to the cancel sequence. By making it harder for customers to cancel their subscription, requiring a phone call to cancel, for example, or not letting subscribers keep their data, companies can indeed enjoy additional short-term revenue. However, hiding the cancel button reduces trust, causes customers to share their horror stories with friends and on social media, and makes it much less likely that a lapsed subscriber will ever return. Netflix, one of the most successful of all subscription businesses, has gone in the opposite direction. It not only encourages subscribers to “cancel anytime” but also doesn’t offer annual subscriptions, because that would be too binding. The company recently introduced a new policy of automatically canceling any subscription that hadn’t been accessed in a year or more — that is, if someone wasn’t getting value from their subscription for 12 months, Netflix doesn’t want to keep taking their money. More subscription services are also offering a pause feature, which allows subscribers to take a break from a subscription without losing their data or having to go through a complex setup process again. Evaluate the ROI of free. Some subscriptions offer a free trial. Others offer a free subscription with limited features alongside a full-featured paid subscription in what’s known as a freemium model. This doesn’t necessarily mean every subscription should have a free trial or free tier option. Consider whether there’s a role for free, and if so, what the return on the investment of free might be. If your biggest challenge is that people don’t understand the value you provide or don’t believe your offering is as good as you say, a small taste might dramatically increase conversion (a free trial). Or if the value to your paid subscribers increases with every new free subscriber, maybe because of content generated by the free subscribers or access to them, you might have a network effect that justifies a free offering. Especially with digital subscriptions, there is often a place for free in your pricing model. Don’t overlook it. Don’t copy someone else’s playbook. You can get great insights by studying how other organizations have incorporated subscription pricing into their business models. Amazon, Salesforce, Dollar Shave Club, and Peloton are just a few of the many organizations that benefit from recurring revenue. But there are very few metrics that work across companies, let alone across industries — each model is unique in terms of what you get with your subscription and what costs extra. Depending on the value you offer, the customers you serve, the other organizations trying to solve the same problem for your audience, and many other variables, you will come up with a unique structure to capture your fair share of the value your organization has created.

Subscription pricing should be easy for the buyer. They should be able to relax into a subscription, trusting that the organization will continue evolving the offering to help them achieve their goals and solve their problems on an ongoing basis. But that doesn’t mean it’s easy to develop a subscription pricing model. So, be thoughtful and experimental. Label your early offerings “beta,” and limit their usage, in case you need to change things as you learn. Above all, always focus on aligning the organization’s goals with those of the subscriber. If you do that, you’ll develop both the recurring revenue that makes your organization valuable and the insights that will help you deepen trusted customer relationships.