consumer...Time Warner Cable Software Adobe Microsoft Media New York Times Wall Street Journal Economist Streaming Spotify Netflix Hulu Subscriptions for Consumer Packaged Goods (CPG)

Tips for optimizing your subscription business at all four stages of the customer journey: Attract, Convert, Upsell and Retain

Succeeding in non- traditional environments: Key considerations for CPG and retail companies launch-ing subscription offerings

and more...

Meetup Strategy Director Brian Lafayette discusses the internet network’s learnings, challenges and experiments with optimizing their sub-scription model

Inside this Issue

Spring 2016 – Volume 3, Issue 1

Perspectives on the consumer industry by Simon-Kucher & Partners

consumer insights

Winning in the subscription economy

Simon-Kucher & Partners Consumer Insights | Spring 2016

Simon-Kucher & Partners Consumer Insights | Spring 2016 3

Contents

Contributors

4 WHAT’S HOT

5 PARTNER COLUMN WINNING IN THE SUBSCRIPTION ECONOMY – FROM TRANSACTIONS TO LOYALTY

7 EXECUTIVE PERSPECTIVE INTERVIEW WITH MEETUP.COM STRATEGY DIRECTOR BRIAN LAFAYETTE

10 GETTING SUBSCRIPTION RIGHT: OPTIMIZING YOUR BUSINESS MODEL ACROSS ALL STAGES OF THE CUSTOMER JOURNEY

14 ASK THE EXPERT BEST PRACTICES IN SUBSCRIPTION PRICING

16 PROJECT SPOTLIGHT

17 3 KEY THINGS TO CONSIDER BEFORE LAUNCHING A SUBSCRIPTION-BASED PRICING MODEL

20 ABOUT SIMON-KUCHER

Editor-in-Chief ELLEN KAN

Editors KYLE POYAR EVAN FERBER

Contributors JOSHUA BLOOM SUSAN LEE VINCENT DUONG NATASHA PANCHAL

Graphics GENEVIEVE SOLOMON BERNICE COUGHLIN

Please send inquiries and comments to: [email protected] Visit our website at www.simon-kucher.com


Wha

t’sw

hat’sHOT

UtilitiesComcast

XfinityTime Warner Cable

SoftwareAdobeMicrosoft

MediaNew York TimesWall Street JournalEconomist

StreamingSpotifyNetflixHulu

Subscriptions for Consumer Packaged Goods (CPG) are undeniably on the rise. In a 2015 report, statista reported CPGs as the second fast growing source of digital commerce spending in the U.S. at 21% Y.O.Y growth1, falling behind to traditional digital content & subscriptions. Subscriptions to product focused companies, such as Dollar Shave Club or NatureBox, are not the only areas of growth. Retail subscriptions are on a fast track as well with companies like Amazon introducing Amazon Pantry and Dash, and competitors,like Target, following suit with subscription box services of theirown. These names may only be the beginning of what consumers will soon be subscribing to…

FOUNDATION 1980s

KITCHEN (remodel) 1990s LIVING ROOM 1990s

UPPER LEVEL 2000s

ADDITION 2010s

Subscription in the Home: An evolving landscape

leave space for bottom margin

1 “E-commerce in the United States.” Statista, Nov.2015


Today’s consumers are changing in a myriad of ways: how they live, how they learn, how they com-municate, how they buy… the list goes on and on. In the past, consumers had more of a transactional association with brands and were kept at a distance. Now, aided by technological advances, they expect a closer relationship built on mutual communication and trust earned over time.

Changing consumer expectations create new opportunities for companies to price and sell

their offerings. Increasingly, it means introducing new subscription or membership pricing options as an alternative to traditional pay-per-use pricing. We see this playing out across a host of industries span-ning CPG, music, digital media, software and more.

As subscription expert Joshua Bloom explains in our “Ask the Expert Q&A”, companies are pivoting towards subscriptions for both reactive and proac-tive reasons. On the reactive side, they are respond-ing to new or disruptive competitors who’ve used a subscription model to gain a foothold in the market. On the proactive side, they’ve noticed that Wall Street values subscription businesses at higher multiples

Winning in the subscription economy – from transactions to loyalty

Susan Lee is a Partner in the Boston office of Simon-Kucher & Partners, regarded as the world’s leading pricing consulting firm. She is a core member of the firm’s global consumer and retail practice. Her comments have appeared in publications such as TIME, Forbes, The Wall Street Journal and Internet Retailer.

Subscription pricing helps increase customer value and loyalty by bringing companies closer to their customers

““

partner column

because such businesses have the potential to both reduce acquisition costs (CAC) and improve customer lifetime value (CLTV).

A subscription pricing model means many differ-ent things for different industries and scenarios. For some companies there’s nothing intrinsic to the value proposition of a subscription and they use it primarily to compete on price. Amazon Subscribe & Save, for instance, started because Amazon wanted to drive stickiness on staple goods and get consumers to switch from buying in a grocery store or Walmart.

At its best subscription pricing helps increase cus-tomer value and loyalty by bringing companies closer to their customers. It enables more opportu-


nities to learn about customers’ needs, usage and behavior and then serve up more personalized and curated experiences. This has allowed Spotify to increase the size of the music industry pie, driving much higher content spend from younger consum-ers than previously thought possible.

In their article “Getting subscription right”, Evan Ferber and Kyle Poyar will help you learn from suc-cessful subscription businesses how to reduce your CAC and maximize CLTV. They walk step by step from attracting more prospects, to converting them into paying subscribers, upselling or cross-selling them and then convincing them to stick around.

We’re also excited to share an executive perspective interview with Brian Lafayette, Strategy Director at MeetUp, where he discusses how MeetUp has been optimizing their subscription business. He also offers his perspective on the operational challenges of suc-cessfully managing a subscription business over time.

However, subscription pricing is not a panacea and is not for everyone. eBook subscription services like Oyster have struggled to gain traction, in stark con-trast to entertainment subscriptions in other catego-ries like music and video. To learn whether subscrip-tions are right for your business, check out Vincent Duong’s article “3 things to consider before launching a subscription-based pricing model.” His article helps you think through whether subscriptions will help you better meet consumer needs, achieve your business objectives and leverage analytics capabilities.

Every single business should take a hard look at whether subscriptions are right for them and will allow them to better serve the changing consumer. Even if it is right, there’s a lot of complexity in mak-ing it work – don’t fall back to only using it for lower prices and discounting. ◊

Susan Lee can be reached at [email protected]


executive perspectiveInterview with Brian Lafayette Strategy Director at Meetup

Meetup is the world’s largest network of local groups. Meetup makes it easy for anyone to organize a local group or find one of the thousands already meeting up face-to-face. Meetup’s mission is to revitalize local com-munity and help people around the world self-organize.

Brian Lafayette is the Strategy Director at Meetup, where he formulates, tests and recommends strategies that help Meetup grow faster. Prior to joining Meetup, Brian spent four years as a strategy and marketing consultant.

Simon-Kucher: How would you describe Meetup for someone who’s never heard of it?

BL: Meetup is an app and website that allows neigh-bors to connect around common interests and get together to learn, do or share something. People create groups, then we help them find like-minded people to join their groups, then they meet up. We now have 24 million members and 220,000 groups across 100+ countries.

Simon-Kucher: How does Meetup make money?

BL: We make money whenever someone starts a new group. All 220,000 of our group organizers pay an auto-renewing subscription fee, which averages about $15 per month.

We also launched a new product this year called Meetup Pro. This allows businesses and organiza-tions to sponsor and create networks of Meetups for their user communities. For instance, Salesforce.com has 200+ Meetup groups around the world for their users to meet other local Salesforce.com users, administrators, developers and vendors.


Simon-Kucher: Roughly how much of your revenue comes from subscriptions?

BL: Today over 90% comes from subscriptions. We have some interesting transaction-based revenue streams that are nascent right now, too. For instance, if you are a group organizer and you want to charge for your event, we collect a small transaction fee for pro-cessing the payments.

Simon-Kucher: When did you start charging and what led you to choose a subscription model?

BL: We started charging back in 2005. This was how similar internet companies were monetizing at the time, for example Classmates.com. We believed that it was a good way to encourage sustainable groups and for our success to be aligned with the success of our orga-nizers. We need to provide a good experience for our organizers to keep paying us, and they need to keep providing a good experience for their members. We did not want to be known for ‘one and done’ events.

Simon-Kucher: What do you like and dislike about subscription pricing?

BL: The benefits are that it is predictable revenue and it is pretty safe. A drawback, though, is that you don’t have the same potential for large transactions or big deals when you deliver a lot of value. One reason why I’m interested in Meetup Pro is because it is an opportunity for businesses to harness the power of our network. Businesses may have the budget and appe-tite for more transactional or one-off services on top of their subscriptions.

Simon-Kucher: What are some of the operational challenges in running a subscription business?

BL: If you want to change the price or any of the pack-aging, you’ve got hundreds of thousands of people all on existing plans and you have to move them to some-thing new. That is no easy feat. Or, if you test plans for some new customers, then you accrue a debt of

there being customers on dozens of test plans going back 10+ years. The legacy transactions can continue to weigh you down.

There are special challenges on mobile, as well, in doing in-app subscriptions. Many companies have struggled with this – not just because Apple takes a big cut of the revenue, but also because they control the subscription. You can’t refund subscriptions for your own customers; they have to talk to Apple. You cede your autonomy in order to run a subscription business on apps.

We need to provide a good experience for our organizers to keep paying us, and they need to keep providing a good experience for their members. We did not want to be known for ‘one and done’ events

““


cept of inviting didn’t exist on Meetup until this year. We want to improve engagement by creating a more personalized experience and having every email or no-tification be something that the member actually wants.

Right now we’re fascinated with the idea of how do we make it really seamless to create a group on mobile with minimal or no typing. A big change for us recently was incorporating in-app purchases in our iOS app. Last year 7% of our group creation was on a mobile device and now it is 15%.

Finally, we want to increase retention by improving the mechanics of the engine. For example, we found that a large percentage of our churn was just from credit card expiration and so we purchased a service that updates credit cards. This added five points to our retention. We can also do more to find replacements when a group organizer wants to cancel since we have a unique base of group members that we can tap into.

Simon-Kucher: How much opportunity does Meetup have to continue to grow?

BL: It’s pretty enormous. There’s so much we haven’t done yet that we want to do. At the simplest level, we have 24 million people on the platform – there’s no reason we shouldn’t have 200 million. So there’s a lot of platform growth opportunity. We also have a big opportunity on mobile and driving the creation of new groups. ◊

Simon-Kucher: How have you optimized your sub-scription packaging & pricing over time?

BL: We’re always experimenting and have done quite a bit of research and testing. First, we surveyed cus-tomers to understand willingness to pay and what features drive value. The surveys identified key price thresholds of $10 and $15, where we had been charg-ing everyone $12. This year we started offering a new lower tier package to get below the $10 threshold. We also moved up the price of the higher tier package by 25% and saw only marginal drop-off in demand for it.

Interestingly, when we launched it, we saw just as much impact from how we displayed the packages, where we set the default and how we positioned them than in the packages and prices themselves. In the winning test, we simplified the sign-up steps and high-lighted the most popular plan, which improved conver-sion and drove customers to higher tier packages.

Simon-Kucher: How do you manage the conflicting goals of growing revenue versus volume?

BL: In most meetings I hear we want both. We’re not operating in a zero sum market, though, and so we be-lieve that most of our growth is going to come from vol-ume and getting more people on the platform. We are willing to take a short-term hit on revenue if it means greater volume growth and greater revenue in the mid to long term. If something is good for volume, but it would continually hurt revenue even in the long run, that would be a tough sell.

Simon-Kucher: What else are you working on to help Meetup continue to grow?

BL: Last year we outlined a flywheel for how Meetup grows. We have teams around each element of the fly-wheel – membership, engagement, group formation and retention – to get them to accelerate faster.

We want to improve our viral growth coefficient by get-ting our members to invite more members. The con-


Subscription business models are in no way new to the consumer tech and media spaces. Previous and current subscription businesses range from magazines to phone service to streaming media. These businesses are highly valued given their recurring revenue streams and long-lasting customer relationships. Consequently, many venture capital and private equity firms evaluate subscription businesses based on the ratio between customer lifetime value and customer acquisition costs.

Optimizing a subscription business can be defined as maximizing that ratio by achieving both a high customer lifetime value and low acquisition costs. It’s all about building a solid base of prospects and converting them into subscribers by developing an optimal strategy at each of the four stages of the customer journey: Attract, Convert, Upsell and Retain (Figure A). In the rest of the article, we will share key considerations and best practices for each of these stages based on our experience helping clients to optimize their subscription businesses over the last 30 years – insights that are applicable both for traditional and non-traditional subscription industries.

Getting subscription right: Optimizing your business model for each stage of the customer journeyEvan Ferber, Consultant at Simon-Kucher Boston and Kyle Poyar, Director at Simon-Kucher Boston

““It’s all about building

a solid base of prospects and converting them into subscribers by developing an optimal strategy at each of the four stages of the customer journey

Figure A: Key considerations at each step of the customer journey

Reduce customer acquistion costs (CAC) Maximize customer lifetime value (CLTV)

ATTRACTMore Prospects

CONVERTHigher conversion to paid products

UPSELLDrive upsell/cross-sell

RETAINCreate loyalty and improve retention

• Freemium• Free trial• Promotions

• Value communications• Price metrics/models• Sales Process

• Don’t give everything away• Packaging/bundling• Add-ons

• Reinforcing value• Customer experience• Save offers


Stage One – AttractThe first step is to attract more prospects. There are three typical means of doing so: freemium models, free trials and promotions. There is not a one size fits all solution; selecting the best method depends on your business goals, your product and your target customers.

Simon-Kucher & Partners uses a checklist of ten evaluation criteria (Figure B) to help determine which method fits best for a given business. Freemium models work well if your business has a large potential market with a tendency toward viral adoption, the ability to monetize free users and increasing value of the product or service over time. Meanwhile, free trials are best when your market has a high cost-to-serve and the migration or upgrade path of your product has a time limitation that can be imposed. Promotions and discounting fit well in similar situations to free trials when there are no clear user benefits to a larger subscriber base and the time limitation does not exist.

Spotify has implemented a freemium model incredibly well in recent years. They appeal to an incredibly wide base of potential users, and had an astounding free-to-paid conversion rate over 25% as of 20151. Additionally, they are able to make money off of those they do not convert through advertising. Apple Music entered into the same market last June and is trying to attract prospects through a three month free trial. They are in a unique position whereby they already have customer relationships and do not need to rely on viral adoption. It should be interesting to see if they can achieve similar success to Spotify when using a different model for the same market – it seems to be off to a decent start with 6.5M paid subscribers at the end of 20152. 1 http://www.theguardian.com/technology/2015/jun/10/spotify-apple-music-75m-active-users2 http://www.streetinsider.com/Insiders+Blog/Apple+(AAPL)+CEO+Cook+Updates+on+Apple+Music+Metrics%3B+Initial+Conversion+Rate+at+~60%25/10984617.html

Evaluation criteria viral adoption

cost-to-serve

free to paidconversion

value in useover time

ability to monetizesubscribers

capacity toprevent gaming

network effects

2 sidesmonetizationpotential infrastructure to

serve high volume Attraction models

- Free trial- Freemium- Discount

Figure B: Evaluation criteria to determine the right trial model for you


Stage Two – ConvertOnce you’ve attracted your prospects, the next challenge will be to convert those prospects into paying subscribers. Creating the right incentive for customers to begin paying for your product may not be as simple as removing the advertising between their favorite songs. LinkedIn Premium does an excellent job of emphasizing the benefits a premium account can have over a free account. For example, during its free trial of Premium, LinkedIn highlights features of the product that might be right for you and enrolls you into a group of other Premium subscribers.

One of any business’s biggest barriers to converting its users will always be finding the right price model. The right price model for your business should balance benefits to your customer and benefits to your business. For example, to increase conversion you might shoulder more of the risk associated with subscribing, thus increasing the benefit to your customer. Or if conversion is healthy but you believe your business could be doing better, there may be room to change the price model in your favor.

The last point to note when discussing prospect conversion is the importance of not giving up on customers who do not convert to paid at the first opportunity – a pitfall many companies run into. Go after them again and see if you can convert them on the second or third try as they deepen or lengthen their experience with your product.

Stage Three – UpsellOnce you have successfully minimized acquisition costs, you have an opportunity to upsell or cross-sell customers to increase their lifetime value. Whether it means offering additional products or services, or simply additional ways to use them, make sure that you leave room for your customers to grow within your business.

One way to do this is to tier your offering in a good, better, best model. While the majority of your customers will fall into the good and better models, some will like the idea of getting the “best” you have to offer, and are willing to pay for it.

There are also less direct, alternative means to maximizing lifetime value. One example is Amazon Prime – there may be a single price tag for Prime’s service, but users get more value out of Prime the more they

““Once you have

successfully minimized acquisition costs, you have an opportunity to upsell or cross-sell customers to increase their lifetime value... make sure that you leave room for your customers to grow within your business


purchase. And the more they purchase with Prime, the more Amazon benefits as it takes purchasing occasions away from other channels.

Stage Four – RetainLastly, once you have accomplished the hard work of attracting a prospect, converting them and upselling them: Give them a reason to stick around. A simple way is to remind your subscribers that you value them. You can do this by rewarding them with early access to new features or through other methods of showing appreciation. Providing excellent customer service is also key to retaining your subscribers: If they are not able to use your product correctly, it should be your top priority to help them correct that.

The other means of driving customer loyalty is by determining why customers leave and offering a solution that better fits their needs. For example, Graze, a UK-based snack subscription service realized that many of their customers cancelled because the volume of snack boxes was too high. As a result, they introduced a prompt in their cancellation process with the option to adjust your delivery frequency in order to retain some of those people who would otherwise have cancelled.

ConclusionA healthy subscription business requires optimizing your business model across all stages of the customer journey. The insights here draw from our experience advising companies in traditional subscription environments, particularly in the telco-media-tech space. Still, the expe-rience of these companies are instructive for players in industries such as CPG and retail where subscriptions have not historically been the norm but are starting to play a bigger role. New entrants to the world of subscription also face unique challenges, which Vincent Duong’s article on page 17 will address in greater detail. ◊

Evan Ferber can be reached at [email protected]

Kyle Poyar can be reached at [email protected]


Joshua Bloom is a Partner at Simon-Kucher & Partners in Mountain View. Over the last 13 years, Joshua’s consulting activities at Simon-Kucher have focused on pricing, marketing, sales, and business model transformation. He has helped over 100 companies achieve their growth ambitions, including mul-tiple undergoing shifts from one-time revenue models to usage-based and recurring revenue models. He has been a frequent speaker at conferences on topics such as “Packaging and Pricing”, “Capturing the Value of Innovations”, “Target Pricing”, and “Sales Excellence.”

Simon-Kucher: Why are so many companies pivoting to subscription pricing?

JB: There are two reasons that I see, one reactive and one proactive. The reactive reason is that some are seeing competitive pressure from companies that have used subscriptions to disrupt businesses with less customer-friendly payment options. The proactive reason is that businesses see the high valuations of their subscription peers and respond to market.

Simon-Kucher: Why does Wall Street value subscrip-tion businesses higher than other ones?

JB: In general Wallet Street values subscription busi-nesses higher because these companies have pre-dictable, recurring revenue streams that can gener-ate very high customer lifetime values (CLTVs). Plus, they typically have a lower cost of sales because these businesses require less of an upfront commit-ment for customers to get started.

Simon-Kucher: Do you ever see industries moving away from subscriptions?

JB: I haven’t seen a mass movement away, but some companies are adopting a more measured pace of blending in new revenue models. In some cases I’ve

also been seeing some movement from subscription to transaction fees or pay-per-use models, such as with Angie’s List cutting membership prices and acceler-ating the purchase of local services through the site. This offers customers an easier, more flexible way to try out a service without committing to a monthly fee and allows companies to communicate that they only get paid when the customer is successful.

Simon-Kucher: What types of industries or companies do you expect to transition to subscription pricing?

JB: There are three factors that I look for to see if an industry is ripe for subscription pricing: technology changes, big areas of spending and high appetite for disruption.

First, is when technology enables consumption behavior to change in a way that either simplifies life or enables a better customer experience. We’ve seen that with music, gaming consoles and educational content.

The second factor is big areas of spending or large ticket items. Instead of paying a large amount upfront, consumers would rather pay a smaller, more manage-able price over time. For instance, I bought subscrip-tion pet insurance because I didn’t want to be put in a situation where I had to make a choice about whether to spend on critical care. The subscription turned a potential shock expense into a small monthly fee.

ask the expert


Third, is when there is appetite for disruption because the industry has not been very customer friendly in the past. Examples here would be in air travel (companies like Surf Air), health care (companies like One Medical) or education. Subscriptions enable a closer relation-ship with the customer and a keener focus on satisfac-tion and retention.

Simon-Kucher: How should companies prepare to transition to subscription pricing?

JB: You first have to understand the cash flow implica-tions. For instance, there have been some companies that have gone off the rails in going to software-as-a-service. Sometimes the customer migration is so fast that companies can miss their earnings. That hap-pened to MobileIron in Q1 of this year, for example.

You also have to be prepared for how subscriptions change operations and managing the customer life-cycle. The focus needs to shift from getting attention or getting on shelves to actual engagement with custom-ers, making sure they are satisfied and renewing.

Simon-Kucher: What are some other keys to suc-cessfully managing a subscription business?

JB: Companies have to be smart about where they dedicate resources in a subscription business. When you start adding a lot of new customers, many are go-ing to leave within the first few months. This is espe-cially true with aggressive acquisition or free trial offers that attract less serious customers. Some companies invest heavily in support time for the customers that aren’t growing or are going to leave. Instead, you have to be able to identify who are the customers worth in-vesting your time and energy in.

Another key to success is using smart packaging strat-egies to grow customer value over time. While a cus-tomer may want to start small with an entry offer, there should be a clear upsell path through packages and add-ons.

Simon-Kucher: How can you tell when a subscription business is performing well?

JB: The best way to look at the business is to under-stand the ratio of CLTV versus customer acquisition costs (CAC). The rule of thumb is that a 3:1 ratio is con-sidered healthy, so long as the company has a high gross margin. Even if a company isn’t profitable yet, having a solid ratio between CLTV and CAC indicates that they are set up well for the future.

Simon-Kucher: What other metrics should a sub-scription business be tracking?

JB: Besides CLTV and CAC, subscription businesses should look at unit-level margins and detailed retention information. Retention is best measured on a dollar ba-sis rather than a volume basis, that way it incorporates growth from upselling customers and the impact of raising prices year over year, which may lead to a few lost customers but higher overall revenue. Companies should drill down deeper and look at retention on a cohort level as well. That will help provide insights on the types of customers you are bringing in over time and how sticky the product is.

Simon-Kucher: How can subscription businesses get smarter over time and continually increase recurring revenue?

JB: Businesses should definitely conduct price tests and offer tests. Price testing is done at many compa-nies, but introductory offers and promotions aren’t always optimized from a CLTV perspective. Best-in-class companies also spend time investigating or quantitatively determining why customers churn and use those insights to drive proactive retention efforts and the right save offers for different segments. ◊

Joshua Bloom can be reached at [email protected]


project spotlight

the ClientLeading Snackbox subscription company in the UK, who also have operations in the US. Were in the process of expanding product portfolio – a breakfast box and a large sharing snack box

Key market characteristics:• No direct competitors• Barriers to customer acquisition due to current

PAYG price model• Heavily focused on promotions which had a high

churn rate once promotions ended

the SituationClient wanted to better understand barriers to join using current pricing model and understand price positioning of new products

the Objective• Size total addressable market and determine seg-

ment differentiators for snacking and breakfast • Identify and quantify main barriers to customer

acquisition • Optimize pricing for the snack box • Identify, prioritize and test alternative product

propositions and pricing models

our Approach the Results• Collect industry best practices • Capture voice-of-customer with primary research• Optimize the new pricing model using conjoint

exercise • Identify acceptable price ranges for new products

with direct pricing questions • Quantify financial impact of different scenarios with

a market simulation model

• Recommended new pricing for current offering and for new breakfast box offering

• Catered snack box portfolio recommendations to each customer segment

• Established exit survey to better understand customer churn

• Introduced subscription plans with recurring PAYG plan

• Utilized pricing psychology in online sales dialogue

the ImpactClient directly implemented the new pricing and portfolio recommendations


3 key things to consider before launching a subscription-based pricing modelVincent Duong, Manager at Simon-Kucher New York

Historically, whenever I reviewed my credit card statement, the monthly or annual charges that showed up were for standard utilities and services such as: cell phone service, home internet, and gym membership. Slowly, entertainment options were added into the mix – Spotify, Netflix, Hulu Plus, and Amazon Prime (apparently I stream a lot of movies and TV). Now I notice myself subscribing to services to replenish even my everyday personal hygiene and pantry items – Dollar Shave Club and NatureBox. Pretty quickly my life has been taken over by subscription services.

What is most interesting about looking at my credit bill is not the vast number of subscriptions (though it is quite a few), but the types I pay for every month. Even traditional retailers and consumer brands that have historically dealt in transactions are looking into different channels to gain new revenue streams, with subscriptions being their new frontier.

Amazon started exploring this with its “subscribe and save” offer, hoping to get consumers who buy items like toothpaste, toilet paper and shampoo on a regular basis to let Amazon handle the purchase. Target has also started playing the subscription game with a similar service , while Walmart has its BeautyBox as an alternative to BirchBox. Consumer products companies are also exploring options outside their traditional channels and trying to target consumers directly with subscription services. General Mills launched Nibblr in 2014 to compete directly with Graze in subscription snacks. And even though General Mills pulled the plug on the experiment a year later, Kellogg’s is now rumored to be planning and entry into this space.

Clearly subscription is the hottest pricing model right now – one that both start-up and established companies are desperately trying to figure out. However, as many of my friends have told me, just because something is trendy does not always mean you should follow it. Much like any best-in-class price execution, successfully launching a subscription-based pricing model means fully understanding your consumer, your strategy, and your data.

““Even traditional

retailers and consumer brands that have historically dealt in transactions are looking into different channels to gain new revenue streams, with subscriptions being their new frontier.


Your consumer: What need are you fulfilling with a subscription service?Everything needs to start and end with the consumer. You need to ensure that in offering a subscription, you are leveraging the nature of the business model to provide the consumer with a value proposition that is relevant and unique. It is critical that your subscription offering is fully aligned with how your consumers want to purchase, consume and engage with your goods or services (Figure A).

In essence, your subscription service must tap into a value driver that is highly important in your consumers’ purchasing criteria in a way that standard transactional models are unable to.

Your strategy: How does subscription enable your objectives? Launching a subscription model is an incredibly huge endeavor, both from an operational and strategic standpoint. The subscription offering must be seamlessly incorporated into your overall brand or category strategy, and not be someone’s pet project. Only when you have fully defined the objectives of your subscription service can you then design your go-to-market strategy and price model.

The first question to ask yourself is: Who is the target for your subscription service? The execution of the offering can look very different depending on whether you are trying to create an entirely new category, attract new consumers into an existing brand, increase loyalty among existing consumers or increase overall spend of existing consumers. While

Figure A: The value of a subscription offering depends on your consumers’ purchasing behavior and preferences

The value of a subscription offering depends on your consumers’ purchasing behavior and preferences

Consumer purchasing behavior and/or value drivers

Regular, consistent purchasing cycle

Sampling, variety and innovation

Exploration and personalization

Value of subscription Convenient and timely replenishment

Easy, low-risk trial and experimentation

Curation

Examples • Amazon Subscribe and save (Household goods)

• Dollar Shave Club (Razors)

• Birchbox (Cosmetics)• Naturebox (Snacks)• Blue Apron (Home cooking

• Club W (Wine)• Gwynnie Bee (Fashion)

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rodu

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these objectives may not be exclusive, in our experience, the lack of clearly defined priorities leads to a confused offering i.

The second question to ask when it comes to your strategy is: What is the portfolio role of your subscription offering? Is it an opening price point to encourage trial or is it a value-added premium offering to help capture willingness-to-pay among a sub-segment of consumers?

Knowing what you are hoping to achieve with the subscription offering and the role you intend for it to play in the context of the rest of your portfolio will heavily influence your choice of subscription model and pricing strategy, as previously discussed in Evan and Kyle’s article on page 10.

Your data: Can you take advantage of the increased analytics from a subscription offering? Subscription pricing models are attractive because they can increase your consumer’s lifetime value when executed well, especially if you are able to quickly implement adjustments on an ongoing basis in response to learnings. In order to do so, you must effectively leverage the data points subscription offerings provide to unlock key consumer insights and driver further optimization.

Data can provide very powerful insights on the impacts of price changes, cross-portfolio effects as well as the emergence of new consumer purchasing patterns or segments. In our experience, however, we have found that many companies do not fully tap into their data. To do so successfully involves developing the right KPIs and analytics frameworks, ensuring the right dashboards/systems are in place, and establishing effective processes with clear owners. This will provide you with the agility needed to adapt your strategies as subscriptions inevitably change consumer purchasing behavior and/or the makeup of your consumer base.

Subscription pricing models offer a wealth of opportunities to capture more consumers, open new channels, and drive more dollars into a category. But before it can do so, you must know exactly who, why, and what this trendy new model can actually do for you. Companies that are able to develop a strategy based on a robust understanding of all three factors are the ones that will rise to the top in an increasingly crowded space. ◊

Vincent Duong can be reached at [email protected]


Simon-Kucher is a global consulting firm specializing in strategy, marketing, pricing and sales. Founded in 1985, the company focuses on Smart Profit GrowthSM by helping clients to boost their top line instead of cut-ting costs. With 860 professionals in 29 offices worldwide, our practice is built on evidence-based, practical strategies for profit improvement.

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“The influence of Simon-Kucher on the prices we pay for just about everything is as little

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We support market leaders across industries and countries. Our specialized Consumer Goods and Retail team has supported clients such as Barnes & Noble, Kimberly-Clark, Pepsico, Office Depot and many more.

Projects completed in the last 3 years alone

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Percentage points of margin improvement

Books written on pricing and business

management

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2000 860

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