Consumers constantly make trade-offs between the options put in front of them, whether consciously or not. When evaluating a product or service, they fixate on the relative price and value compared to the available alternatives. Successful companies have learned to proactively adjust the options they make available and, in doing so, influence what consumers buy and how much they spend.
The impact of restructuring your portfolio isn’t trivial. For example, Simon-Kucher helped a subscription online marketplace increase average revenue per user (ARPU) by 88% and monthly recurring revenue by 62% just through optimizing the portfolio and pricing architecture.
As we’ve seen across numerous clients, restructuring your portfolio of subscription pricing plans helps increase revenue both by bringing in more customers and by increasing your ARPU. This article will share four best practices to leverage relative price points and successfully restructure your portfolio. In this article we define “packaging” as product offering bundles that have different features and price points.
One of the best ways to entice consumers is to present them with a beacon offering. The price of this offering should be relatively low compared to the rest of your portfolio to spark interest and decrease the perceived risk of trial.
DISH Network, for instance, stresses that pay TV packages start at just $19.99 per month to “make the phone ring” and position DISH as an affordable alternative to cable. In reality, few consumers ultimately purchase the $19.99 package and DISH’s ARPU is north of $80 per month.
DISH carefully fences off its beacon offering in three ways: content, features and sales channels. On the content front, the $19.99 package lacks some popular TV channels like ESPN, USA and Disney, which limits the appeal among sports lovers and families. In terms of features, those who buy the $19.99 package are ineligible for either HD or DISH’s Hopper® DVR. Finally, consumers can only purchase the $19.99 package if they call a 1-800 number where, presumably, a sales rep will try to upsell them into a higher tier.
In some cases, we recommend freemium products or free trials to act as beacon offerings. These allow consumers to experience the core value proposition of a company’s portfolio without any financial commitment. The “free” price point is extremely attractive to consumers and draws on the “penny gap” phenomenon in consumer behavior: the drop in demand with an increase from free to one cent is much more dramatic than the drop in demand with an increase from one cent to two cents.
In subscription pricing, low price point grabs the attention of potential consumers; however, once consumers are engaged and start examining their choices, many tend to avoid the options at the extremes of the portfolio. Most consumers prefer a product that’s “just right,” neither too cheap nor too expensive (this is also known as the “compromise effect” in behavioral economics).
Imagine looking at a store display with two bottles of a similar type of wine – one costs $15 and the other costs $20. In our experience, consumers will typically purchase the $15 bottle mers now “compromise” and drive toward the middle price point (the $20 bottle).
Some companies even make it clear where the landing point for consumers should be when communicating possible options. By visually highlighting the middle option as the most popular choice, Squarespace furthers the compromise effect by indicating that other consumers have preferred the middle option as well.
Having a showcase offering is a great way to maximize revenue through market skimming. For a relatively high price compared to other products in your portfolio, a showcase offering provides a premium product to customers with the highest willingness-to-pay. An added benefit is that this type of offering creates a “deal effect” – making everything else in your portfolio look more affordable.
In the previously mentioned online marketplace example, the client initially offered three tiers of featured listings to subscribers who wanted to sell or rent properties to consumers. Simon-Kucher found that there was demand for a more comprehensive, showcase offering. We therefore recommended adding a super-premium tier (“Advantage”) at a higher price point.
With the new Advantage tier, the client was not only able to capture additional revenue from customers with a high willingness-to-pay, but also able to encourage subscribers to purchase the Elite or Deluxe tiers who would have otherwise thought they were too expensive.
When designing your packaging portfolio architecture, you must also make sure your subscription pricing options do not get too numerous. If presented with too many product packages, consumers get turned off by the need to evaluate all the options and may walk away from the purchase decision completely.
In our project experience, Simon-Kucher has found that fewer choices can yield better results. In an engagement with a telecom provider, Simon-Kucher tested different approaches for adding subscription internet plans with usage caps to the product portfolio, which at the time only had plans with unlimited usage.
Approach 1 offered a capped option everywhere – resulting in 20 bundles, and approach 2 offered a capped option selectively – resulting in 15 bundles. Our testing found that the selective approach increased both market share and revenue due to reduced customer confusion and purchase paralysis.
The context in which consumers shop for products has a significant impact on buying behavior. A low price beacon offering grabs the interest of price-sensitive customers, a showcase offering maximizes revenue from premium segments, and a middle offering provides a landing point for consumers who want to fall somewhere in between. By balancing coverage of your market and a simple product portfolio with these relative price points, you can guide consumer behavior to align with your product and overall business goals.