BCG’s John Pineda on Subscription Pricing Strategies

Tom Krackeler & Rachel English

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John Pineda is Partner-Director at the Boston Consulting Group. He’s a core member of BCG’s Technology, Media, and Telecom as well as Marketing, Sales, and Pricing practices. John is an expert in pricing model transformation, monetization of digital platforms, and pricing to value to improve core business profitability. He has helped clients in implementing large-scale pricing programs, applying pricing quick hits tactics, and developing new subscription-as-a-service revenue models. John’s clients come from a range of industries including technology, data/business services, life sciences, industrial goods, and financial institutions. We talk to John about pricing strategies for the Covid era, challenges faced by technology companies, and subscription growth levers. And we also try to find out if the list price is really extinct!

How are you seeing pricing strategies evolve in the Covid era? Let’s start with the big picture view. One of the more important data points for us has been our surveys of investors. When we asked investors what they thought the priority should be for companies that were COVID resilient, 90% of them said that it was important to prioritize building new business capabilities, even if it came at the expense of EPS (earnings per share). It’s great to hear that kind of long-term thinking. The question is, what does it mean for pricing? I thought my clients were going to start pulling back on more transformational pricing topics. I thought they were going to say, “You know what? This is a really tough year. We’re going to need to defer that transition to a subscription model or that the deployment of the new digital tool until next year, until we come out of this.” But I’ve seen a surprising and refreshing amount of interest in continuing down the path of transformation and continuing to pivot the business to new ways of pricing and monetizing. In terms of discounting, again, we expected a very short-term view of the world, where there were heavy discounting pressures on most of our clients. There is some of that, but more than discounting when we surveyed sellers and talked to customers, the number one thing that stood out was flexibility. More than lower prices, they wanted flexibility in how they were priced and the terms that they had. They wanted the flexibility to go down when they didn’t need certain things and the flexibility to go up. The flexibility theme has been dominant and persistent.

You help companies across a range of industries and many of them are switching to subscription-based pricing. I’m curious to learn more about the challenges you’re seeing across technology companies?

For technology companies, there are two types of challenges. The first is, if you’re a technology company with a traditional hardware footprint, I often hear that roughly 70% of your engineers were already developing the software but your monetization model wasn’t really reflecting that. Typically, when companies start charging for that innovation, they charge for it in a subscription model and that’s a big change. The navigation from hardware to software and from upfront payments to subscriptions is quite a journey for most technology companies. The second set of problems have to do with the thinking around selling “the big deal.” The traditional thinking was not about—is my customer realizing the value? Shifting to a value realization and expansion mindset is the second big challenge that I’ve seen in technology companies. And the ones that navigate it well say, “We’re going to deliver value every year. We’re going to work with the customer to make sure that they’re actually realizing the value and then we’re going to identify the next opportunity to deliver more value.” The companies that build that muscle are the ones that truly succeed.

One of our previous guests on the podcast, Patrick Campbell, CEO of ProfitWell talks about three levers to drive subscription growth—customer acquisition, customer retention and upsell or expansion, pricing, and monetization strategies. What are your thoughts on this?

I would generally agree. Monetization strategy can be a lot more deliberate. The big driver we’ve seen is shifting the monetization question earlier in the innovation cycle. As you’re thinking about what innovation you’re going to deliver, how you’re going to package it, how you’re going to price it, and whether it’s going to pay for itself. The second one that we often see as a blind spot is the upsell part. Some people are great at customer retention, some are not, but it is generally something that companies and our clients pay attention to. And it’s a metric that’s tracked pretty consistently. Upsell within that base is not as commonly activated. It can be hard to get really good views of how well you’re upselling. If you look at the most successful subscription businesses out there, the vast majority of them are really good at upselling within their base, bringing new products to the base, making sure that their customers realize the value, to begin with, but then, teeing up that next great solution that’s going to take them one step up the value ladder.

A couple of years ago, you declared the list price extinct. What made you say that and do you think it’s still true?

We were trying to be a little bit provocative! I’d say the list price is still probably a useful starting point for many people. The point that we were trying to make is the notion of list price as what people pay, which is challenged more and more transparently these days. Ecommerce is a great example, where you look on Amazon or other sites and you often see the MSRP or the list price with a big slash across and it says, “Great deal just for you.” There’s still value in this notion of a list price as a reference. but. segmentation of how much below list price you make is becoming increasingly important and it’s become a must-have. As we have newer and better tools, they’re allowing us to tailor the net price that people actually pay more and more for an individual buyer at that point in time.

You’ve been a pricing expert for more than 15 years now. What would you say is the single most important element of a successful pricing strategy?

It would be playing out the pricing strategy to its first punch. Where your strategy takes a punch is when you actually try to get paid what you thought you were going to get paid or for what you thought you were going to get paid, and the market tells you whether it’s going to hold or not. I’ve seen brilliant strategies that didn’t play out because the competitive response or the customer response didn’t get factored into the plan early enough. Let me give you two examples. One question we often get is, can I price my way to a higher share of the market? Of course, we always think we know about elasticities. We often see industry leaders that are actively pursuing that strategy. What hasn’t been played out yet is if we lower our prices, is it logical for our competitors to match? And are they in a position to match just as well as we are? Or do they have to stay high? And that’s the part that you always want to play through, that concept of game theory which we all learn in economics and feels very abstract, is very real when you’re doing pricing. If you’re going for market share by discounting, but your competitor can match you, often the result is that everybody just keeps the same share but at a lower price level.