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Data-driven product pricing for digital subscriptions

Mar 23, 2016
Analytics

This is another article from Piano’s Lead Data Scientist Roman Gavuliak written last year and re-posted here for the edification of our faithful readers. To read all of Roman’s articles please click here.

Digital pricing is not usually coupled to the cost of production. In fact, digital pricing, like that of luxury brands, is based upon perceived value. Why would people pay for the New York Times online when news and information is freely available on the Internet? Because people believe when they purchase a NYT subscription they are getting a better product, with unique, distinctive content plus they value the paper’s editorial curation. So how does this apply to online publishers who are not the New York Times?

Two words: Quality Content

Recent studies have shown, and Piano has written a White Paper, about the effect Quality Content has on subscription revenue. Quality content can take many forms – video (OTT), audio (podcasts), short or long form articles. Bear in mind though that long form articles may not always work on mobile, where more and more people are consuming content, because people come for shorter, but more frequent, visits. Nevertheless, the need to produce engaging content that users consider valuable, remains. Therefore, engaging content, content that captures a reader and holds him on your site, either desktop or mobile, must be considered as a part of the pricing equation. For online publishers, based on the strategy pursued, getting pricing right might mean more subscribers, higher revenue or both.

Further, pricing has a direct impact on subscribers’ decisions to renew; our analysis shows that higher prices tend to have lower retention rates, although not in all cases and not for all price rises. A price increase could well have no impact upon retention and yield positive revenue. Therefore, we strongly recommend A/B testing price increases and examining retention again prior to making any permanent changes.

A note of caution: subscriber volume drops precipitously over time if retention rates fall, therefore retention rates matter significantly when adjusting pricing. As an example, a persistent 5% retention decrease for monthly subscriptions results in four times fewer subscribers after 24 months. Again, A/B testing your price increases and monitoring subsequent changes in retention will help answer these critical questions.

Another important question is what the pricing relationship should be between annual and monthly subscriptions? Most publishers offer a discount for an annual subscription relative to the annualized price of a monthly subscription because the average tenure of an annual subscriber is greater than the average tenure of a monthly subscriber. The goal, then, should be to define how much of a discount an annual price could have compared to the annualized monthly price in order to entice consumers to select the annual subscription while generating the same or great Average Revenue Per User (ARPU).

Pricing is always a trade-off between the number of subscribers you have, near-term revenue and longer-term revenue. A/B testing can help to determine the sweet spot between conversions, retention and pricing so you can maximize your revenue stream. If you want to raise your prices, it’s important to carefully manage the trade-off between higher prices and the impact on conversion and retention because it could mean a significant difference in overall revenue.