In my last article on Pricing Questions to Ask, one of the questions I listed was whether to capture value upfront or over a period. A subtlety I did not add was, “What if the customer lifetime (with your service) is limited?”. Let us see such a case here.
Match.com is running a promotion for its service, “If you do not find your special someone in six months, your next six months is free”. Simple and elegant plan that may on the surface seem to give away too much and yet captures the full lifetime value of a customer.
If a customer did find the special someone, there is no reason for them to pay for the next six months. If they did not, then they may still be less likely to continue to pay for a service that is not meeting their expectations. The marginal utility of the service to a customer decreases as the time progresses and at some point the service adds no value to a customer. In other words, the lifetime of a customer is limited.
For any product or service with decreasing marginal utility that approaches zero, the pricing should capture all the value upfront and give away additional units at marginal cost.
For Match.com, the marginal cost of serving a customer is $0. So a pricing scheme that charges $60 for six months with additional six months free is better than a scheme that charges $60 for an yearly subscription.
There is one additional factor in the pricing of match.com, customer margin. The likelihood of a customer staying on after six months, intuitively, is very low. But if they stayed on, there are opportunities to make incremental revenue in the form of selling other products and help build critical mass to attract new members. This turns a cost activity into a revenue opportunity, squeezing extra profit from the limited lifetime of a customer.
I think Match.com is practicing effective price management with a clear understanding of consumer behavior and lifetime value of customers.
How do you price your offering when the lifetime of a customer is limited?