4 SaaS Pricing Lessons

Take a look at the subscription pricing options from two leading national newspapers The Wall Street Journal and The New York Times.


Take a few minutes to look at the two approaches to bundling and subscription pricing. Which one is done better and stand to drive more profit? What do these tell us about your SaaS pricing?

Here are a few things I would like to point out

  1. Branding – It is very important to brand your multiple versions. The WSJ branded the offerings and Times didn’t. Branding offerings is about telling customers how you think of them. It gives a much better way to position the offering than a utilitarian description. If you have three different versions take the time to brand them.
  2. Per Month vs. Per Week – Many SaaS product managers have asked me this question, “Should you list per month pricing or per year pricing”? Clearly the goal is have the customer stay longer but there is advantages to reducing the initial impact by anchoring on a lower price point. As a tactic it is preferable to show a price for the smallest period.
  3. Number of Versions –  WSJ has three versions but only two price points. Are four price points better than two? You remember my oft repeated statement, “If one price is good, two are better“.  So does this scale linearly? Can we say four prices are better than two prices? No. It depends on customer segments. As a rule of thumb 3 is an ideal number. A forced fourth version may pose more challenge to customers. The Times approach to restrict smartphone access does not make sense. In your SaaS pricing do not raise artificial fences.
  4. Entry level pricing – It is generally a good approach to have a lowest priced entry level version that allows customers to try your product. But if this is too good an option most will gravitate towards it. The Times approach priced it too good to pass, at $3.75 a week more will be willing to forgo the tablet access. Given we have significantly more smartphones than tablets (which is shrinking) this claim is validated in the data. Here WSJ approach is the preferred one.  As a scenario had the Times priced this at $5/week and not had the Tablet only option, they would bring in as much revenue (and profit) even if they see 25% volume drop.

How do you define your SaaS pricing?

iPad Sales are 100% Price Insensitive

I am doing an about turn on a statement I made 18 months ago on iPad price elasticity. Then I presented this graphic below and stated the existence of linear demand curve,


Looking at the unit volumes and average selling price (ASP) over three most recent quarters it appeared iPad sales were price elastic. That is, volume changed  with price changes.

This time I expanded the time frame and included data from the first month iPad was launched to latest quarter. Over this nearly six year period here is how the chart for Units vs. ASP looks like,


We can step back and squint all we want, this does not say much. So I ran linear regression analysis on this data, trying to test the hypothesis if changes in volume can be explained by changes in price.  It turns out there is absolutely no correlation between unit volume and price.

The linear model  Units =  Constant + Coefficient X Price,  has an R-square of 0.0017, that is absolutely no predictability. Changes in unit volume is independent of price.

Here is how the scatter plot looks like, almost horizontal curve with points scattered above and below the line.


Which means demand for iPad is driven by completely different factors  – use cases, product fit, features, customer preferences  etc. So if Apple wants to spur value growth it has to pull different levers than price. That is why you are seeing newer product innovations like the iPad Pro.

On the other extreme of price spectrum is Amazon’s $50 Kindle tablet. If iPad is not price elastic can we say anything about volume for $50 Kindle. Unfortunately we cannot extend the model to a different product category at such a low price point. It is highly likely a price point like that can drive impulse purchases that can drive up volume significantly.

Finally on changing my stand on price elasticity of iPad,

When new data come in I change my mind. What do you do?


Does Intuition Fill Data Void?


In his final letter to Groupon employees ex-CEO  Andrew Mason wrote this as his biggest regret,

My biggest regrets are the moments that I let a lack of data override my intuition on what’s best for our customers.

Decisions need to be based on data. Right and relevant data. Decisions must change based on data, when new evidence is uncovered. Decisions with same supporting data must be reproducible and repeatable by anyone within and outside the organization.  This does not mean we are assured of the results. We never will be certain of results. The role of data/information is to reduce the uncertainty.

But how do we decide when there is lack of data? It is likely true not all that matters is measurable but do we give up on gathering data? Does lack of data mean we fall back intuition?

Decisions based on intuitions are not repeatable by you or by others with their own intuitions. It is like throwing darts blindfolded, you might hit the center but that does not mean your method is correct.

Lack of data does not mean we let intuitions drive but we experiment to seek data that will help improve our decisions.

Your regret should never be you did not override your intuition but you did not experiment enough.

Now a final word on Groupon whose stock is tearing around $2.30 from its IPO level of $20. The problem is who is group’s customer? The deal seeker who moves from deal to deal or the small business owners? You should read my book from four years ago to understand that.


Delighting Customers Just Right

What does delighting customers mean?  Stated differently,  what delights customers? Many have offered their own opinions and recommendations. Most fall in the general category of beating customer expectation by a mile.  Examples like throwing in something extra when they least expect, sending a thank you card to customer or flowers for life events are ubiquitous.

But let us drain the murky pond of opinions and get back to the basics. We have data that points to what delights customers – it is when they willingly pay a price for a version of product we offer and feel good about it. You build and offer the product at a price that delights them and at a cost that is profitable to you.

The product packs the right set of values that are most relevant to them for the price point. They are more delighted to swap their cash for the product. Stated in economic terms, they get positive consumer surplus and you as marketer get better profit than otherwise. Perfect synchrony.

Nothing more. Nothing less. No need for gimmicks, to throw in an extra or send handwritten thank you note. If the customer sees positive consumer surplus at the offered price point you are done.

See this on display with Apple. Take the case of ear phones they pack with different iPods, iPhone and iPad.

  1. With the $49 iPod shuffle Apple ships the older style ear phones
    specs_headphones_mediumRemember Apple’s messaging when they introduced the newer EarPods that fit the natural shape of the ears? Wouldn’t customers be delighted to get that over the older models?
  2. With $199 iPod Touch Apple ships the EarPods but without the Mic and remote volume control.
    Wouldn’t customers be delighted to get the same one they get with iPhone? Wouldn’t the Mic be useful when you make Skype or FaceTime calls on iPod Touch? If customers want to add that convenience they can buy for the model that retails for $29.
  3. With iPhones Apple ships the EarPods that has Mic and remote control.
    earpods_mic_smallThis makes sense after all it is a phone.
  4. With its most expensive iPad model, iPad Pro that costs $1079 apple ships nothing. That is right, not even the cheapest earphone that ships with $49 shuffle is included with $1079 iPad.

This is not just one example making the case but an example illustrating the principle of pricing, value allocation and consumer surplus. Yes we all will feel happier when we get the EarBuds with Mic thrown in with iPod Touch or iPad. But the point is we are already delighted to get the product as is at its price point. Once we stand up and reveal our preference there is no need to do anything more, even if it is to add EarBuds that likely cost less than a dollar for Apple.

When it comes to customer delight ignore the platitudes and focus on the simple principle that customers express their delight when they swap their cash for your product. If your product does not offer value that leaves positive consumer surplus they are not going to buy your product. Therefore not delighted.

Do you understand customer delight?

Why isn’t there a iPad Pro Bundle?

ipad-pro-primary-100627050-largeAre you tired yet of reading the many reviews on iPad Pro? May be it is time for you stop and take a closer look at its pricing and its two key accessories.

Apple’s iPad Pro goes on sale today for a list price of $799. But wait there is more. You can spend $169 more for a keyboard that turns it into a laptop. And you can spend another $99 to get its Pencil.  These are optional add-ons. There is no Apple bundle that offers iPad plus keyboard or all three at a lower price than the sum of individual products. What if Apple offered one or both these bundles?

  • Bundle 1: iPad, Keyboard and Pencil for $999 (a $69 discount )
  • Bundle 2: iPad with Keyboard for $919 (a $49 discount)

It doesn’t and it won’t. Why is that?

Before we go into this I want to remind you why a product manager should consider product bundling. I wrote this while back on bundling,

pricing a bundle is not a straightforward answer. A marketer needs to know the demand schedule, customer preferences, customer segments, and value add from bundling. The correct price is the one that maximizes profit

Regarding two possible bundles, let us knock out one right away. It is the iPad plus Keyboard bundle. This simply could have been achieved by pricing the keyboard at $129 vs. $169. The keyboard has no standalone purpose and works only with iPad Pro. So a bundle at lower price is exactly same as a lower priced keyboard.

There is no reason for Apple to bundle or drop price because it understands well the customer segment that prefers the keyboard, why they choose the keyboard and what the customers are willing to pay.  Dropping the price may increase volume but at the expense of profit. If we assume 50% gross margin on the keyboard (highly likely number given Apple’s track record),  Apple will have to sell twice as many keyboards $129 to make same profit as $169 keyboards.  That does not fit its pricing philosophy or strategy.

If you see the logic of this simple bundle it is not difficult to see why a full bundle of all keyboard and Pencil doesn’t make sense either. Additionally the segment that prefers Pencil does so for very specific use case and that does not apply to most who prefer a keyboard. So a bundle price will need to so low to appeal to both segments to generate any incremental volume, meaning even lower total profit than selling them unbundled.

In simple terms, no customer demand or economic preconditions exist to create iPad Pro bundles. Apple’s product management team took the simpler and favorable approach of selling the add-ons to maximize profit.


The iPad Average Selling Price Erosion

apple-event-sept9-2015-ipad-pro-3211I have written at length about value waterfall and price waterfall. Value waterfall is a model to understand what prevents you from getting your fair share of the value your product creates for the customer. It is marketer’s failure to understand customer choices, buying experience, sales process and mostly a messaging failure. Price waterfall occurs in most cases because of the markup mindset which leads to discount after discount to a low pocket price or average selling price. Price waterfall leads to low average selling price (ASP) and hence lost profits.

You would not think of Apple committing either of these mistakes. There is no question about Apple’s monomaniacal focus on value messaging and setting prices to capture its share. Apple does have to give better pricing to channel so its ASP is not same as MSRP but we hardly ever see any discount on Apple’s products. Apple does join Black Friday for minimal discount but nothing you would call as significant price leak.

But take a look at this chart of ASP of iPad till date since its introduction in 2010. This is the blended ASP, that is across the mix of all iPad models computed from Apple’s earnings reports.


What we see is the ASP erosion from its high of $662 to $433.There are two reasons for this erosion

  1. Every time Apple introduces new iPad models it drops the price on previous gen models by $100.
  2. Apple introduced iPad Mini whose MSRP is $100 lower than iPad Air.

The previous gen models are still value rich and compelling. iPad mini was attractive to a large segment that prefers the compactness of the device. Together these two changes nudged customers to pick models that are lower priced, resulting in lower ASP. This ASP erosion is brought about by product mix not discounts.

ASP drop is not all bad if that makes up in volume. Unfortunately you can see in the chart how far the volume has fallen.  Apple tried to help fix the ASP with another product mix change when it introduced 16GB, 64GB and 128GB getting rid of 32GB models. But that change did little to ASP as you see the near flat ASP curve in the last 5 quarters. Counterfactually we could say the change helped step further erosion.

Let us break the ASP down further and compute ASP for iPad and ASP for iPad mini. For this we need percentage of each.in the sales mix which Apple does not report. Using the devices share mix reported by Localytics  I computed the sales mix to,

iPad 57%  (current and previous gen models)

iPad mini 43%  (current and previous ten models)

Looking at iPad ASP in quarter prior to introduction of iPad mini in November 2012, we see $467. Using this with the sales mix and $433 blended ASP we get iPad mini ASP o $380.

What is left for Apple to do? It tried the 32GB level but didn’t move the needle. The two ASPs are not going to move much. So it did the only option available, introduce another product at much higher price point, the iPat Pro that starts at $799. In addition it introduced iPencil and Keyboard which can be attached to sale of $99 and $169 respectively.  Together it hopes to get iPad Pro ASP as much as $800 (after channel pricing etc).

In last article I made a prediction of number if iPad Pro models Apple will sell this quarter. With individual ASP numbers and the volume predictions the blended ASP of three models come to $471. A 10% increase, not bad but not enough.

$800 ASP for iPad Pro is far better that $467 for iPad Air. And Apple will try hard to split the market between Pro and Mini by not introducing any more innovations to Air.