Pricing Software Subscription Service

PowerFrameworks sells Microsoft PowerPoint frameworks for visually presenting concepts- if your slide deck is usually filled with bullets you might want to start with them. The more interesting point to me is their pricing strategy, which stands out as an example of pricing done right. There are a few things about their product strategy and pricing that are worth mentioning:

  1. Instead of selling the frameworks as a software with one time revenue, they sell it as a subscription service with recurring revenue.
  2. The subscription model allows them to continuously innovate and deliver new frameworks.
  3. Subscription model is unbundling the product along the usage dimension – instead of buying the product all at once the subscribers pay for usage.
  4. What they offer with subscription are PowerPoint slides with the frameworks, about 400 of them, that a subscriber can download. Technically, someone can subscribe to the service only for the minimum allowed period and download all the frameworks. Their pricing addresses this by pricing the lowest possible subscription period of six months and not month to month which is the norm for  SaaS offerings.
  5. Their six month subscription is priced at $150 and their full year subscription is priced at $250, incenting customers to buy the latter.
  6. They offer mixed bundling – you can either get the subscription that gives access to all templates or buy each template separately. Pricing studies have shown that offering mixed bundling is more profitable than either pure bundling or fully unbundled offering.

I think their pricing schedule is done very well and almost right.    Since the frameworks are available for download, there is no need for a customer to buy an yearly subscription if the customers download all they want over the six month period. So a customer can simply buy the subscription for every other six months or worse even less frequently.

One recommendation I will make is to look at their numbers for six months and  full year subscribers and see if there is opportunity to increase  profit by increasing number of full year subscriptions.

Suppose the numbers of  six month subscribers is   x and full year subscribers is y.

Their total profit (since variable cost is $0) = 150x + 250y          — (1)

if they were to drop yearly subscription to $200 and that causes  ‘z’ number of subscribers to migrate from six month to full year subscription. Assume their total number of subscribers remain the same for now. Then their new profit is

150(x-z) + 200(y+z)   = 150x + 200y + 50z                          — (2)

From (1) and (2),  for the price drop to be profitable,  50z must be greater than  50y, hence z > y

This means they need to more than double the number of full year subscribers. If their current y represents a small percentage of total subscribers there is definitely room for more profit by dropping prices. But if  y represents a higher proportion (most of their customers purchase full yer subscription) then I recommend increasing price of the six month subscription.

Suppose they increased the six month subscription by $25 and as a result lost 30% of their six month subscribers and 10% upgraded to full year subscription. The new profit equation is

(0.6x)175 + (y+0.1x)250    —- (3)

From  (1) and (3) we can see that     the price increase for six month subscription offer more profit than current pricing even if we assume a steep drop of 30% in subscribers.

The net of this is while offering multiple subscription pricing, studying your customers and their willingness to pay is essential to maximize profit. Increasing the pricing on the lowest priced version may still deliver higher profit even at lower subscription rate.

It is not what you can give away, it is what you can charge for

In one of my previous posts I talked about why free is not a viable business model.  With every Web2.0 business based on free model, can anyone hope to charge for services? The answer comes from an essay by Gordon Crovitz, on online news media pricing:

For years, publishers and editors have asked the wrong question: Will people pay to access my newspaper content on the Web? The right question is: What kind of journalism can my staff produce that is different and valuable enough that people will pay for it online?

Applying this to Web based businesses, which for some reason are looking at their marginal cost of production ($0.00) to price their offering,  “It is not what it costs a marketer to produce or whether people will pay for your service but does their service add unique value that is not available for a lower price anywhere else?”

Of course this depends on whether people who recognize the value are still willing to pay for it even though no such service is available elsewhere. That depends on whether or not the marketer gave it away for free in the beginning and is now trying to move from a free to fee model. If you had trained your customer by giving them your service for free it is not going to be easy to switch them to a fee model.

So why not charge them from the beginning? Why worry about freemium/ freeconomics and building users base? Why invent complicated schemes based on growing mind share?

Crovitz says,

The truth is simpler: People are happy to pay for news and information however it’s delivered, but only if it has real, differentiated value.

True for any online service.

For related discussion on this see a post by Peg Corwin in her Score Chicago blog. She discusses Chris Anderson’s model  and the proposal by Walter Isaacson on newpaper.

See also a case for Unbundled Wall Street Journal in my Unbundling blog.

My Willingness to Pay for web services: $0

The concept of Willingness To Pay (WTP) is meant to convey what price a consumer is willing to pay to buy a product and still be left with a positive value. The idea of profit maximization is to price a product in such a way to extract every bit of value from the customer that they will be indifferent between choosing and not choosing the product.

I have not paid any for any of the web services I have been using. Search, blog, group collaboration, my own social network, surveys, documents, spreadsheets, etc.

Now when a new service that is marginally effective aims to charge me for using it, the choice is easy. Unfortunately the price of web services is now their marginal cost, $0 , not because it has to be priced at MC but because my reference price is $0.

Anyone who attempts to charge a non zero price without managing the customer reference price (that is improving it from $0) has a wrong business model. You cannot simply move from free to fee without first focusing on customer reference price.