Subscription Pricing for Value
with Mark Stiving
Pricing is one of the trickiest elements of good subscription strategy and one that most practitioners feel unprepared to tackle. Coming up with a simple and clear pricing strategy is really complicated.
Mark is an educator at heart as well as a pricing expert, and in this episode, I ask him all kinds of questions about how to determine, test, communicate, and adjust pricing.
In this conversation, we talk about the difference between a Will I decision, and a Which one decision, how to raise prices, and why so many product prices end in nine.
The following interview is adapted from my podcast, Subscription Stories: True Tales from the Trenches.
Robbie Baxter: Mark, welcome.
Mark Stiving: Thank you, Robbie. It is so good to be here.
Robbie Baxter: You’re quite the expert on pricing strategy. Was that something that you wanted to be since you were a little boy, or was there something that happened along the way that made you focus on this quasi art/quasi science of business pricing?
Mark Stiving: I’ve talked to hundreds, if not thousands, of pricing people, and nobody grows up wanting to be a pricing person. Now, it turns out I was curious about pricing as a little boy. I remember going to the grocery store with my mom and seeing prices that ended in 9, 69, and 99. I always wondered, Why do companies do that? We know 99 is a dollar. What’s the big deal? Then I had a chance in a doctoral program at UC Berkeley to test this, does it really work or not? And it turns out this 9 cents thing really works.
I was able to figure it out. It works because we are lazy subtractors. I became addicted to understanding how people use prices to make decisions. And from that point, you go into how do companies use that information to make better decisions. That’s where I got this bug from.
Robbie Baxter: I love that you remember it from being a kid, those 99s, and that you can synthesize your doctoral research with: people are lazy subtractors.
Mark Stiving: It took a long time to get to that point. But it is true, and in fact, let me give you quick proof points. When you shop for gasoline, and you’re comparing two gas station prices. Do you subtract the 9-tenths of a cent, or do you just ignore that piece?
Robbie Baxter: I ignore it.
Mark Stiving: As you do the pennies too, by the way. And what you really do is subtract from the left digit towards the right, and once you find a left digit that’s different, you stop subtracting.
Robbie Baxter: Interesting. I guess the other part of it is that for me, it’s relatively insignificant, as well as for them. You know every penny matters.
Mark Stiving: That’s exactly right. You don’t make a mistake by ignoring the right-hand digits in your choice decisions.
Robbie Baxter: Yeah, it’s so interesting. I’m curious, you said nobody wants to be a pricing expert when they’re little kids. But as we grow up and work in businesses, we realize that pricing pops up periodically in our work, and most of us who aren’t pricing experts don’t exactly know what to do. Pricing is hard.
Where should pricing belong? Because it often seems like it pops up as a surprise. We’ve got to figure out pricing, or is this the right price? Where should it fit in the business strategy? And what should be pricing’s role relative to the rest of the business?
Mark Stiving: First up, pricing should be really early in your business strategy. If you’re going to create a new product, why would you create a product that people weren’t willing to pay for? And you should know how much they’re willing to pay for that before you spend the resources to go create the product.
Part of pricing is, how is it that we’re going to charge for something? What’s our pricing metric that is going to be part of our business strategy? What are we going to charge for? There’s a saying that how you charge is more important than how much you charge.
Think about what Netflix did with Blockbuster. They just changed the way they charge for renting movies. Back then we had DVDs and we mailed them, so how you charge is more important than how much you charge.
Robbie Baxter: I want to take this apart a little bit because I think it’s important. You’re saying you should know your pricing very early in the process.
I say I want to create a new kind of mug that keeps your coffee hot. Before I start manufacturing prototypes, I should go out and do market research. Either have a qualitative discussion with potential buyers and ask them about their coffee, drinking habits, how hot they like their coffee, and how much of a problem that is, and then what would you pay for it before I start designing. Is that kind of what you’re talking about?
How you charge is more important than how much you charge. — Mark Stiving
Mark Stiving: That would absolutely be my advice if you didn’t want to waste a whole bunch of money developing products that people don’t care about. Now you’ve probably heard the statistic that 90% of products fail. It’s because we go out and build products thinking they’d be really cool, or it solves the problem for me, or I think I really like it. But in truth, we never talk to our marketplace to understand if this is a problem you have and if you would actually pay money to solve this problem? When we can do that first, then we build products that have a much greater chance of success.
There’s one more really important part of this market research, that is some people love your idea, and some people hate your idea and think it’s ridiculous. What you’re looking for are: What are the types of people that love this? What are the types of people who really have this problem? This is what we call market segmentation. You can do your market segmentation before you ever build your product to know who you’re building that product for.
Robbie Baxter: Do these things early, and the product building is the last thing you do. In many companies I’ve seen, they build the product and then hand it to the marketing team and say, “Now segment the market, figure out who wants this, and come up with a price.”.
Mark Stiving: Yes, it isn’t many companies. It’s most companies.
Take a step back for a second. I used to teach product management. It’s all about, how do we decide what products we’re going to build next? How do we decide what features we’re going to build next? And that is a really hard thing for companies and people to do.
Until you start to step back and say, “Okay, now what I really want to focus on is, what’s my customer willing to pay? How much value is my customer getting from this product? And that should be driving the decisions we make for how we develop products. It should be driving our decisions. How do we sell our products?”
You can do your market segmentation before you ever build your product to know who you’re building that product for. — Mark Stiving
Right? And so once we understand how customers truly value our products, it changes the way we run our entire business.
Robbie Baxter: You have a new book coming out, Power Value, and a new book, Selling Value. Value is a really important concept in the way you think about pricing. Can you talk about what’s important about value for us to understand? And I also would love to tie it back to your earlier point that how you price is more important than what the price is.
Mark Stiving: Sure, but let’s start with the value. Oh my gosh! I can talk for a day about value. But we won’t. We’ll try to make it really fast. The first thing I want to talk about is what’s called value-based pricing. We hear this phrase all the time, value-based pricing, and I’m going to give you the world’s simplest definition. It means, charge what a customer is willing to pay. Right now that’s really hard to figure out. I’m not going to say it’s easy to know what customers want to pay, because I can’t read a customer’s mind. But when I take that as an attitude or as a goal, I’m now no longer doing cost plus pricing, or some other type of less optimal pricing mechanism. I’m actually trying to figure out how much is my market willing to pay? It depends on how much value they get from my product.
Now, let’s talk about what value actually means. Value could mean willingness to pay. How much do you value something like value-based on how much money I would give to you in exchange for that?
There’s two other definitions of value that I use a lot that are very helpful in pricing. One is what I’ll call inherent value. Inherent value is what’s the value of solving the problem. My favorite example of this is air. How much value do you get out of having air to breathe?
Robbie Baxter: You’re asking me?
Mark Stiving: Yes, I’m asking you.
Robbie Baxter: I would say it’s way up there. It’s right up there with water.
Mark Stiving: Even above water, if you want to make it true. But I’m with you. So this is inherent value. You get a ton of value out of having air to breathe. The other type of value is called relative value. It’s what’s the value of one alternative versus the other alternatives. I just captured some fresh Reno air. How much would you pay me for it?
Charge what a customer is willing to pay. - Mark Stiving
Robbie Baxter: Nothing. I like my California air.
Mark Stiving: Good. You have air around you that you want for free, right? So air is either worth everything to you or nothing to you. Depending on if we’re talking about inherent value or relative value.
Robbie Baxter: Okay, this an AHA! for me. This is really valuable, because I’ve thought about this a lot, and I love the way you frame this as something can be really valuable, but you’re not willing to pay for it.
Mark Stiving: You’re spot on. The way we think about this is, we build products to solve problems for customers. And I could solve a really valuable problem for a customer but if I have a competitor who solves that exact same problem at a really low price, I can’t get a customer to pay me a ton of money, because they have alternatives that are much lower priced. So when I’m thinking about pricing a product, the very first thing I ever think about is, “Do I have a competitor?” And if so, “Who is that competitor?”, “What’s going on inside my buyer’s mind as they decide?”, “Am I going to buy your product? or Am I going to buy someone else’s product?”. I call these the ‘Will I’, and the ‘Which one’ decisions. ‘Will I’ is, “Am I going to buy something in this product category? Am I going to breathe air? Am I going to go to the movies? Am I going to buy a new car?”
And then we have the ‘Which one’. ‘Which one’ is, “Which one am I going to buy? Am I going to breathe Reno or California air? Am I going to buy a Ford, a Toyota, a Lexus or a Mercedes?”. We’re making a ‘Which one’ decision. When people are making the ‘Will I’ decision, they’re not price-sensitive. When people are making the ‘Which one’ decision they become very price sensitive.
Robbie Baxter: If there’s no other choice, your pricing has a lot more flexibility, but the minute that you start to have competition, your price needs to get more and more specific and precise.
Mark Stiving: Yes, we can say it that way. I would say that the buyers are more price-sensitive. But let me toss this into the subscription world for a second, so now imagine I’m trying to win a new customer. By the way, my second book was called Win Keep Grow. I love that because I didn’t come out of the subscription world. I came out of the transaction world.
When I first started studying subscriptions, the idea that you have to win customers, keep customers, and grow customers was so unique to me. That’s the main framework I think about when I think about subscription is winning, keeping, and growing customers.
Now let’s talk about pricing. I want to go win a new customer. How do I win this customer? Well, I’ve got to say, you like my product better than my competitors products. So you’re making a ‘Which one’ decision and I need to be priced competitively. But then you choose me, you’re now in my world and I want to upgrade you from my good package to my better package. Guess what? You are only making a ‘Will I’ decision. You are not thinking to yourself, “Oh, I could upgrade to your better package, or I could switch to this other competitor.” Because switching costs are almost always too high. It’s painful. I have to deal with the evaluation again. So we’ve now moved people from that ‘Which one’ decision back into the ‘Will I’ decision, and the price becomes less important and less price-sensitive. And what we’re doing now is we’re not selling the value of my product relative to my competitors products. We’re now selling the value of solving the problem. What’s the problem that we solve with this upgrade? How valuable is solving that problem?
Robbie Baxter: Yeah, that’s really interesting. This ‘Will I’ versus ‘Which one’ and where it is in the Win Keep Grow continuum is really important and a good framework, for a lot of our listeners who are thinking about subscription product-offering and how to price both the core offering, and then higher or lower tiers of pricing, or any add-ons that they have.
I want to keep going on this. I appreciate you bringing us into subscriptions, and I want to ask when you think about all the different how’s for pricing, which I want to get your thoughts on, when does subscription pricing make sense when you’re considering how should I price?
Mark Stiving: The hardest time I have answering this question is defining what subscription pricing is. If you wanted to define a subscription as, I pay the same monthly price every month or the same price every year, then I could take that as a subscription price and say, “Okay, we can figure that out.” But what we often are doing is we’re charging based on usage. You’ve seen a lot of subscription companies nowadays say, “Hey, we want to go do usage pricing.” So is usage pricing still a subscription or is it a layer on top of subscription? It depends on how you want to define the word subscription. The way I think about it is that I always want to charge based on how my customers are getting value from my products.
Let’s talk about Netflix, because everybody knows Netflix, right? It’s hard to say Netflix is doing it wrong, although I’m going to say they’re doing it wrong, but if we were doing usage pricing. What Netflix might do is they might say, “Oh, you watch 10 movies a week, you have this price. These guys only watch 3 movies a week, they get this price.” That’s really based on usage. And you can imagine that usage has to do with how much value somebody is getting from my product. If we switch that into a B2B world, we think about someone like Hubspot. Hubspot could charge based on the number of people on your email list and in your CRM. The more people you have in your CRM, the more value you get because you’re sending out more marketing messages to more people and you’re managing more. That’s usage-based pricing.
Robbie Baxter: Are you saying that you believe that Netflix would do better to price on usage because it’s more aligned with how consumers see the value rather than pricing the way that they have priced which is for most people who use streaming. It’s unlimited access to all of their content.
Mark Stiving: It is very hard for me to say that Netflix is not doing it right because they make way more money than I do. But if I were to craft a new pricing strategy for Netflix, I would probably craft something like.
By the way, when we use usage data because we have a solution that’s in the cloud, we can see how many and how much people are using our product. This gives us great information to know who’s getting the most value from our products. And so I would be watching usage and saying, “What are my top 20% or top 25% customers using?” And if I were to pick that price, that number of movies or number of minutes per month they’re watching and put a price, a relatively high price and say, “Hey, you can watch up to 100 hours a month at this price point, and then above that, it would be this next price point.” They would get subscribers to subscribe to the highest level because they want to watch Netflix all the time.
Robbie Baxter: I guess the things that are coming up for me when I’m listening and thinking about this because these are the real issues that people think about, especially when they’re launching a subscription business or some kind of a recurring revenue option is, is it more fair to charge the people who use whatever it is the most? The most content, the most features, the most support time. Charge them more than people who use less? Or is there some kind of a built-in benefit to having unlimited access in exchange for a regular fee?
When I go to an all-you-can-eat, all-included resort, I’m not a big drinker, and I know intellectually I’m not getting the best value. There’s some guy in the pool who has not stopped with the margarita since 9:00 AM. He’s getting a lot more value. Theoretically, he should be charged more. But the value that I get is in not having to keep track or not having a meter running. When you think about this Netflix example and try to guess why they don’t charge on usage. That would be a hypothesis that there is something relaxing or comforting about fixed price. I don’t know if you remember this, but their very first campaign was no late fees.
In other words, don’t worry about pricing. You will have pricing security. I think people are willing to pay, or some people are willing to pay more for pricing security or ease of understanding what the pricing is going to be, even if they’re paying a premium for that privilege.
Mark Stiving: You just said that I could give you an unlimited plan at a higher price, and you would pay that because it makes you more comfortable. Let me rephrase what I said, and maybe I’ll make this simpler. Let’s assume that Netflix is charging $20/month right now. And I say, “Netflix, why don’t you create a $10/ month plan that limits people to 50 hours of movies a month?”
Robbie Baxter: This is something that I think people worry about or wonder about. Will they do better if they have a 50 hours a month plan or unlimited family now that they’ve just cracked down on shared passwords? Unlimited access but limited hours. Would there be a group of people that would want it? And my guess is that there is a group of people that would move to that, but I don’t know if the total revenue or the total number of subscribers would go up or down as a result of doing it, and I don’t know whether the happiness, the net promoter score, the satisfaction, or the loyalty would go up or down as a result of that. I’m sort of struggling.
Netflix also recently introduced Ad Supported pricing tiers, which they swore up and down they would never do, and I think they’ve just maxed out on the number of people that are like me, that like the security of having a fixed price and are willing to take some disruption in ads in order to get a better price.
Mark Stiving: Yeah. If I were advising Netflix, and now that you’re taking a chance to think really hard about how you would do this, here’s what I would do. I would say to Netflix, “Take your top 20% users and figure out what the number of hours is they’re using, and you’re going to make that cap and tell everybody else and say, “Look, you use way less than 100 hours a month. So although we put a cap on you, it doesn’t affect you.” And we take the 20% who are watching over a hundred hours a month, and we raise their price to $30 instead of $20.
Now, here’s what’s great about what I just did; that top 20% of users are really heavy users. They love Netflix. They watch Netflix a lot. The heavier the user, the more value they get from our product, and the less likely they are to churn if we raise their prices. It is very likely that they make a lot more money if they raise prices on a few of the sub-segment of their really high-user customers.
Now, are they going to do that? I don’t know. But it feels to me like they could easily get away with that. Now, we shouldn’t worry about Netflix’s pricing. We should worry about everybody else’s pricing. But take that lesson and say, you’ve got people who are using a ton of your product. They get a ton of value from your product. You should be able to somehow raise their price.
Robbie Baxter: Let’s keep going with this. So, you now have the top users paying a higher price. Medium people paying a medium price. There’s an ad-supported tier at a lower price. How many tiers is too many and is there a trade-off in the number? I believe that the more tiers you add when there’s no salesperson as inter-intermediary, the more confusing it is for somebody, the less likely they are to buy, or the more likely they are to keep revisiting their decision and make sure they’re in the right tier. What do you think about the number of tiers or the number of options you offer as a subscriber?
Mark Stiving: So good, better, best is popular for a reason. Three tiers is really a good answer for how many tiers you want. The saying that I use all the time, which is very similar to what you just said is, “Confused buyers don’t buy.”
Robbie Baxter: Great. Another great line. Confused buyers don’t buy.
Mark Stiving: Yeah. So we want to make sure that our pricing and packaging are very simple for buyers to understand. My favorite by far is good, better, and best. Now, if you are going to add an option, here’s what I would require and that is, to make sure that it’s expensive because you don’t want to manage a whole bunch of inexpensive SKUs. You don’t want to nickel and dime your customers.
Confused buyers don’t buy. — Mark Stiving
Robbie Baxter: I love that. I’ve never heard somebody say, “If you’re going to add an option, make sure it’s expensive.” But you’re right! Because people often add these things. I told you before we started recording that a client has a $25 option on a $4,000 product. I’m like, Why bother? Why not just give it away or raise the price a lot?
Mark Stiving: You’re spot on. And then the other thing you want for your option is for it to be something that people in your good category would want, some people in your better category would want, and some people in your best category would want. If it’s obvious that only people in the best category want it, we just put it as a feature in the best, and we don’t make it an option. It doesn’t make sense to me.
Robbie Baxter: That’s another great rule. There are a lot of little nuggets here, but that’s very actionable, right? You have your three tiers. You’re thinking I have a new feature. Do I put it into one of my buckets, or do I make it a separate feature? You’re saying, if there are some people in each category that would want it, then it gets its own price. If it’s only for one, then dump it in there.
Mark Stiving: Exactly. You don’t want very many options. You want very few options to keep the decision simple. Here’s a great example of an option that works well: if you are doing Turbo Tax for your taxes, there’s a California state version of Turbo Tax as an option. If you live in California, you’re going to buy that as an option. I live in Nevada. I’m not going to buy it. It doesn’t matter if we both use the least expensive version of Turbo Tax or not. I don’t want it. You do want it, right?
Robbie Baxter: Makes perfect sense. What about the price of free? When does free work? When doesn’t it work? What’s your point of view on the role of free in pricing?
Mark Stiving: Free is amazing for products that have no marginal cost. So that means it’s always digital-type products or data. It works best by far if you have a network effect in your business. So a network effect is where the more people I get to use the product, the more valuable it becomes to all the users.
All social media users are based on network effects. Right? We all have LinkedIn accounts because everybody else has a LinkedIn account. What we want to do with free is to say, “How do I get more and more users on my platform as quickly as possible?” Totally okay with that in terms of a free strategy. But we have to think of free. It’s much more of a customer acquisition strategy than it is a pricing strategy because what we’re really doing is we’re giving the product away to build a pool of people that we can now go fishing in.
The whole point of free is to have this group of people that I can eventually upsell and get them to pay me money for something, whatever that happens to be.
Robbie Baxter: What about free trial?
Mark Stiving: Free trial is interesting. There’s a big difference between free and free trial. For free, I use a package called Toodledo. It’s what I do for my tasks, how I manage my daily to do, and it’s free. I used it for free, and I got to the point where I was using enough of it that I just subscribed because I wanted to pay the money. I think there might have been some features that I cared about, but I really wanted to make sure I was paying them for it. But I would never have tried it if it was a free trial, and I knew I was going to have to pay for it a month from now or 2 months from now. I’m just using this because I can now use it. And as I grew my capability, I grew my willingness and ability to pay.
Robbie Baxter: This is a double-edged sword for a lot of subscription companies who introduce a free offering. They introduce it for free because they want to show people that you don’t think you’re going make a habit of it but we know you are going to make a habit, therefore it’s freemium. In some cases, it’s just free forever because they don’t have a premium product yet.
I had this issue with Zoomerang, which was my second subscription company many years ago that became part of Survey Monkey. All these people think, including people at Procter and Gamble saying, “Well, I’m using the free version, but it’s all I need.” I love the company, but it’s all I need. I don’t need any more features. Then you have people who are very nice, and say, “I just want to pay you because I don’t want you to go out of business, and I really value what you’re doing.” But most people don’t. Most people just accept that there’s some logic in the world that says this app is free, music is meant to be free, or a dating app is meant to be free. If you realize you got yourself into that jam like Toodledo did, what do you do to get out of it?
Mark Stiving: This is the packaging question, which is a really hard question. What features I’m going to put in my good, my better, my best? And what we want to think about, especially for a free package, is what’s the minimum viable product that I could possibly have? Then what’s the value that most people truly get from my product?
Let’s say that I gave my product away for free to everybody for a year, just because I wanted to watch usage. I want to see what these people use, and what I could do then is go through and say, “Look, everybody uses these 4 features. So these 4 features are going for free and 50% of my users are using this set of features, so I’m going to take them and put them in my paid tier and from now on, anybody who wants to use this set of features is going to pay me some amount of money. And 25% of people are using this set of features so I’m going to put them in my best tier. If you want those, you’re going to pay me a lot of money.” By watching the usage from our current customer base, it gives us great insight into which customers are valuing which features.
Robbie Baxter: Yeah, that’s interesting, and is it tough to put features behind a paywall to start pricing? To price or not to price is the question. How do you know when it’s time to price the product? I agree with you that a lot of companies offer the whole thing for free upfront. Their MVP, the first product that they come out with, that they think is really viable, solves the problem completely, even if it’s not as elegant as what they’re envisioning for the future. Lots of people sign up. They see they’re giving lots of value. But they’re also educating people that this product is meant to be free. If you have to raise the price or add a price. How do you do that?
By watching the usage from our current customer base, it gives us great insight into which customers are valuing which features. — Mark Stiving
Mark Stiving: Let’s talk about two different things. First, if I’ve got a whole bunch of very free customers, that may be very valuable because I’ve built a brand. I built a reputation. I built a great product, and now I can start charging for new customers to come in. This doesn’t matter if it’s free, or if we’re just talking about raising prices on normal subscription products. Your new customers don’t know your old price. Just raise your price.
Robbie Baxter: On day one, you say, “Anybody who’s in before today gets our old price, and going forward, you get our new price if you leave. If you’re a subscriber and you cancel when you come back, you’re in our new bucket. But as long as you stay loyal, we’re going to keep you where you are. Is that what you’re saying?
Mark Stiving: Yes, so I didn’t actually say that, but everything you said is consistent with what it is because I’m going to modify what you just said for my step two. Step 2 is one of the most amazing things about subscriptions. In order for me to win a new customer, I have to convince them of the value of my product. Let’s call this perceived value. You don’t know if it’s true or not, you actually don’t know how much value you’re going to get from a product until you’ve started using it. Now I’ve convinced you to use my free product. I’ve convinced you to buy my good package, whatever it is I’ve convinced you of, you’re using my product. You now know there’s real value in this product. You’ve put time into learning it and building your own processes around it, right? If Toodledo doubled or tripled its price, I would still pay it. It would tick me off, but I would still pay it because I’ve built my world and the way I manage my day around their products.
Mark Stiving: Now, what that says is that we can now go raise prices on our current customers because they now know the real value, and the odds are good. Their real value is much higher than the price we’re actually charging them. Now, I’m not saying that it’s comfortable to do that. I’m not saying they’re going to like you when you do that. I’m saying you can do that, and most of them will stay.
Robbie Baxter: Then you could raise the price for everybody, including new customers, new subscribers, and existing subscribers, at the same time. Is that what you’re saying?
You have a year. You see what happens when people use it for free. Make it a habit, commit, they’re not going to go anywhere, and they’re getting great value. Therefore, at the end of that first year, I could charge new customers or subscribers. And I could probably charge my existing subscribers because they’re the ones who actually understand the value.
Mark Stiving: Absolutely right. However, can we talk about raising prices to existing customers for a while?
Robbie Baxter: Yes, next question.
Mark Stiving: Step one. If I were raising prices on existing customers in a subscription business, I would look at usage. We’re going to look at that usage data one more time, and the ones who are using my product the most, get the most value for my product. I would raise their price first. And odds are good, nobody is going to churn. Then as we start going down that usage level, we’re going to get to the median point, and we might start finding a few people who would churn when we raised their prices. As we get to the low usage, people would start to churn. People will churn.
My advice is to find that price point, find that level inside the amount of usage your customers are using, to where the amount of churn is costing me more than the increase in profit from the price increase, and stop raising the price below that level. Now, let me give you a great example of that. Imagine that you belong to a gym. You pay 20 bucks a month. You never ever go, but you just pay your 20 bucks a month, and one day the gym calls you and says, “Hey, we’re raising rates. It’s not going to be $25.”
Robbie Baxter: They are the most likely to cancel.
Mark Stiving: Yeah, they’re most likely to cancel it like I’m out. But if you go every day, you pay your 20 bucks, and they say it’s going up to 25 bucks. You’re like, I don’t like it, but I go every day. It’s my life.
Robbie Baxter: Great example, fascinating.
Mark Stiving: Can I give one more example before you ask the next question?
Robbie Baxter: Yeah.
Mark Stiving: If we’re going to raise prices on current customers, I want to give you the formula for how to do this. This is the communication that you’re going to send out to your customers. The first thing you’re going to say is that my costs went up. Costs don’t drive pricing, but customers don’t want to hear you want to make more money. So you just say my costs went up, whatever they were. You could say we haven’t raised prices in 3 years, 10 years, 40 years, or whatever the number is. Number 3 is that we’ve added more value to our product recently.
Then number 4 is to say or do something nice for them. A couple of examples of those are: you could say, you’ve been a loyal customer of ours, so although we raise prices today, we’re going to hold off on your price increase for 6 months, and then we’ll bring your price up; or another one might be if we’re at that free level, we decide we’re going to start charging. Say we’re going to charge $20 a month. We could send out an email that says, “Hey, we’re charging everybody $20 a month,but because you are one of our Beta customers upfront, your rate is only going to be $10 a month.”
So what we’ve done is made them feel good that we’re doing something for them while we’re raising their price.
Robbie Baxter: Right? I love that. That’s very specific. I think a lot of people struggle with how to raise their prices, how to talk about it, and whether to talk about it at all or just hope that nobody notices, although the FTC is not letting people do that anymore.
I have a question on a very different topic that I wanted to make sure we got to because I know that some of the people that are listening come from the B2B world. I’m wondering if you’re somebody who’s been pricing for consumer, and now you’re pricing for B2B. What additional considerations do you need to take into account?
Mark Stiving: Let’s differentiate B2C and B2B. In B2C, we get tons and tons of data. We set a price. It’s on our web page where people choose to buy from us or not. And I call that TIOLI pricing, which is take it or leave it pricing. I’m not negotiating with individual customers about prices. This is just the price.
In the world of B2B, if you are selling to small and mid-sized businesses in that same TIOLI-type market where I’ve got a web page, and I’ve got a set of prices. You can do it exactly the same way, right? We’re trying to figure out how much somebody is willing to pay. One advantage we have in B2B is that we could theoretically estimate how much profit my customers will make when they use my product. In B2C, we don’t have that. But if I’m selling with a single price on a single web page or three prices on a single web page, then the pricing is mostly the same.
The huge difference in B2B is most of your revenue, or half of your revenue is probably coming from negotiated deals. It’s probably coming from a direct salesperson out dealing with enterprise-type customers, and you’re trying to sell huge opportunities. I think of these as custom one-off pricing. You probably want to use all the strategies we thought of in terms of what am I going to use for pricing metrics? And how am I going to do my packaging? But when it comes time to deal with any given customer, you’re negotiating with that customer about what it is you’re going to do for that customer. The price and price metric could be different. You do want to be really careful that your internal systems can handle whatever it is you choose to do. So oftentimes, we choose pricing metrics that we’re already using in our ‘take it or leave it’ world. But we’re negotiating different rates and different prices
The one other thing I would strongly recommend to everybody who’s in a cloud-based SaaS product do is never customize your solution. Keep it standard! Keep it cloud, and if they need customization, make it configurable, not customized, because otherwise, your management of your technology becomes ridiculous.
Robbie Baxter: You lose a lot of the benefits of the subscription models.
Subscription pricing and models are in part, I think, successful because of their clarity, consistency, and tracking ability. When you have customized offerings, you also have customized pricing, and you have to keep track of both. So I think that’s a great point.
Mark Stiving: And I know that you’re going to upgrade my software next month, and it’ll work because it’s everybody else’s, and you’ve tested it. But when I have customized software, now you’ve got to test mine as well as everybody else’s. It’s just that it’s a pain.
Robbie Baxter: Yeah. I’m going to wrap it up. There were lots more things we could have talked about, but that’ll have to wait for another day. Do you have a minute or two for a speed round?
Mark Stiving: I hope so. We’ll find out.
Robbie Baxter: Okay. The first subscription you ever had?
Mark Stiving: Probably a gym membership.
Robbie Baxter: Your favorite subscription today?
Mark Stiving: Toodledo.
Robbie Baxter: An effective pricing strategy that delights you?
Mark Stiving: I rave about LinkedIn’s pricing all the time.
Robbie Baxter: Why do people end prices with 99 cents? And how well does that work?
Mark Stiving: Because we are lazy subtractors. It is probably the least important thing you want to care about if you’re worried about your pricing, although it’s a decision you have to make.
A really great rule of thumb is, if your price ends in 9 people tend to think of it as a good deal, if your price ends in 0, people tend to think of it as high quality, and if you care, all of my prices end in zeros.
Robbie Baxter: Awesome! The last question is, which of your books is best for subscription pros?
Mark Stiving: Am I allowed to say all three?
To be fair, Win Keep Grow is actually written for subscriptions, but I would say a lot of people who are born in the cloud know a lot of what’s in Win Keep Grow but they’ve never thought about it. It was a person’s observations coming not from the subscription world about what subscriptions are really like.
Robbie Baxter: Mark, thank you so much for being on Subscription Stories. I hope you’ll come back again soon. It’s been a great pleasure to talk to you.
Mark Stiving: Thank you, Robbie. This was a lot of fun.
