Lessons from Netflix and Spotify: how to perfect subscription strategies

Online subscription services, the new tech battleground
What have the big players taught us about subscription models?

Netflix and Spotify seek to become the de facto standards in their paid-for video and music streaming services, and this is coming at the expense of profits currently, with Spotify loss making and Netflix loss making outside the USA.

So what is a smart pricing strategy for subscription businesses – both in the digital and non-digital worlds? Here's a handy break-down:

Offer a range of price points

Let customers choose how much they are prepared to pay by offering a range of price points for differentiated products.

This has the combined effect reaching a wider market, extracting value from those most willing to pay (e.g. with a 'premium' offering), and giving customers something to down-trade to, which lowers the risk of price increases and churn.

But companies need to be careful to avoid cannibalisation if introducing lower price points by ensuring these mainly target new customer groups.

Lock customers in with discounts for longer term subscriptions

This also helps to achieve the above and stabilises revenues (particularly against competitors). By promising not to increase prices for existing customers for 2 years, Netflix has implemented a form of this strategy.

Communicate price increases carefully

Communication should always lead with a value message, and state the price increase in the smallest way possible – Netflix's UK price increase was 17% but was communicated as just £1/month.

Differentiate price increases if possible

At the most basic level this means differentiating the communication to customers based on what they value most about the product they buy.

The most sophisticated subscription businesses will also differentiate the price increases based on customer segment level price sensitivity – but this is only possible if pricing is fairly in-transparent or you risk consumer ire.

If you have a retention strategy it should be carefully controlled

As anyone who has tried to leave a mobile phone contract knows, there are discounts available from the retention teams at these companies.

But companies should be prepared to let some customers go – depending on the current strategy, profit should be a key goal, and companies may need to cede some market share to lower priced competitors to preserve profit margins.

Companies should make sure there are limits in place to control this discounting and avoid turning their customers into consistent hagglers.

  • Nick Zarb from the world's leading pricing advisors, Simon-Kucher & Partners', can offer his top tips for a smart pricing strategy.