Lehigh (10 13)

$X.99 per Month
An introduction to the method and madness that underlies
subscription pricing
Presented by: Brent Chudoba, SurveyMonkey
Lehigh University: Principles of Marketing – MKT 111
OCTOBER 29, 2013

Hi,
I’m Brent

•  VP, GM of SurveyMonkey Audience
•  @SurveyMonkey since Apr. ’09
•  Previously:
-  Private Equity: Spectrum Equity Investors
-  Investment Banking: Piper Jaffray

@bchudoba
brentchudoba.com
in/brentchudoba
2

Goals
•  Introduce several common pricing examples,
discuss embedded marketing themes
•  Discuss LTV (Lifetime Value), how it's used in
practice and how tightly it connects to pricing
•  Show how price points and and subscription
terms interact with marketing and business goals

4

Scope
•  The content is focused on B2C (business to
consumer) and B2B (business to business)
subscription models
-  Dealing largely with lower priced offerings

•  Out of scope: lots of things
-  International, licensed models, high value contracts,
services, auction pricing, price testing inventory
constraints…
-  We are only scratching the surface of pricing
considerations in the following material
5

DIRECTV
What can you infer about DIRECTV’s
marketing goals from the following page?

6

Avg. customer
price probably
around $70,
avg. lifetime at
least 2 years
(LTV >=$1,700);
CAC tolerance
of $200 or more
for a new paid
customer

Packages 1 and
5 may be used
as bookends,
guiding people
to packages
2,3,4

This is where
they want you,
middle
package, most
popular

Disclaimer: Comments and estimates and are to be used for example/discussion purposes only. Estimations may be inaccurate.
8

Spotify
What can you infer about Spotify’s

9

This is a freemium
product, if I downgrade I
revert to free

Using images to show the major
differences, which is device
portability, extremely helpful cue

They are
really trying
to drive to
this
package w/
a badge
and a
different
color CTA

11

SurveyMonkey
What can you infer about SurveyMonkey’s

12

These are annual packages,
but displayed with per month
pricing, with one option for
monthly billing

They want me here, “most popular” badge and “Gold” naming
convention implies best of breed with minimal price increase

14

WTA?!? What the acronym?
I overhear conversations like this every day…
Marketing: “This test failed, the LTV impact was too negative despite
a higher AOV.“
Exec: “But first period churn may be better given the source, and with
the higher AOV and ARPU, the LTR is going to look better.”
Marketing: “The main AOV impact was related to higher conversion
because of the source mix, but that also means CAC is higher for
these users so LTV will be lower.”
Exec: “Ah, gotcha. Makes total sense, let’s keep testing.”
16

But the acronyms and jargon are pretty important
•  There are about a dozen inputs that
go into many of the spend
calculations for marketers
•  Most businesses rely heavily on core
metrics that allow them to gauge
performance
•  Advice: when you hear a metric you
don’t understand, raise your hand,
figure out what it means…
17

LTV (Lifetime Value)
A metric that matters more than most for a subscription business

18

LTV: Lifetime Value
AKA: CLV (Customer Lifetime Value)
AKA: The godfather of all metrics
•  Definition(1): a prediction of the net profit
attributed to the entire future relationship with a
customer
•  Formula:

(1) Source: http://en.wikipedia.org/wiki/Customer_lifetime_value

19

Calculating LTV
Let’s start with with a simpler LTV calculation:
•  We are going to ignore discounting (time value of $), and
assume costs to acquire and supporting customers are
negligible
How much do
How long will you
keep paying me?

you pay me per
month?

LTV = Monthly ARPU * Average Customer Lifetime (in
months)
•  ARPU = Average Revenue Per User (per month)
20

Monthly ARPU
How much do customers pay every month?
•  Netflix: $7.99
•  Spotify: either $9.99 or $4.99
•  SurveyMonkey: $17 or $25 or $65
For products with different package pricing or term
discounts (annual vs. monthly pricing), you
basically need to find the weighted average, or
calculate each package type separately
25

Average customer lifetime
How long do customers stick around?
Method 1: Half life
•  Simple, but can grossly underestimate LTV
Method 2: Sum of monthly retention % estimates
•  Accurate, but requires healthy historical data and/or good
assumptions
These are just 2 of myriad ways to find avg. lifetime
27

Half life

Retention Rate

•  Assuming stable churn rates (e.g., 5% per month), the average life
time of a customer is when retention reaches 50% and half of
customers have churned
•  In the example below, right after month 13
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Month
* The data used above is used for example/discussion purposes only.

28

Sum of retention
•  The sum of the area under a retention curve can estimate average retention
•  Useful with irregular churn patterns (e.g., high churn in early months)
•  In the example below, the sum of the first 36 months of retention percentages
is 13.4 months

Retention Rate

80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Month

29

LTV Calculation
LTV = Monthly ARPU * Average Customer Lifetime
(in months)
Using examples from the previous sections:
•  If ARPU = $10/month
•  And Average Customer Lifetime = ~13 months
Then, LTV = $130 per new customer
30

Question:
Why does LTV matter to a marketer?

31

It often governs how a marketer spends their time
and $
•  If the marketing spends $140 on paid acquisition
channels (e.g., AdWords) to acquire a customer
that is only going to generate $130 (using our
prior example) in their lifetime, they will run out of
money to spend very quickly, if they still have a
job…
32

LTV can govern…
•  How much businesses are willing to spend to
acquire a new customer
•  Whether a business model can support having
sales people
•  What marketing channels are available (e.g.,
online, social, TV, radio)
•  What areas in the customer lifecycle are the most
important (acquisition, retention, engagement)
33

So where does pricing fit in to all of
this?

34

•  Price is the 1 variable in the LTV equation that
marketers and businesses have 100% control over
•  So its one of the most important levers that
marketing can use to achieve business goals
-  Initial price setting
-  Price testing
-  Packaging/bundling
-  Discounting
-  Upselling

35

So if a LTV governs marketing and sales
possibilities…
And pricing is a key component of LTV…
And higher prices correlate to higher LTVs…
Why not just raise prices to the maximum that
people would pay?

36

Price often impacts conversion
•  Price impacts conversion rates which impact revenue
•  Marketing needs to know what it is optimizing for: conversion or
revenue, or something else
Revenue & Conversion Rate @ Various Prices
16%

Revenue per 100 Visitors

Revenue per 100 Visitors
$60

Conversion Rate

14%
12%

$50

10%

$40

8%
$30

6%

$20

4%

$10

2%

$0

0%
$1

$2

$3

$4

$5

$6

$7

$8

$9


$10 $11
Pricing
37

$12

$13

$14

$15

$16

$17

$18

$19

$20

Conversion Rate

$70

Quick pricing detour
Let’s look at how pricing changes can interplay w/ conversion and LTV

38

Question:
How many people have access to a Netflix
subscription?
We surveyed 514 people and
asked:
Do you currently have access to an
active Netflix subscription?
•  Yes
•  No
•  I don’t know

39

Question:
How much does Netflix cost?
Survey Question:
How much does Netflix cost per
month?
•  $4.99
•  $7.99
•  $9.99
•  $14.99
* The data used above is used for example/discussion purposes only. N=246 40

Question:
What would you do if Netflix raised its price to $9.99?
Survey Question (for those who answered
$7.99 to the initial pricing question):
What would you do if Netflix raised its price
to $9.99 per month?
•  Nothing
•  Cancel my subscription
•  Move to a competitor
•  Other (please specify)

Question:
What would you do if Netflix raised its price to $14.99?
Survey Question (for those who answered
$7.99 to the initial pricing question):
What would you do if Netflix raised its price
to $14.99 per month?
•  Nothing
•  Cancel my subscription
•  Move to a competitor
•  Other (please specify)

Netflix pricing considerations
•  On 10/21/13, Netflix reported that it added 1.3M
net subscribers additions (new minus churned)
•  Let’s assume it added 2M new subscribers and
700k cancelled, so 1.3M net additions
•  And let’s use some estimates for our LTV
variables
-  ARPU = $8/month
-  Average customer lifetime (months): 24

44

LTV using current pricing
•  New customers: 2M
•  ARPU = $8/month
•  Average customer lifetime (months): 24
•  LTV per user: $192
•  Overall LTV = $384,000,000


45

LTV using $9.99 pricing
Assumptions:
•  Netflix does not increase pricing for existing customers (churn stays the
same)
•  The % of people who said they would cancel are a proxy for the % drop in
new user conversion
•  The conversion drop has no impact on avg. customer lifetime
Updated metrics:
•  New customers: 1.3M (2M * (100%-35%))
•  LTV per user: $240 (+25%)
•  Overall LTV = $309,984,000 (-19%)

46

LTV using $14.99 pricing
Assumptions:
•  Netflix does not increase pricing for existing customers (churn stays the
same)
•  The % of people who said they would cancel are a proxy for the % drop in
new user conversion
•  The conversion drop has an equal impact on lifetime
Updated metrics:
•  New customers: 292k (2M * (100%-85%))
•  LTV per user: $360 (+88%)
•  Overall LTV = $105,048,000 (-73%)

47

Scenario Review
•  $7.99: New customers: 2M, New customer LTV: $384M
•  $9.99: New customers: 1.M, New customer LTV: $310M
•  $14.99: New customers: 1.5M, New customer LTV: $105M
•  My hypothesis before running the experiment was that LTV may actually be
higher for the on of the higher priced scenarios (it wasn’t, which makes for a
less difficult conclusion)
•  With this example we see that individual user LTV must be combined with the
impact of new user conversion
•  And even if the higher price scenarios had provided higher overall LTV, we
must answer questions like:
-  How do we feel about total subscriber count and overall user growth?
-  How do we factor in viral marketing from more happy customers?
-  How important is market share and competitors picking up more customers?

48

Business goals help optimize pricing
strategy

49

What can pricing be optimized for?
May optimize for:

Business scenario:

•  Conversion

•  Boostrapped startup

•  Cash

•  VC backed startup
•  Established business

•  LTV (long term revenue)

•  Unknown CLV

•  Profit

•  Physical product retailer

•  Supply/Inventory mix
50

Subscription term implications

52

What’s your LTV?
A peek into the complexity of a multi-product, multi-service
calculation

53

LTV can get really, really complex
Does anyone have an iPhone?
How would Apple estimate your LTV?
How valuable did you become to Apple when you bought an iPhone?
After your iPhone purchase, you became:
•  Much more likely to spend money on iTunes
•  Much more likely to buy a Mac, which makes you
-  Much more likely to spend more money on iTunes
-  Much more likely to upgrade to the latest iPhone device within 1 year of
launch

•  More likely to buy an iPad
•  Much more likely to upgrade to new versions of all these products…
54

Survey respondent sourcing
For the consumer survey about Netflix pricing in this presentation, we
used SurveyMonkey Audience survey respondents
•  We surveyed 514 respondents on October 27-28, 2013
-  Screening/skip logic was used, so not all respondents answered all
questions

•  This survey was conducted for example and discussion purposes
•  For more information on SurveyMonkey Audience
-  SurveyMonkey Audience Overview video
-  SurveyMonkey Audience Help Center

57

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