Episode 59: Pricing Subscription Services with Mark Stiving, Ph.D., Chief Pricing Educator, Impact Pricing LLC
In the episode, we’ll learn everything about pricing subscription services, from the psychology of costs to all about bundling and loyalty programs.
Keep reading to learn more about the episode.
Impact Pricing
Impact Pricing aims to educate companies about value-based pricing, which means to charge what a customer is willing to pay.
The company’s initial courses focus on pricing and value in subscription businesses. This relatively new business model differs from traditional ones and requires a new framework for capturing value.
Impact Pricing’s courses are available both online and live. The company also provides one-on-one mentoring for companies or people who want to have a pricing expert help them make important pricing decisions.
Mark Stiving
The episode begins with Mark explaining his background and how he founded Impact Pricing.
Mark shares that when he was 12 years old, he remembers going to grocery stores with his mom and seeing prices that ended in nines. He always wondered why companies did this.
Twenty years later, Mark found himself in a doctoral program at UC Berkeley. Here he had the chance to play with scanner panel data. This is the data companies take from your loyalty card usage.
Mark was able to show that pricing ending in nines actually worked statistically. This is because, as humans, we’re lazy subtractors.
Mark fell in love with trying to understand how people use prices to make decisions. Since then, Mark has been a director of pricing and a university professor. He has taught product management and created pricing courses.
A few years ago, Mark decided to start his own company, Impact Pricing.
In October 2021, Mark published the book, Win Keep Grow. Win Keep Grow shares the fundamentals people need to build and grow a successful subscription business.
The Psychology of Pricing
In the episode, Mark delves into the psychology of pricing and answers whether he sees different personal behaviors in B2B decisions versus B2C.
Mark’s pricing ends in round numbers, and he doesn’t use any nines.
However, Mark explains that when we compare two products, we usually subtract the prices and ask ourselves whether it’s worth it. But as we’re lazy subtractors, we don’t take away all the digits.
If people ignore those right-hand digits and subtraction, why wouldn’t companies use nines?
On the other hand, Mark explains why he uses zeros in his pricing. He uses the example of a suit that usually sells at $400 on sale for $299, which sounds like a good deal.
Then, imagine that the same suit typically sells at $399 and is on sale for $299. It doesn’t feel like as good of a deal, even if it’s essentially the same offer.
Mark explains that the correct method of pricing depends on the product and the situation. He shares that there are also studies that show that high-quality products typically end in 00.
We also learn how Mark finds out about the issues his customers experience. He goes on to explain his experiences dealing with companies he felt have priced their subscription services wrong.
Bundling
Mark talks about the bundling trend and whether he sees it continuing. Bundling refers to the selling of different items together as a package.
According to Mark, bundling makes sense as a business decision. He gives the example of Disney and ESPN. Mark explains that some people would pay a lot for Disney because they have small children who want to watch it constantly.
As such, they don’t have that much time to watch sports. Because of this, they probably don’t value ESPN that much.
On the other hand, some families watch lots of sports on TV and would pay for ESPN. But they may not have kids. Perhaps there are a couple of shows on Disney they would watch, but it isn’t something they massively care about.
But, if Disney and ESPN are bundled with a slight discount, you may interest both groups. People may think to themselves, ‘it’s only slightly more to get Disney or ESPN, so it’s worth it’.
Bundling interests people who have disparate preferences for different items. It bundles these separate products together so that more people buy both.
There are some families who would happily pay for both services separately. So when a company offers a bundle, they lose some revenue from the families who would have bought both services anyway.
However, bundling helps companies gain revenue from the families who would have only chosen one of the services without the offer. In most cases, companies make more money selling a bundle than they lose from those who would otherwise buy both services.
Loyalty Programs
Toward the end of the episode, Mark talks about the link between subscription services and loyalty.
Mark explains that he wants to redefine the word loyalty. Because when he thinks of loyalty, he doesn’t believe that he’s loyal to Netflix, for example. Just because he pays for Netflix every month doesn’t make him loyal to the brand.
He uses Netflix because he decided to use it in his home. However, when Mark goes to the grocery store, he has a choice to buy diet Pepsi, Coke, diet root beer, or something else similar. Deciding to buy diet Coke every week makes him loyal to the brand.
Mark goes on to discuss loyalty programs. A loyalty program typically rewards a customer for buying from a brand often.
Loyalty programs make a lot of sense, Mark explains, and this, in several different ways. But one important way is because of the behavioral economics concept, where we hate the idea of losing.
If you spent ages collecting points on a credit card, you’d hate the idea of losing the points, even if you weren’t purchasing for the points.
The point of a loyalty program is to give us a sense of belonging. It gives us something we don’t want to lose. Instead, we want to use and make the most of our rewards.
While a loyalty program provides customers with better prices, that’s not a big deal for them.
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