Subscription Pricing: When Complexity is Your Friend

“The way to build a complex system that works is to build it from very simple systems that work.”?

-Kevin Kelly

Welcome! I got a lot of great reactions to last week’s interview with Stamos Kanellakis, but one comment stood out: “Why force multiple prices on a subscription service when all you really need is one? Isn’t this all a little too complex? Netflix seems to be doing just fine with one price.”?

Now, I certainly agree that Netflix remains an incredibly powerful value proposition: one monthly price for thousands of hours of content. Particularly in consumer subscriptions, pricing simplicity is a strength.?

As the New York Times reporter Shira Ovide notes in a recent article on subscriptions: ”One of Netflix’s overlooked superpowers is that there’s (mostly) just one version, without add-ons for sports or new-release movies, or different prices with and without commercials. The simplicity of a single subscription offer removes the need to evaluate a bunch of options before deciding to sign up.”?

But as someone who lives in the realm of subscription complexity, I think we’re headed for way more diversity in terms of services and pricing. Many of the companies I work with, particularly on the B2B side, have quote-to-cash flow charts and software architectures that will make your head spin. Things are changing in retail subscriptions as well.?

And guess what? That’s not necessarily a bad thing. We all know that the economy is heading towards customization, personalization, and agility. That’s what customers (both individuals and businesses) are asking for. The “offering design” challenge for subscription companies will always remain the same: aligning value to price. And increasingly, that value is starting to diversify in all sorts of interesting ways.?

Let me give you an example from Stamos’ HBR piece of how a “complex” subscription offer can sometimes make way more sense than a simple one. Let’s say you’re an auto manufacturer with two new digital services that you’re excited about: over-the-air software updates and semi-autonomous driving. Here’s your challenge: Should you include both in an existing subscription service and slightly increase the overall monthly price (the simplicity route), or offer them as stand-alone services (the complexity route)?

Here’s what could easily happen in the first scenario: you wrap in the new services and boost your standard monthly rate to cover the R&D costs, and everything goes horribly wrong. A significant percentage of your customer base revolts. They didn’t ask for these new services, and they’re not happy about paying for them. As a result, the increased subscription fee isn’t enough to cover the subscriber churn, and your monthly ARR actually drops. Yikes. (Lots of people forget, but this scenario actually happened to Netflix in the early days.)??

But here’s what happens when you choose the “complexity” option. You determine that over-the-air software updates don’t warrant that much additional customer value, so you decide to bundle them into the standard package for a slight overall price increase. The real appeal is the semi-autonomous driving feature, so you offer that as a stand-alone package for your fangirls and fanboys. Instead of going down, your MRR bumps up nicely:

Sometimes the more complex option is the one that makes the most sense because it accommodates more kinds of subscribers. Sly Sly Stone said it best -- different strokes, for different folks. The Subscription Economy is maturing, and as systems grow, they inevitably become more complex.?

Oh, and that New York Times article I cited in my introduction? It’s called “The Subscription Buffet May Be Over.”?Spotify and Youtube are experimenting with lower-tier offers. On the other end, Disney + is charging extra for new release movies, and Whole Foods is experimenting with new delivery fees. Even in the consumer space, the days of one-size-fits-all subscriptions seem to be coming to an end.?

The trick, as Kevin Kelley notes in my opening quote, is to keep building on simplicity.?Keep building on value.?

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Disclosure: These opinions expressed are mine, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.?