Considering a Subscription Model? Avoid These Rookie Mistakes

Considering a Subscription Model? Avoid These Rookie Mistakes

A pricing expert shares 10 pitfalls to watch out for.

The subscription economy is taking business by storm. Entire industries have moved to subscription-based pricing, leaving behind some of the slow movers but also giving new life to companies that were struggling. Some talk about the end of ownership and the start of usership. It is a real revolution.

Industrial companies have lately been getting on the bandwagon. BAE, NCR, Caterpillar, Siemens, Thales, Honeywell, GE, ABB and others are proposing subscription-based digital offers to their direct customers and channel partners.  Many such companies are just getting started with these flexible consumption business and pricing models, and they are prone to making mistakes from the very beginning.

Industrial companies need to pay closer attention to the successes and failures of their B2C counterparts. As you embark on you subscription journey, here are 10 mistakes to watch out for.

1. Setting subscription prices solely based on cost. In many industrial groups, cost-plus pricing is the de facto methodology for price-setting. It is internally focused and provides a sense of control. Applying this methodology to subscription-based pricing in a world that is dematerializing and commoditizing is irresponsible. In digital, the cost of devices and accessories are plummeting, and the rate of equipment obsolescence is accelerating. Pricing solely based on cost automatically means prices are going down cycle after cycle. It is not sustainable. Subscription-based pricing should be based on the 3Cs of price-setting: customer, cost, and competition.

2. Confusing leasing and subscription. These are two different business models. Leasing has been offered for decades in industrial markets, and finance teams are very proficient in designing leasing programs in partnership with financial institutions. Subscriptions are a very different business model. Not only does it imply a move from a “capex to an opex” model, but it brings additional value to customer besides the financing benefits. It is not unusual for customer subscribing to a product-as-a-service offer to pay several times the upfront value of the product over the duration of subscription agreement. This is why subscription-based models need to be differentiated and bring concrete value to customers. Do not forget to explain this to your finance organization!

3. Pricing too low from the get-go. When you sell a product, if your price is too low, you can always make an adjustment. In a recurring business, your pricing mistakes are also recurring! Set your subscription price too low for a two-year agreement, and your price is wrong for two years. Because many industrial companies use competition-based pricing to set their pricing levels, they focus on penetration pricing to capture market share and set the price too low. The reality of industrial markets is that prices will only go down from where they start. It is hard to move prices up when value is not demonstrated as part of robust marketing strategy.

4. Using the wrong value metric from the get-go.  Your pricing metric needs to match your customer value metric.  If your customer thinks in terms of run time or linear yard, then your pricing model will have to reflect that. Put yourself in the customer’s shoes and understand how they think. The same goes for the time of analysis of your subscription. Study your customer’s profit-and-loss statement and find out how they measure cost and income as well as what vocabulary and metrics they use.

5. Offering one price for all customers. It is also known that conducting customer needs-based segmentation is a real challenge for industrial companies. “One-size-fits-all” offers are easier to design and commercialize. In subscription pricing, one price for all is never recommended. Proposing a “1 or 0” choice to customer limits the opportunity to capture a larger portion of the total addressable market. The ideal number of offers is three or four, according to subscription experts.

6. Lack of versioning and packaging. Similarly, within customer or market segments, subscriptions should be design and packaged based on the most commonly accepted options used in B2C: good/better/best, bundles, a-la-carte pricing, core package with options, etc. Pricing is a science and subscription-based pricing is not new. Industrial firms should learn from the best practices used in industries where subscriptions have become second nature: SaaS, media, music, etc.

7. Offering freemium without a clear plan to convert users. The freemium is a great option to get users to test drive your business models and to establish a strong user base. Freemium models are designed to eventually transition a portion of the user-base into paying customers. Here, too, some of the B2C companies have struggled in the conversion process. That process needs to be designed up front before the launch of the freemium offer. Having a roadmap to move from free to fee is essential to capture value from the addressable market. Launching a subscription without this roadmap might mean freemium forever. Remember that in industrial, savvy buyers are good at keeping things for free!

8. Offering large discounts because you offer them for your products. It is not unusual for subscription pricing to have tiered pricing levels based on volume or usage levels. However, industrial marketers should avoid transferring their existing product pricing structure to their subscription offers.  High discounts levels for industrial products and services are not uncommon. Procurement teams expect discounts from their vendors. However, it makes no sense to offer 60% or 70% discounts in subscription pricing. It might be a good opportunity to switch to net pricing for subscriptions. It is best to keep it simple.

9. Not matching your subscription pricing roadmap with your offer roadmap. Part of the business model roadmap for your subscription offer needs to includes a pricing roadmap. Your technology and your value proposition are going to evolve. Your offer might need to pivot several times over a few years. Your pricing models might move from a hybrid pricing model with an up-front payment and a subscription, to a full subscription pricing model. It is also essential to worry about the renewal of your subscription in your design roadmap. Competition might have caught up and might be offering a similar subscription.

10. Not offering the option to change pricing during the subscription agreement. Your customers want choice and the freedom to make changes to their subscription. This is a lesson I learned while attending the 2018 Zuora Subscribed conference. Over the duration of a subscription, customer will add users, upgrade or downgrade their subscription, or put it on hold for a while. The more you allow this to happen, the higher your growth will be, according to Zuora.  Your subscription pricing needs to be packaged right, but also needs to be dynamic and flexible. And for that, you need to have the right subscription ERP in place.

Pricing is a science. It cannot be improvised. Someone is going to design, package, integrate, and scale your pricing models. Your pricing decisions need to be integrating input from your customers, your competitors, and your cost models. If that is not done well, chances are pricing will be cost-based or free for a while.

Lots of B2C companies have experimented with subscription-based pricing and have shared their best practices. Avoid these 10 mistakes and get it right up front.

Stephan M. Liozu, Ph.D. is chief value officer at Thales Group and founder of Value Innoruption Advisors, a consulting boutique specializing in value-based pricing, digital pricing, and industrial pricing. He is the author of nine pricing books and is a frequent keynote speaker at industrial and digital conferences.

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