Welcome to Atlanta – it’s the 30th Annual Spring Pricing Workshops & Conference at the Loews Midtown Hotel in Atlanta with some of our top pricing experts in the Syncron organization to share our insights and learn from others in the industry. In case you’re just now joining us, we’re live-blogging the entire event, so stay tuned for more content throughout the day!
Yesterday, we heard from leaders at world-class companies and pricing communities about the 80/20 rule and how to amplify its impact in business by layering and streamlining pricing into processes, the top 10 lessons on the pricing transformation journey and how to start the shift to usage-based pricing today.
Now it’s Day 2 and time for another round of keynote discussions covering all things pricing strategy. Up first? Edward Hartman of Simon-Kucher & Partners is here to discuss pricing for lifetime value and the three myths you need to know before you press go.
Pricing For Lifetime Value
As purchasers gain power in the marketplace, executives have sought to increase the long-term yield of a company’s established base, also known as customer equity. This makes pricing for lifecycle a prime opportunity for those who can look beyond the traditional tradeoff of price level and quantity, enabling organizations to avoid three specific misconceptions about lifetime value and think more holistically about the customer.
But, to understand the myths, you have to know the facts. When it comes to recurring revenue there are three absolutes known as The Iron Triangle – the need to acquire, the need to monetize and the need to retain is the tradeoff necessary to provide more value for less. And, the following myths are inevitable as you strive to succeed in each of these categories:
The 3 Myths You Need To Know
If approached correctly, the beneficial economics of durable customer relationships will create strong returns. But, failing to incorporate lifecycle considerations is not just a missed opportunity, it can be a hidden trap. What happens to a SaaS per-seat model with software that makes customers more productive? What happens to a shippers per-unit model when the average television screen increases in size?
Myth #1: “Lifetime pricing” and “subscription” are the same thing.
Customer Lifetime Value (LTV) is an estimate of the average gross revenue that a customer will generate before they churn (cancel). True lifecycle maximization employs multiple models, and frequent purchase behavior is mathematically very similar to contractual subscription relationships. Think of this spectrum: pure subscription to subscription & usage to pure usage to loyalty & usage.
Myth #2: Penetration pricing will save a doomed customer relationship.
In practice, many populations benefit from high on-ramp. Instead of desperately trying to retain people, focus on acquiring new. Oftentimes, the very best customers are the ones who would have paid the very best price up front. Moral of the story: don’t charge a promotional price if it attracts the kind of customers that will leave you anyway.
Myth #3: Churn is the inevitable by-product of a fee increase.
There is a tradeoff between monetization and retention. Churn can be decomposed into a set of components. Collectively, this is a driver of the regular distribution of churn propensity observed in most buying populations. It follows that the relative churn propensity of different groups can be estimated and factored into a fee-increase program. As a result, churn can be planned and controlled using an approach similar to portfolio theory.
These are the questions that you need to assess as you dive into any kind of subscription model. And, if you heed the warnings correctly, you’ll be prepared for the common pitfalls of pricing for a lifetime value cycle and be ready to acquire, monetize and retain more customers.
Join us as we live blog our experience during the performance workshops, interactive working groups, and so much more. With nearly a week’s worth of networking, technology and strategy, we’re sure to come home with some of the best tools in pricing today!
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