For our March Webinar, Mark Stiving, PhD, Chief Pricing Educator at Impact Pricing, explored how every B2B company can utilize segmentation, packaging, and pricing metrics to capitalize on their innovative offerings and improve profitability. After the session, he answered questions from the webinar audience. In this blog, we share part one of his live answers.
What non-SaaS industries are you seeing increasingly adopt subscription models? Are there any you found surprising?
Absolutely. The answer comes down more to companies that are embracing IOT – the Internet of Things. One of my favorite examples is Goodyear. They came up with a new tire technology for trucks with about a 20% better lifespan, but they couldn’t get truck drivers to pay them 20% more for the tire. What they did was they about how truck drivers get value from a tire, and it’s based on how many miles they can drive.
Instead, Goodyear offered the truck drivers, “we will sell you the tire per mile.” So instead of a price for a tire, we’re going to charge you a price per mile. And what that ended up doing is several things. Number one, because the tire lasted longer, Goodyear made more money because of the tire’s lifespan, and two, it changed the way the customer – the truck driver – billed their clients because they could now have a variable cost, which was the cost of the tire or the cost per mile. They could add that into their billing systems. Everybody was really happy about it, and it only happens because you can monitor how many miles someone’s driving.
I’ll give you another example that’s almost identical, and that is insurance companies. Insurance companies can charge you by the mile. Now they can charge you based on what your driving habits are because they can monitor your driving habits and see if you’re a good driver or a bad driver and decide what rate to give you and adjust the amount based on the value that you’re getting for the product. So these concepts are fascinating in a lot of different ways. The question always comes down to how is it that your customers perceive value?
My other favorite one is Porsche in Atlanta. It turns out that in Atlanta you can subscribe to a Porsche as opposed to buying a Porsche. And when you subscribe to a Porsche, you pay them $2000 or $3,000 a month depending on which plan you go for. And then you can go in one day and drive a 911 off the lot, take it back a few days later and drive a Porsche Cayenne off the lot, and then take it back a few days later and drive a different Porsche off the lot. You can just keep swapping out Porsches. They cover all of the maintenance and all of the insurance – all you have to pay for gas, and you get to choose what car you want. Now you never own the Porsche, right? You just subscribe to it.
Now what I love about this example, is if we want to move to subscriptions, we want to be thinking about “how do we plus the offer?” So how do we take whatever value we’re giving to our customer today and give them even more value and solve more of their problems as we shift them to subscriptions? In the world of SaaS, when we went from perpetual license to SaaS, one of the big pluses that we often got was now we’ve got managed services. So you’ve got someone else that’s managing all the IT infrastructure and the company doesn’t have to manage their own IT infrastructure.
Think about if you build hardware today, think about the software companies around you and how much money they’re making selling something that has almost zero marginal cost, and yet you build hardware. The reason you don’t sell software is because you’ve trained your entire company to think about the need to make sure that the cost of the hardware is covered. If I’m in a sales situation and a customer asked me for a discount, it is so much easier to give away software because there’s zero marginal cost and much harder to discount hardware as much. So now I’ve covered my costs, and what we have to do is shift our whole company’s thinking away from the idea that we have to cover our costs and towards value-based pricing and value selling. That makes all the difference in the world. And there’s so much more money to be made in software than in hardware.
Why do you see subscription as different than a ‘repeat purchase’? Aren’t repeat purchases just subscriptions with a shorter sales cycle?
If you have a recurring business model you probably want to think about it almost identically to a subscription business model. In fact, I think the only real difference when you think about it hard is that a subscription is a constant payment month after month or year after year. I think a great example of this is AWS. Anybody who’s using AWS is paying by the use. You haven’t subscribed to it, but odds are good that you’re paying a big number every single month. And so, although it’s unpredictable, you are paying for usage. Now Amazon should be treating AWS customers exactly the same way as when we talked about the three value levers and the four ways to grow a customer.
They should be thinking exactly this way as they think about their customer base. So as with most subscription companies today, most SaaS companies are trying to figure out how to do more usage-based pricing. And you could argue that usage-based pricing is essentially saying, “let’s go closer to the way AWS does it.” It doesn’t have to mean that because we could put a usage quantity in a tier, so you can get up to 10 uses for a certain price and then 10 to 30 uses for a higher price – a lot like the way we used to buy cell phone coverage.