Written By: Kurtis Hardy
Fleeting are the days of large scale, one-time consumer payments. Nostalgic days of old where families, pockets brimming with cash on hand, journeyed to local retailers to purchase any number of appliances or electronics in-full. Today, altering consumer perception surrounding dynamic pricing further incentivized the continuous expansion towards monthly fee models.
What began as licensing sheltered to the software industry, gradually transitioned to the monthly streams expanding over commerce. Today, subscription modeling is found in everything from dating apps to shaving razors to readily prepared meals. Yet, traditional firms clutch outdated pricing models as if ordained religious doctrine, risking future business as the market alters.
The advantages are clear. The psychological advantage of selling a product at a seemingly lower price, combined with the more important realization of significant value obtained in lifetime payments from a particular consumer. Put simply, would you rather a customer pay you once today, or every month for the life of the product? If structured appropriately, the answer should always point toward the latter.
Despite regrettable marketing strategies of late, Peloton endures in controlling an admirable subscription model. With the standard product, stationary exercise bicycles, sold anywhere between $1,499 and $1,999, users pay monthly subscription fees between $13 and $39 per month for access to a variety of digital workouts and features.
While small in comparison to a mortgage or car loan, the monthly benefit realized turns critical in projecting future revenues. Due in large part to the COVID-19 pandemic, remote fitness class subscriptions for Peloton grew to a staggering 1.1 million. Assuming then even the lowest memberships at $12.99, the monthly benefit received from the firm’s pricing model equates to more than a staggering $14 million.
Likewise, software-as-a-service firms have illustrated success in this realm. As detailed in a previous case (Frank’s Fridges), successful benchmarking includes earnings that double the cost to acquire an individual customer. The more frequent this benefit achieved, the better the business model.
A relevant archetype is the popular enterprise CRM firm, Salesforce. While the costs to acquire a new, large customer land very high. These firms pay an extraordinary amount in annual licensing fees based on the number of users. Salesforce is then not only able to recover that initial spend in the first year, but continue to add value in the lifetime relationship year after year.
CASE STUDY: HYDROPONIC SUBSCRIPTIONS
Earlier this year, Hardy Boys Consulting partnered with a hydroponic plant-growth startup out of Wisconsin. The value in this business is the ability to not only produce organic, fresh food, but additional benefit in requiring far less water and waste than traditional agriculture. With a collapsible product the size of a standard refrigerator, the firm is set to compete with large-scale hydroponic farms, by marketing use in schools and consumer homes.
This issue hindering expansion, as with most promising startups, concentrates on price. A base model earmarked for a one-time charge of $4,695, only moved 500 units the previous year. Using the Peloton model as a guide, recommendations included revised pricing at $2,350, with a $35 monthly subscription fee. Simple projections were as follows:
[OLD] 100 units sold at $4,695 equals $469,500
[NEW] 100 units sold at $2,350 equals $235,000
- Subscription collections equal $3,500 per month, amounting $42,000 annually
- Totals $277,000 in first year, with $487,000 by year five
Applicable from the image shown, adapting to this model understandably creates risk in the short-term. Yet in this case, that uncertainty dissipates after five years, providing extended long-term benefit on the 10-to-15 year expected life of the product.
Expanding this theory further, creates greater disparity in revenue as sales increase. Imagine this same scenario with 10,000 units sold, as opposed to the initial 100. While the subscription model similarly recovers concluding the fifth year, the recurring payments continue far more dramatically. By the end of year fifteen, projected estimates display a $150 million imbalance, in favor of subscriptions.
Key metrics remain, however, in order to properly structure for success. One must first feel confident in the average lifetime of the product, concerning accurate calculation of pricing. Additionally, major considerations in our analysis ignored logical sales increases achieved in lowering unit sticker price. Rationally, the more units sold, the shorter the timeframe required for breakeven.
Conclusively, advantageous firms such as Peloton strategically evade opportunities to double product pricing and continue to achieve effective profit margin. Due to prosperous success of the monthly subscriber payment model, additional benefit is realized over the full lifetime of a customer. What certainly exists as a risk / reward determination in the short-term, is providing tremendous value to those able to project future sales accurately.