Lessons from Netflix: How to Make Subscription Pricing Work for You

Gabriel Smith June 24, 2021

As we watch an increase in the number of customers subscribing, it is clear that streaming TV has revolutionized how consumers consume. It seems that convenience, choice and customers taking back control are some of the major keys to the reason why Netflix is leading the streaming wars. With more than 200 million subscribers, Netflix represents 34% of all streaming traffic in the U.S.

Customer expectations evolved over the last 20 years and it has never been more clear what consumers really want: To watch what they like, when they like, how they like. In short: they want an entertainment universe completely designed around them, and only them. Netflix listened to how viewers wanted to consume content and set about industrializing its learnings. In the process, it revolutionized the entire industry by introducing subscription streaming services in 2007.

Netflix gave the customer complete control. Content can be consumed at any time. It can be binged on, paced, paused, resumed, rewound, renounced and re-watched. Consuming content is easy – effortless in fact. You can watch on your TV, your laptop, your iPad, or phone.

To ensure there is something for everyone, Netflix offers incredible content diversity. Most recently, it teamed up with Nickelodeon to compete with Disney’s content for kids. In its obsessive pursuit of the ultimate seamless and frictionless customer experience, Netflix also leads in personalized recommendations. It uses cutting-edge algorithms to help customers whittle down its immense library by delivering personalized landing pages, curated lists, and even custom artwork, based on viewing preferences. And it keeps subscribers engaged with personalized email updates.

In the midst of all this disruption of content consumption, there has been a correspondingly massive change in how we pay for it. Instead of monthly charges of between $ 25-$ 80 with a lock-in contract of up to 12 months to have access to certain channels, we can now choose from multiple flexible monthly subscription packages at a fraction of the cost that we can sign up for, pause and cancel at a moment’s notice. These consumer-friendly terms provide the ease and convenience of monthly contracts with short-term cancellation policies.

Now it isn’t just these streaming platforms that are adopting these subscription techniques, many e-commerce businesses are using similar approaches to keep and maintain their customers’ loyalty using nurturing and a deep understanding of their users’ lifestyles.

Why subscription models work

Subscription models work for companies because they mean regular recurring payments, help overcome initial trust barriers, bring invaluable data, and enable brands to build loyalty with their customers. Customers are on board because subscriptions are convenient, personalized, sometimes cheaper, and don’t require long-term commitment.

Aside from recurring revenue, the big benefit of subscriptions is the accurate and actionable data, such as customer preferences, spending analysis, conversions and costs. These are invaluable in being able to personalize offers and cross sell directly to your customer, building that customer relationship. It’s no wonder, therefore, that the market has grown by more than 100% each year over the past five years, attracting big brands and retailers. According to the Subscription Trade Association, of the $ 41 trillion spent globally on credit cards, 18% is subscription-based purchases. 15% of online shoppers signed up in the past year to receive subscription boxes on a recurring basis.

Subscription builds trust. By allowing users or consumers to use a product or service on a subscription basis, you demonstrate that you have faith in your own product, so they should, too. Businesses offering this level of freedom to their customers or clients show that they expect the product to speak for itself: ‘we don’t need to lock you into a long-term contract because you’ll want to stay on of your own accord, and if you don’t want to, we’re not going to force you to!’

If you are considering a subscription model, there are three types:

• Replenishment subscriptions (also known as continuity subscriptions) provide subscribers with an automated monthly shipment of products they want or need. According to a survey by McKinsey, they account for 32% of all subscriptions and have the highest conversion rates. Subscribers are motivated by a strong need for the products as well as financial incentives like discounts. Convenience is of great importance to this group, as is value for money and a personalized experience. This group has the highest retention rates with 45% of members staying for a least 12 months.
• Curation subscriptions are designed to delight through personalized selections of the latest styles, or newest deals, or little surprises each month. Accounting for 55% of total subscriptions, they are by far the most popular. The ever-more-tailored experience is very important to these subscribers and they want to feel surprised and that they’re getting good value for money if they’re to stay.
• Access subscriptions feature mainly in the apparel and food industries and are those where customers pay a regular fee to obtain lower prices or members only privileges. They account for 13% of total subscriptions. Convenience is key for this group, but personalization is very important too.

Making subscriptions work for you

While the e-commerce subscription market is not yet maxed out, clear differentiators are still crucial. What is your differentiator? What is your value-add? There are three ways to compete with a subscription model and each has a different playbook for success.

How to Compete on Price

• Your price should reflect your offering and be perceived as good value for money.
• It should be in line with similar services, but you can use it to change pricing perceptions (e.g., Disney+ challenged the Netflix cost-value perception by coming in at nearly half the price).
• Any aggressive pricing should take high churn into account.
• Any higher pricing should present a clear value-add, something customers can’t get anywhere else.
• As subscriptions generate a higher customer lifetime value, higher marketing spending is justified.

How to Compete in Your Offering

• Have something unique to offer.
• Be distinctive in how you do business.
• Either appeal to a large niche audience or have something for everyone.
• Ensure your terms and conditions are customer friendly; this will help get over trust issues at start.
• Build in revenue security with other streams or partnerships.

How to Compete in Customer Experience

• Make this your top priority. This is how you get new customers through word of-mouth recommendations – the best kind – and how you build the kind of trust that lets them know they no longer need to shop around for the best price.
• Create unforgettable personal experiences with your customers at every touchpoint.
• Use customer data to tailor cross sell and upsell offers and direct advertising.
• Ensure any dashboards and websites are easy and intuitive.
• Make the process smooth and free from friction.

It is true that the cost of convinced customers in subscription models can be extremely high, but they bring a higher lifetime value, which justifies the higher marketing spend. They also bring accurate data on customer spending analysis and conversion costs. As such, the investment should be in loyalty.

Current customers cost less and provide more insight than new ones. Remember, it’s not that customers inherently love subscriptions, but that they want great end-to-end experiences and are willing to subscribe for tangible benefits. Done well, subscription-based pricing will not only enable you to forecast and scale like never before, but will set you up to deliver those exceptional customer experiences that create customers for life.

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