Pricing Lesson: Subscriptions Aren’t Big Winners

November 20, 2008

In the early days of the commercial database business, I participated in discussions about the relative merits of different pricing models. There was the “by the drink” approach. This model allowed a customer to buy a single item just like a 20 something hanging out in the local watering hole and buying one Perrier at a time. Then there was the “membership plus pay as you go”. The idea was that a customer would sign up for a service and pay a fee either a one time hit each year or a monthly tab like the bill one gets from the Harrods Creek Country Club. The country club knows that there will be a certain amount of revenue each month and management hopes that enough farmers and bootleggers will show up to buy dinner and gold to make the business pay off. We also talked about the leasing model. The idea was to provide the customer with a piece of hardware and then charge a fee for that equipment. Variations included a certain amount of data. I know the leasing angle seems strange today, but in 1980, the red LexisNexis terminal made a lot of money because the terminal used Mead Data paper with a nifty LexisNexis logo on each side so the information could only be printed in narrow margins. Even better, LexisNexis charges $0.02 per cartridge return and the system double spaced. Mead had discovered the same revenue source that Hewlett Packard applies to its ink business.

These long ago conversations flooded through my mind when I read the CNet story by Ina Fried “Microsoft, Labels Try to Revive Subscriptions” here. The story reports that Microsoft’s subscription plan for Zune music is not hitting its financial targets. Ms. Fried reported, “Both Microsoft and music industry executives acknowledge that the uptake for subscriptions has not been what they’d hoped.”

In my opinion, this admission is quite significant for these reasons:

  1. Spreadsheet fever makes it trivial to create wonderful payoffs. The problem is that subscriptions are not working too well today, and they did not work too well in the 1980s either. Poke around for fees for the original Wall Street Journal online service or the original LexisNexis New York Times online service. When these publications set up their own subscription based systems, the services sank in a sea of red ink. Now the Zune crowd has discovered that what’s possible in a spreadsheet doesn’t match behavior of online customers.
  2. The Apple model worked and continues to work. What’s interesting about the Apple approach is that it worked in spite of rampant piracy by people worldwide. Microsoft may want to me too Apple’s pricing and skip the effort to find a better way to price.
  3. The pricing models are less important than the perceived utility of the service. Lawyers will pay Thomson Reuters or Reed Elsevier big bucks to get access to information when it is must have information. The pricing model becomes irrelevant when the client will pay, there’s a risk of going to jail, or a huge payoff will result from having the information. Music is also must have information but there’s a growing price sensitivity which makes pricing music more difficult than pricing a law review article. This means there probably isn’t a fixed answer to “which pricing model?” The Zune pricing approach may find itself in a state of constant experimentation until the right combination produces the payoff Microsoft wants. The problem with this approach is that there may never be a payoff. So, the question becomes, “How long will Microsoft be willing to fund a product that costs the company money?”

With the death of the print version of PC Magazine, subscriptions may not be a pricing option for magazines either. In short, the conversations we had in the 1980s are being held today at Microsoft. Unfortunately, in the world of online information, the company that cracks the code first remains in the preeminent revenue position until another model displaces the incumbent’s pricing model.

My thought is that Microsoft should duplicate what Apple is doing and accept the fact that its maximum Zune revenue will be capped behind the market leader. Constant experimentation is the hand maiden to this approach. Maybe Microsoft will crack the pricing code? My experience suggests that the flow of red ink will continue for the foreseeable future. What pricing approach should Microsoft take? Amazon’s? Apple’s? Some other?

Stephen Arnold, November 20, 2008


One Response to “Pricing Lesson: Subscriptions Aren’t Big Winners”

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