florian bauer - pinpointing sustainable growth and new revenue strategies

Pinpointing sustainable growth and new revenue

strategies

Florian BauerMember of the Board and FounderVocatus AGGermany

Pricing excellence in print & e-publishingHow to boost margins with professional pricing

64th World Newspaper CongressKiev, Ukraine

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Vocatus is the leading research and consulting company in psychological pricing

Our USP: We are experts in psychological pricing. We understand that consumers act in predictably irrational ways. And we know how to leverage this with smarter pricing strategies.

Awards for our approach to pricing:2005 German Market Research Award: 'Best Study'2006 ESOMAR nomination: 'Fernanda Monti Award'2007 ESOMAR nomination: 'Excellence Award'2008 Nomination for German Market Research Award: 'Best Study'2010 German Market Research Award: 'Best Study' 2010 ESOMAR award: 'Best Methodological Paper' (Congress)

2011 ESOMAR nomination: 'Excellence Award‘2011 Nomination for German Market Research Award: 'Tool'2012 Nomination for German Market Research Award: 'Innovation' 2012 ESOMAR nomination: 'Research Effectiveness Award'

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We have successfully helped over 75 titles in different countries optimise their pricing strategy

Experience: Vocatus has successfully optimised the prices of over 75 titles during the last eight years in three continents (Europe, Asia, Latin America) encompassing an array of different dimensions including copy/subscription, print/e-publishing and b2c/b2b markets

ROI: The ROI for projects has been high – we have had payback periods of less than 1 day and ROIs of over 30,000%!

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Current (print) pricing practice is suboptimal

Relevance of sales revenue

Advertising revenue

Sales revenue

Tomorrow?

In the past

Today

Current pricing practice

Often based on experience, a 'gut feeling‘ or rule of thumb:

– “We've always done it like this"

– "Not higher than our competitor(s)"

– "Not higher than inflation"

– "Not too much, in case we lose circulation"

Little systematic/empirical investigation of room for manoeuvre in terms of pricing

Readers' motivation, attitudes and price acceptance remain a mystery

Reaction is awaited with 'uncertainty and curiosity'

Vague exploitation of potential: knowledge of ideal price point is lacking, and money is wasted

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False assumptions about people’s decision behavior are guiding gut-feeling pricing strategies

How publishers see readers:

Price: readers know the price of their own newspaper as well as those of the competition (“we base pricing on what competitors are doing”); in their willingness to pay they are guided by value for money (= “pages”)

Price increases: readers recall price increases. If prices are increased, this must therefore be duly justified

Firstly, this must be justified by citing increased costs

Secondly, the pill must be sugared via a noticeable increase in coverage

Cancellation: readers are influenced by underlying economic circumstances. If they deteriorate, one should also spare them any price increases for one year – “they’ll thank us by showing greater loyalty”.

Case study – Newspapers (1/4)

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In reality, consumers think and act differently; having a precise knowledge of this helps to avoid wrong decisions

Readers as they really are:

Price: readers don’t know the price of their own newspaper, let alone that of others. The decision in favour of a specific newspaper is rarely driven by price.

Price increases: as a rule, they can recall neither the time nor the level of past price increases. In most cases justification will only lead to higher awareness. To skip the (yearly) price increase option is not a good idea.

Cancellation: if there’s one outstanding reason why people cancel, it’s the lack of time to read the paper and the ‘pain’ of throwing away a newspaper when it’s hardly been read. This is because people tend to be guided by the ‘price-usage-ratio’. Sugaring the pill of price increases via extended coverage only aggravates this problem.


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0%

10%

20%

30%

40%

50%

price

In order to deduce ‘true’ price acceptance, a combined analysis of price interest, price knowledge and assessment is required

0%

1%

5%

Subscription price after price cut

0%

0.5%

1%

- critical price knowledge

- critical sensitivity to price increases

- high price interest

+ uncritical price knowledge

+ uncritical sensitivity to price increases

+ low price interest

Segment 1

Segment 2

Recommended subscription price

(+12%)

2%

1%

9%

Critical!

8%

1.5%

1%

Newprice:

PSM predicts a 1.5% loss (weighted)


Current subscription

price

Cumulative share of

respondents that would ‘certainly

cancel’ their subscription at

this price

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‘True’ price acceptance can be found and leveraged to realise significant additional margin potentials

Vocatus client since 2006:32% price increase

in 3 years; circulation index: 98

Subscription price

Main competitor:14% price increase;circulation index: 95Became a Vocatus

client end of 2008

2006 2009Year


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Even though our individual price optimisation projects have varied greatly, there are a number of fundamental insights

Fundamental insights: Print Soundly based pricing research is indispensable because using 'rule of thumb' to

decide upon price increases is doomed to failure – the respective starting points are too different. The outcome is not always a higher increase than clients had hoped for. The value of a given project occasionally consists in preventing an excessive price increase or changing the frequency of price increases

Payback of research investment is between 1 day and a few weeks

ROI between 600 and 30,000% p.a.

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If one relies on 'gut feeling', one sometimes aims too high in-stead of too low - with negative consequences in the long run

Subscription price

Subscribed circulation

Index:circulationand price

(at Year 1)

60

70

80

90

100

110

120

Year 1 Year 2 Year 3 Year 4 Year 5

Withdrawal ofprice increase

But fresh loss in terms of circulation

Price increaseYear 3 to 4: + 6.2%

Loss in terms of subscribed circulation Year 3 to 4: -24%

Subscription price

Subscribed circulation

Case study: price increases based on 'gut feeling'

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Publishing companies play a much more active role than they suspect when it comes to determining price sensitivity: unnecessary price wars vs. deliberate development of relative price acceptance




Case study: ‘Cause and effect'

Publishers often see their role as having to react to price acceptance: in reality, they can crucially influence it

Berlin example: publishing companies in Berlin placed prices and bonuses/gifts at the forefront of aggressive price communication

From the perspective of pricing psychology, the consequences are:

– There's roughly a threefold increase in terms of price knowledge

– Price interest is much higher

– Price sensitivity is much more pronounced

The consequences in terms of customer retention:The majority of new subscribers are looking for bonuses/ gifts of some sort

– They commit themselves for shorter periods

– It costs more to acquire them

The consequence in terms of perceived value:The newspaper forfeits its subjective value over the longer term

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The basis of any optimal pricing strategy is always a soundly based understanding of the role of price within the decision and usage processes




Case study: B2C titles

0

11%

3%

60%

79%

29%

18%

15

76%

73%

55%

8%

10%

12%

17%

33%

16%

An improved awareness of the decision process makes many traditional sales & marketing strategies look ridiculous…

Immediately available when it appears

Don't have to go to the kiosk

Advantage that you read every issue

Saving compared to single copy purchase

Attractiveness of bonus

Convenience

Discount

Is crucialAlso mattersDoesn't matter

Bonuses

Advertising with attractive bonuses always reminds

existing subscribers that it pays to be disloyal

Many subscribers think a discount isn't necessary, and they don't calculate it

either

Title-specific results

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The basis of any optimal pricing strategy is always a soundly based understanding of the role of price within the decision and usage processes

The core asset of media is habit – this has existed in print for a long time and helps prevent the negative side-effects of classical marketing approaches




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What is true for print pricing is also true for e-publishing –but with different implications

Fundamental insights: e-publishing

Soundly based pricing research is indispensable, since price increases that rely on 'rules of thumb' simply won't work e.g.: Customers think in terms of benefits, not production costs

Also applies to e-publishing

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Publishers play a much more active role than they suspect when it comes to engendering price sensitivity – it’s in your control e.g.: Price acceptance doesn't exist for innovative products it has to be developed




Price acceptance and mental positioning

Price acceptance differs in accordance with how users 'mentally position' the app

Mental positioning of apps

Anchor price (print)

Anchor price (online)

Alternativeonline edition

43%

Don't know 31%

prices

% r

esp

on

den

ts

50% higher price

acceptance, depending on positioning!

Resultant price acceptance

'Cheap' curve

'Expensive' curve

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The basis of any optimal pricing strategy is always a sound understanding of the role price plays within the decision and usage processes e.g.: Price acceptance depends on the context and the choice architecture





Price acceptance also depends on the context and 'packaging' – rules of thumb are no help here

€ 3.99

'Packaging', and not just content

Context andhabit, not just

channel

€3.80 €0.00

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Price acceptance and context

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The basis of any optimal pricing strategy is always a sound understanding of the role price plays within the decision and usage processes e.g.: Price acceptance depends on the context and the choice architecture

The core asset of media is habit – while it exists in print, it first hasto be developed in e-publishing e.g.: Habit evolution with respect to product and payment is the key success factor






The strategic function of the product has to be clarified (attract new, retain old, prevent cancellation)

The ‘usefulness’ of e-publishing products must first of all be more clearly differentiated and more explicitly communicated

Product must be developed out of a detailed understanding of the actual product benefits:it's easier to learn new habits if old ones can be 'transferred' (usage habits, PDF as 'killer app')

The most important challenge is only confronted after the download

Too much 'development aid' guided by the traditional focus on ‘reach”, ie, low price strategies or end device subsidies, can destroy future potential

Internally 'learnt' success criteria (reach) can latently impede the consistent implementation of these insights

Product

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Habit

Habit and its implications

Successful e-publishing products are 'interwoven’ into existing habits so that the latter can gradually be expanded

“Marketing”Publisher Reach

No valuation

No sales turnover

No usage pressure

Reduced ad revenues

Performance based pricing metrics

Forget about ‘circulation and reach only’ – this focus destroys sales and ad profits before they are even generated

Reader

Habits

Case study: “next issue”Commercial app for more than 30 e-papers of US-titles

Target: E-paper flat-rate for tabletcomputers

At the moment the offer comprises 32 titles of US publishers, e.g. Time, Vanity Fair, Elle, Glamour etc.

Single titles may be read as e-papers, handling is mostly standardised

Depending on the number and type of titles included, cost amounts to $ 9,99 or $ 14,99

At the moment the app is available for Android based devices only, an iPad version is announced

next issue

Case study: A typical attempt to increase circulation and reach - with a low chance to induce a stable willingness to pay

To offer an app with numerous titles for free or with a flat-rate is an act of desperation in order to merely increase reach

From our point of view a flat-rate constitutes an irreversible price-strategic surrender leaving no room for strategic price management (upselling, bundling, etc.)

The offer neglects a fundamental insight of pricing psychology: People hate to pay for something that they do not use, even if this is logically not the case

Based on this offer, the reader probably will not recognize and appreciate a single title‘s value: Quantity is used to outweigh missing understanding of individual preferences and willingness to pay

The offer neglects and tries to bypass the core challenge: ‘to develop habits’. Readers do not know such a model from the offline world and hence it is rather a hurdle than an accelerator, for persistent and valued usage

Hence, it may well be doubted whether sustainable usage and habits will ever evolve

next issue - conclusion

Payment habits, contexts and ergonomics are often more crucial than actual costs: sometimes it's not all about money, but about how easy you make it for users to spend their money

'Adaptation' is also a prerequisite when it comes to purchase habits: the further removed the e-publishing purchase process is from the classic offline one, the more psychological barriers there are to purchase

Basic service standards are often not satisfied in e-publishing: the depth and clarity of price and transaction information in the online world, in no way matches what we are used to in the offline world

Product

Payment

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Habit

Habit and its implications

The process of purchase and payment has to be understood as a critical factor of success

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The basis of any optimal pricing strategy is always a sound understan-ding of the role price plays within the decision and usage processes e.g.: Price acceptance depends on the context and the choice architecture

The core asset of media is habit – while it exists in print, it first hasto be developed in e-publishing e.g.: Habit evolution with respect to product and payment is the key success factor

A pricing strategy never merely consists of the given price level, butalways of ‘price communication’ and ‘pricing structure’ tooThis is a new challenge for publishers, but one which also offers new opportunities





Additional aspect rel. to e-publishing


Economist e-paper subscription $ 59,- Economist print subscription $ 125,- Economist e-paper & print subscr. $ 125,-

Economist e-paper subscription $ 59,- Economist print subscription $ 125,- Economist e-paper & print subscr. $ 125,-

Choice (%)

16%0%

84%

68%

32%

You might think that an option that nobody buys is dispensable, but...

Av. revenue:ca. $ 114,-

Av. revenue:ca. $ 80,-

Portfolio thinking produces new strategic dimensions which can be used for pricing if one understands the pricing psychology

Case study: media

Three Take-aways for Print Pricing:1. As long as print pricing is based on gut feeling, a lot of margin is left on the table. We

always and regularly have to ‘test the waters’ to optimise pricing

2. Price sensitivity is not something stable – publishers have to challenge and develop it – think of price sensitivity as being a muscle: If you don‘t train and challenge it, it won‘t get stronger!

3. And remember: The unexploited potential of today can never be recovered , it is lost forever

Three Take-aways for e-publishing:1. e-publishing is not about content it‘s about developing a new habit – in every respect:

Price, Payment & Product

2. e-publishing has to be developed outside-in – publishing houses must learn to listen; maybe for the first time ever!

3. Publishing houses need to start thinking in portfolios instead of silos. They have to differentiate, explain and manage product and price portfolios to leverage the opportunities of bundling and upselling effectively

Great challenges provide even greater opportunities!

Dr. Florian Bauer

Vocatus AGOppelner Str. 5D-82194 Groebenzell / Munich

Tel: +49 8142 5069 - 235Mobile: +49 175 2263 - 235Email: [email protected]

Thank you for your kind attention!

florian bauer - pinpointing sustainable growth and new revenue strategies

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