Suppose you are planning to watch a movie tonight: you sit down, open the Amazon app, and start searching. You want to watch marvel The Avengers from 2012? It’s free on Amazon Prime. But if you’re interested in the latest installment in the Avengers series, Marvel Studios’ Avengers: Endgame as of 2019, it will cost you $ 3.99 to rent. But not all new movies are rental only, and not all older movies are free. For example, you can watch Eddie Murphy in 2021 Coming 2 America for free with your Prime membership, but if you want to experience the Murphy’s classic Beverly Hills cop starting in 1984, it will cost you an additional $ 2.99. Which give?
Amazon is known for making very deliberate choices about what to bundle with a standard Prime membership, when, and for how long. To make these decisions, the company probably uses a metric such as cost per first stream – dividing the costs of the title (for example, production or licensing) by the total number of subscribers streaming a given title – to determine what to offer in standalone mode versus adding to the base Prime pack. Because the value of shows and movies tends to depreciate, some titles will lose value after a certain period. At this point, the stand-alone charge can no longer be justified, so Amazon is moving these titles under the standard Prime subscription.
This two-step approach to service deployment is an example of a strategy called biphasic subscription monetization in which 1) companies deploy new services as stand-alone offerings and quickly monetize them by targeting enthusiastic consumers, before 2) launching them. add to pre-existing bundles. consisting of more mature services and monetizing them over longer periods of time with a broader consumer base.
As companies across industries move from a product-based business model to a subscription-based business model – from Microsoft, Google and Nike to carmakers, industrial manufacturers and traditional retailers – this strategy is gaining momentum. . If done correctly, it can help offset the initial development costs of new offerings, provide businesses with rapid and actionable feedback on these new services, and generate positive momentum that drives greater investment in innovation. . And as businesses continue to add more services to existing subscription plans, they may justify a gradual increase in subscription fees as the perceived value of the plan increases.
In my experience working with thousands of subscription companies, I have seen three considerations that lead to the successful adoption of the biphasic monetization strategy. First, companies need to prove the benefits of this biphasic monetization strategy by qualifying new services based on 13 attributes that make up what I call the Unified Subscription Adoption Model (USAM). I developed USAM as the first hybrid framework to assess the end-to-end potential of subscription offerings, combining two models of widely recognized technology and product adoption, but adjusting their core attributes to better correspond to the particularities of subscription offers. Second, new features / services must be added over time to maintain or increase the overall price of a given subscription package. Finally, companies must take into account the sensitivity of demand for a given supply to price changes.
Let’s take a look at an example to show this biphasic monetization strategy in action.
How Biphasic Subscriptions Work
Recently, mainstream automakers – alongside software behemoths like Apple, Google, Amazon, and Baidu – have entered a close race to offer the most advanced and integrated software as a service subscriptions, resulting in makes them ideal candidates for deploying a two-phase monetization strategy.
Let’s explore a simplified example of how this might work.
A hypothetical automaker has already introduced a basic subscription package consisting of three car-connected services: road navigation, roadside assistance and remote start. The package is offered to all future car owners as a subscription of $ 89 per month. Ten thousand car owners have already purchased the basic subscription, generating a monthly recurring income (MRR) of $ 890,000 for the automaker.
Suppose that the R&D unit of the same manufacturer has developed two new connected services ready to be launched: over-the-air software updates (OTA) and semi-autonomous driving (SAD).
The Marketing Department conducted a market segmentation study whereby the Achievable Automotive Manufacturer (SOM) market consists of a total of 10,000 existing drivers, of which 9,000 are low income and 1,000 are high income. Through various A / B tests in the past, the automaker has found that the price elasticity of demand (PED) for the base package is 0.9 (quite elastic). This means that an increase in the overall bundle price will lead to an almost proportional decrease in demand. The company also set the minimum prices for the two services at $ 5 / month for OTA and $ 15 / month for DSS depending on the size of the investment required to develop each service.
So how would the company deploy a two-phase monetization strategy?
Step 1: Assess the maturity of the new services
Companies need to measure the maturity of an offering to determine the overall market readiness for a new service. The Unified Subscription Adoption Model (USAM) is a hybrid framework for assessing the end-to-end potential of offerings, measuring attributes that will impact potential adoption, including: functionality, reliability, utility, usability, efficiency and desirability.
To use the framework, you measure quality of service attributes by asking a series of fundamental questions. For example, for “Desirability” the relevant question is “Does the user care?” – and what you are evaluating is the measure of positive emotions, such as desire and pleasure, that a service generates for the user. Likewise, for “Utility” the question is “Does this solve real problems?” For each attribute, you score on a continuum from low to high, and then count the results for a total score.
If we use this framework for our two hypothetical new connected services, we can clearly see that the two services differ from start to finish. The first service (OTA) is a very mature service (scoring 55/60 points). In contrast, semi-autonomous driving is more of a minimum viable product (MVP) scoring 32/60 points.
The overall quality of service is very often a reliable indicator of both maturity and market penetration. The ratings for the OTA indicate that the service is well disseminated / adopted in the market (beyond the last majority of the consumer population). In other words, OTA is an existing feature in most, if not all, cars. Car owners expect their car’s software to be able to be updated remotely (i.e. wirelessly), much like laptops or PCs. On the other hand, the SAD seems to be a new service still in the early adoption phase (first majority of the consumer population). It’s widely regarded as a nice feature to have, not really a necessity.
Step 2: Bundle vs. autonomous
Let’s start by hypothesizing that the automaker decides to add both services to the existing basic subscription offering.
Approach 1: “All-inclusive” grouping strategy
Once the automaker adds the two services to the existing base package, the subscription fees increase to cover the R&D costs incurred to develop the OTA and SAD services. As a result, 2,000 subscribers representing 20% of the overall subscriber base are terminating their subscriptions. The increase in subscription fees is barely enough to offset the churn rate of subscribers, resulting in a 2% reduction in monthly recurring revenue (MRR) for automakers from $ 890,000 to $ 872,000.
Think about this dynamic. Once the automaker adds a pleasant service to a core set of services and uses it to justify a fee increase, car owners feel like they are being asked to pay for a feature they don’t. don’t need and they never asked for. The basic package including services with close substitutes, they will not hesitate to cancel their subscription.
Now let’s see how the biphasic monetization strategy can offer a much more profitable alternative. Annex 2 shows the impact of adding OTA to the existing base plan and launching SAD as a stand-alone subscription service.
Approach 2: basic bundle + stand-alone strategy
The OTA service closely matches the overall maturity of the basic package already adopted by 10,000 subscribers. By adding it to the package, the automaker is increasing the overall subscription fee to cover R&D costs. As a result, part of the subscribers still cancel but the churn rate in this case is much lower resulting in net gain of MRR.
The gains don’t end there though. The manufacturer is launching SAD as a standalone $ 15 / month subscription and only targets those drivers in its subscriber base who demonstrate the greatest willingness / ability to pay for additional features. The automaker now has two recurring sources of income.
Over time, semi-autonomous driving will evolve as a capability as more and more car manufacturers offer it and its overall quality increases. It will eventually be adopted by the early and late majorities of the consumer population. At this point, the stand-alone subscription fees will not be justified, forcing the automaker to build the functionality into the base plan and, perhaps, use it as justification for an increase in its subscription fees. .
To avoid losing the second source of revenue altogether, the automaker will need to launch a new standalone subscription service to replace DSS. This process creates a continuous cycle of innovation that can help subscription businesses stay competitive while increasing their revenues and minimizing the risks associated with new launches.
Overall, the biphasic subscription monetization strategy provides a proven, logical and practical solution to the dilemma of launching new services as stand-alone offerings versus adding them to existing bundles in the subscription economy. rapid evolution.
Success, however, comes with conditions. For biphasic monetization strategies to be successful, companies must maintain a constant flow of innovation, know their costs, study their followers, and analyze the drivers of acquisition and retention. It’s a tall order, but the benefits are well worth it. Just ask Amazon.