Welcome to Good Better Best! If you’re reading this, but haven’t subscribed, join forward-looking product leaders, founders, and investors by signing up below:
Happy New Year y’all!
Hope you enjoyed the holidays and had the chance to unwind with loved ones.
Stepping into 2021 kinda feels like what I imagine shedding a snakeskin feels like. Here’s to the start of a new year - I hope it’s off to a great start for all of you!
This week’s post is an annual review of sorts, pulling together some of my favorite pricing trends from the last year that I expect to grow more popular going forward. If you want to read more on any of the companies called out below, just click the hyperlink to go to the original post.
If I had to summarize where I think digital pricing and packaging strategies are going in one word, it would be toward empathy. Simply put, we’re living in a time of more transparency than ever, and it’s becoming obvious that value-based pricing is a serious strategic advantage.
As always, I would love your feedback! If you’re seeing these trends or others on the front lines, I’d love to hear about it.
On to the trends I look forward to watching in 2021…
1. Value Metrics Shift toward Transparency
A broad theme that came up several times over the last year is value metrics shifting towards better alignment with customer value.
Since value metrics are a proxy for the value customers get out of a given solution, the more closely companies can tie the unit they’re charging for to the value customers are getting, the less friction during pricing discussions and the better their competitive optics. Two examples that immediately come to mind are Electrify America and Metromile.
Electrify America: Electrify America is one of the largest charging networks in the US for Electric Vehicles. In September, they announced they would be shifting their pricing from per-minute to per-kWh (kilowatt hour) in available states.
For context, per-kWh is the closest equivalent to paying for pure fuel for electric vehicles (e.g., gas for a non-EV). Alternatively, per-minute pricing refers to the time spent charging, and leaves room for ambiguity, as several factors, including weather, can influence the time it takes to charge an electric vehicle.
This gives Electrify America an edge over charging networks that still charge per-minute, endears them to EV-drivers, and suggests a wider shift toward per-kWh going forward. For what it’s worth, Elon Musk is a strong proponent of per-kWh pricing, and Tesla charging stations have always charged per-kWh where possible.
Metromile: Metromile is a car insurance provider on a mission to disrupt traditional car insurance pricing.
While insurance premiums are typically calculated by a combination of the driver’s car, driving record, location, age, gender, credit history, and mileage, Metromile divorces usage from the rest of these factors, resulting in lower rates for low-mileage drivers.
This is the type of shift that can push the industry in a new direction, and incumbents are already catching on. It reminds me of T-Mobile’s Un-carrier campaign, which eliminated service contracts and allowed consumers to pay off their phone as part of their monthly fee. As we all know by now, this was quickly adopted by Verizon and AT&T and has become the standard.
While both of these examples happen to come from the automotive industry, this is a trend that could manifest anywhere. If you’re in an industry where the most common value metric is a few steps removed from the value customers derive from your solution, it’s worth thinking about how you can bridge that gap.
2. Skin-in-the-Game Pricing
One of my favorite books I read in 2020 is Skin in the Game, by Nassim Taleb. In it, he argues that having a measurable risk is necessary for fairness, commercial efficiency, and risk management. In other words, symmetry and shared risks foster better, more equitable relationships.
One version of Value Metric transparency is Skin-in-the-Game pricing, which is when a company only makes money if their customers make money. This is an extreme, but compelling way to directly align incentives, and bridge the gap between value metrics and true customer value. Two companies utilizing this approach are Lambda School and Substack.
Lambda School: Lambda School set out to disrupt traditional higher education by offering Income Share Agreements (ISA’s) rather than charging conventional upfront tuition.
Put simply, instead of paying tuition, students pay 17% of their post-Lambda School salary per month until they hit $30,000. Critically, students only have to pay this once they’re making more than $50,000 per year. If they never get hired for a career that’s related to what they learned at Lambda School, they never have to pay. With this model, the onus is on Lambda School to ensure their students are successful. Otherwise, they won’t make any money.
Substack: Substack is the platform I use to send this newsletter. Rather than charging a flat monthly fee like other email providers (e.g., Mailchimp, ConvertKit), Substack charges 10% of subscription revenue. That means if you aren’t charging for subscriptions, you don’t have to pay.
This has been hugely successful in fueling acquisition and allows writers to optimize for writing above all else. For many, this model is appealing. However, for writers that are willing to spend the time and energy building out their own tech stack, the 10% fee can feel excessive, which has led some to migrate away from the platform.
Skin-in-the-game pricing gives companies a powerful value proposition, and it’s something I expect to influence a wide range of verticals going forward.
3. Subscription Swerving
As the subscription model has grown more popular, at times it’s felt like there’s been an over-indexing towards recurring revenue. Simply put, I expect a correction at some point, as companies realize traditional subscriptions aren’t the best model for their product. Two companies that embody this idea are Snowflake and Stitch Fix.
Snowflake: Snowflake uses a credit model where customers have the choice to either pay-as-you-go or pre-purchase a desired number of credits at a discount. Snowflake CEO Frank Slootman has openly stated that he does not like the SaaS business model, believing it’s not equitable for customers.
Allowing customers to pay for Snowflake however they want gives them the option to ramp up usage at their own pace. It also gives the product the chance to sell itself. Inherently, if a customer is getting a lot of value using Snowflake, they’ll continue purchasing credits and paying more and more. This seems to be a common dynamic among Snowflake customers and has helped power their insane growth.
Stitch Fix: Rather than offer a monthly subscription, Stitch Fix charges customers a styling fee that ends up being credited toward any clothes they keep on a given order. While customers can choose to receive deliveries on a regular cadence, they don’t have to pay a monthly membership fee. The styling fee protects Stitch Fix from non-serious customers, and since it’s not a recurring fee, it reduces the friction of new users giving Stitch Fix a try.
The subscription model only works if you’re continuing to add value to customers over time, and as more and more consumers realize not everything they’re paying for is doing that, I expect more businesses to move towards a model that’s more relevant to their product, or adjusting their product to be more suitable to the subscription model.
4. Monetizing Fun
One of my favorite trends in pricing is the optional subscription that allows SuperFans to formalize their allegiance to a particular product or service. Both examples below come from gaming, but this feels like a trend that will end up influencing a wide range of verticals beyond that.
Discord: Discord offers its core functionality for free, and has decided to eschew a lucrative advertising business in favor of a model that makes the experience better for their users.
Their paid subscription offering, Discord Nitro, allows their heaviest users to get more out of the platform, and give back to the communities that they’re a part of.
This approach to monetization is so refreshing. It allows Discord to align revenue with the value their power-users get from the platform while allowing most users to continue using it for free. It also means they can avoid the headaches that come with an advertising model.
Fortnite Crew: Fortnite Crew is essentially a bundle of 3 offerings within Fortnite that allow players to get more out of the game. The crazy thing about Fortnite Crew is that none of the products included have any marginal cost, but because they are each priced individually, the bundle price looks like a steal.
This dynamic feels like a form of monetization magic and is part of why I believe Fortnite Crew is going to be incredibly successful.
My favorite part about these subscriptions is that they’re completely optional. They give power-users a way to show their love for the product without alienating the majority of users that don’t share the same willingness to pay.
I could see this kind of model influencing all types of solutions. I use a lot of free software throughout the day that I could envision optional paid upgrades for. One that comes to mind immediately is Gmail. While I don’t need the full functionality of Superhuman, I’d easily pay a few dollars a month for a sleeker interface with cleaner filters and more customizable inbox configuration.
5. Selective Monetization
Freemium has become an incredibly popular approach to driving acquisition across a wide range of industries. What I’ve found interesting this year, is a few companies have notably taken products that they were charging for and made them perpetually free.
I use the term Selective Monetization because there’s a clear difference between where these companies want to make money. A traditional Freemium model might have usage throttles or feature differentiation, but what I mean by selective monetization is that there is a clear, thematic difference between the free and paid product.
Companies embracing this strategy actively choose against monetizing a particular product, use-case, or customer segment in favor of monetizing elsewhere. Two examples that immediately come to mind are Notion and Nike.
Notion: Earlier this year, Notion made their personal plan completely free. By doing so, they commoditized Personal Knowledge Management and decided to monetize in the Enterprise through team and collaboration features.
Along with incredible optics for individual users, this strategy puts a ton of pressure on their competitors in the Personal Knowledge Management space to deliver tons of value to paying individual users.
Nike Training Club: Along similar lines, earlier this year, Nike decided to drop the paywall for their exclusive Nike Training Club content. By doing so, they made a firm commitment to monetize merchandise, and utilize their digital fitness product as a way to learn more about their customers and foster a more personalized commerce experience.
Simply put, every time a user picks a workout, it gives Nike more context into the type of products they may be interested in, and allows them to craft personalized promotions to increase their ACVs.
Selective Monetization feels like an off-shoot of commoditizing your complement, and I expect more companies to use it as a way to fuel acquisition and focus their monetization strategy.
That’s it for this week! Again, I would love to hear your feedback, especially if you’re seeing these trends or others in your domain. Otherwise, enjoy the first week of 2021, and see you next Sunday!
Enjoying Good Better Best?
If you enjoyed this post, I’d love it if you hit the like button up top, so I know which posts are resonating most!