PRICING: MAXIMIZE REVENUE
WITH THE RIGHT STRATEGIC MIX
HOW TWO COMPANIES USED STRATEGIC PRICING
TO BOOST SHARE AND DRIVE REVENUE
Case Study by Stephen McPhail, Sr. Consultant, CMG Partners
PRICING: MAXIMIZE REVENUE WITH THE
RIGHT STRATEGIC MIX
How two companies used strategic pricing to boost
share and drive revenue
PROTECT YOUR REVENUE WITH THE RIGHT PRICE
Too often companies with subscription-based business models become
prisoners of their own past behaviors and decisions. They build up B2B and
B2C customer bases with projected revenue patterns and are loath to change
those expectations. Then they plan and budget for the future using historical
patterns. While history can guide us, the market is a living, dynamic entity—
now more than ever. Any negative deviation or change in the marketplace can
create budget shortfalls that often lead to shortsighted, reactionary decisionmaking like expense cutting, hiring freezes, or even layoffs.
What if there was a way that a company could
readjust its revenue trajectory, get back on track and
avoid short-term decisions and cuts? There is a way
to stop the typical knee-jerk reaction to a revenue
shortfall. It’s called strategic pricing and we’ll outline
that strategy in this paper.
Stop the typical knee-jerk reaction
to a revenue shortfall
LOWER IS NOT ALWAYS BETTER
Many subscription service companies, such as wireless carriers and broadband
Internet providers, find themselves lowering prices over time to remain
competitive. Therefore, they look to alternative revenue sources to compensate
for lower average revenue per user (ARPU). Many companies feel trapped in
their current pricing system for recurring services, especially regarding future
revenue streams. They don’t want to reduce prices for fear that the “lost
revenue” will never be recaptured. Companies usually handle this dilemma in
one of two ways:
1. Give more product/service for the same price that was previously charged for
a lesser product/service. This approach will increase cost but maintain ARPU.
2. Lower prices to respond to a competitive threat or shortfall in growth in order
to maintain market share. This will decrease revenue but costs stay relatively flat.
While these are the most common solutions, there is a third, highly advantageous
strategy that most companies neglect to pursue: to lower prices to change the
sales mix and shift loading to high-end service plans. This approach serves to
actually increase ARPU at a faster rate than expenses.
This paper outlines two cases, in B2B and B2C environments, where subscriptionbased companies raised ARPU through strategic pricing, not by lowering prices
across the board. Both approaches were tested and validated in market trials.
EXAMPLE: 1
CHANGE THE MIX
A national provider—priced competitively on the lower-mid tier of its highspeed Internet/data portfolio—is demanding an out-sized premium for its
higher-end product tiers.
33%
PRODUCT 1
$29.99
ARPU
$9.90
PRODUCT 2
$49.99
ARPU
$12.50
PRODUCT 3
$69.99
ARPU
$13.99
PRODUCT 4
$89.99
ARPU
$10.81
PRODUCT 5
$129.99
ARPU
$9.10
PRODUCT 6
$159.99
ARPU
$4.79
0
25%
20%
PRODUCT 1
$29.99
ARPU
$9.89
PRODUCT 2
$49.99
ARPU
$12.49
ARPU
$6.69
PRODUCT 3
$69.99
12%
ARPU
$12.81
PRODUCT 4
$79.99
7%
3%
25
2%
NEW PRODUCT PORTFOLIO WITH SALES MIX SHIFT *
ORIGINAL SALES MIX *
50
TOTAL ARPU CONTRIBUTION: $61.09
PRODUCT 5
$119.99
ARPU
$10.80
PRODUCT 6
$149.99
ARPU
$10.56
0
33%
25%
10%
16%
9%
7%
25
50
TOTAL ARPU CONTRIBUTION: $63.54
THE CHALLENGE
This operator was successful in attracting subscribers at the low-mid tier of
their product portfolio but the high end of their rate card was not driving
material volume or impact to overall subscriber acquisition. The speed and
quality of the higher end products were better than the lower end products,
however the price premium did not justify the service differential. The result
was that higher end, higher margin product sales were artificially depressed
from a sales perspective; and customers self-selected lower end products
because the price-to-value equation was not justified on a comparative basis.
THE ACTION TAKEN
The company performed internal and external benchmarking for overall services and
quality delivered across the range of market options. Corporate leaders realized they
were placing too high a premium on high-end services, which wasn’t justified against
their own lower-mid tier options. The company reassessed the pricing on the high
end of the portfolio compared to their lower end portfolio, as well as competitors’
offerings. They developed a more strategic approach by balancing expected ARPU vs.
incremental costs. This led to an optimized sales mix that was accretive to overall ARPU.
THE OUTCOME
The company leveraged strategic pricing to understand the price-to-value
ratio of their product set and to optimize their sales mix. In this example, ARPU
and overall sales increased from the pre-test to post-test period leading to an
increase in ARPU and overall revenue.
ARPU and overall sales increased
from the pre-test to post-test
period leading to an increase in
ARPU and overall revenue.
Find the Right Mix?
When the higher end products were rationalized and
ultimately lowered in price,
the company was able to
shift loading from the lower-mid tier products to the
higher tier products driving
incremental ARPU and margin across their sales mix.
*Pricing and mix are illustrative.
EXAMPLE: 2
FACE YOUR COMPETITION
A national wireless carrier is uncertain about how to respond to increasing price
competition in the lower-mid tier of its rate card. Matching the competition’s
price drops would result in a rapid decline in ARPU (15 to 20 percent) over just
a few months.
THE CHALLENGE
Wireless pricing was becoming more competitive as market penetration
approached 90 percent. Competitors were trying to sustain high subscriber
growth rates, resulting in price cuts from two carriers and a huge potential
impact across industry pricing. Our example company, which had over 50
percent of sales coming from B2C, faced two main issues:
1. How to respond to these price cuts on the lower-mid end of their
product portfolio
2. How to maintain industry-leading ARPU in the face of any potential cuts
THE ACTION TAKEN
The carrier understood that a reactive change in pricing without
understanding the overall impact to their current rate card and customer base
could be disastrous. They took a breath and formulated their next steps with
the objective of setting their strategic platform for the next 18-24 months. By
understanding the micro-segments within the marketplace and their customer
base, they were able to identify purchase-and-usage trends that enabled
them to create a strategy addressing both the low and high end of their
pricing lineup.
Rather than cutting prices on the low end of their rate card, they added more
value to their entry-level offerings. By increasing value, they didn’t have to
chase the price cuts of the competition and could legitimately explain how
their offering was a better value. They also re-energized the high end of their
rate card by lowering prices on the highest end of their portfolio. The strategy
was three-fold:
1. Maintain significant volume on the lower end of their portfolio
2. Combat competitive threats while increasing volume
3. Adjust the mix on the higher end to drive higher average ARPU
One potential negative impact that the company was keenly aware of was
cannibalizing their mid-tier offerings. By understanding consumer usage
patterns, they were able to design the lower end and higher end offerings
so that a portion of mid-tier prospects would move up to purchase higher
level plans than previously expected. This positive outcome was attributed
to better clarity about the new price-to-value ratio on higher end plans
compared to mid-tier plans.
EXAMPLE: 2
FACE YOUR COMPETITION
ORIGINAL PRODUCT PORTFOLIO *
SERVICE 1
$29.99
ARPU
$10.20
SERVICE 2
$49.99
ARPU
$12.00
ARPU
$7.00
SERVICE 3
$69.99
34%
SERVICE 5
$119.99
ARPU
$10.80
SERVICE 6
$149.99
ARPU
$10.50
0
SERVICE 1
$29.99
24%
9%
7%
ARPU
$6.48
SERVICE 4
$79.99
ARPU
$11.85
SERVICE 5
$99.99
ARPU
$12.50
ARPU
$15.05
SERVICE 6
$129.99
25
50
TOTAL ARPU CONTRIBUTION: $64.89
24%
ARPU
$12.03
SERVICE 3
$69.99
16%
28%
ARPU
$8.33
SERVICE 2
$49.99
10%
ARPU
$14.40
SERVICE 4
$89.99
NEW PRODUCT PORTFOLIO WITH SALES MIX SHIFT *
0
9%
15%
13%
12%
25
50
TOTAL ARPU CONTRIBUTION: $66.24
THE OUTCOME
The carrier was able to stabilize sales on their lower tier plans while increasing
overall sales activity on high-end plans through two simultaneous actions:
1. Adding in more value (minutes, data, texts, etc.) on the low- and mid-tier
plans without cutting prices to the levels of the competition
2. Lowering the price on higher end plans
Originally, 58 percent of sales came from their two entry-level price points
and that decreased to 52 percent; however that dynamic was more than offset
by the growth they saw from their higher end products.
*Pricing and mix are illustrative.
A Smarter Trade-Off
Businesses are always focused on
expenditures and often make tradeoffs for pricing as it relates to cost
versus benefits. When companies
overprice their higher end products
they often sacrifice sales on those
products under the guise that
premium products demand premium
pricing. This may be a good rule of
thumb; however determining the
range of that premium over average
product sets is a discipline that
requires strategic pricing expertise.
Strategic pricing is not a zero-sum
game but rather a tool to optimize
your position in the marketplace.
Making the most of this tool is not
about simply picking price points and
placing them into the market. It takes
discipline and rigor to understand
several factors:
• the market and its dynamics
• the competitive landscape
• your own capabilities vs.
the competition
• the customer—both those you
already have and those you will be
targeting in future campaigns
Are competition and market forces
putting pressure on your current
pricing strategy? It’s time to take
an agile stance—to be flexible and
data-driven and most of all strategic in
your approach to pricing. By studying
the nuance of tiered pricing as it is
currently structured, you should find
there are opportunities to shift low-,
mid- or high-end pricing structures in a
way that maintains the customer’s value
perception while also protecting—or
even growing—your ARPU. Don’t get
stuck in the mud, be nimble with your
pricing to stay ahead of the pack.
CMG PARTNERS
CMG Partners is a marketing consulting firm that has earned its customers more
than $1 billion in new revenues over the past 17 years. With deep experience
in telecommunications and MSO industries, we are standing by with smart
marketing strategists and practitioners ready to help you create more growth.
ABOUT THE RESEARCH
To help marketing leaders prepare for “what’s next” in their profession, CMG
Partners conducts extensive, ongoing research – The CMO’s Agenda™.
To learn more about taking a strategic approach to pricing, email Stephen
McPhail at [email protected].