Why one size doesn't fit all

Publishing has become a tough business. Gone are the days of relatively easy profits and high margins. Advertising revenue no longer covers all the overhead expense and subsidizes the cost of subscriptions, so readers pay a fraction of the cost to produce and deliver the product. The Internet and new digital distribution channels have forever changed the economics of the publishing business and the relative balance of advertising versus audience revenue. What are the implications for revenue growth and the profit maximizing pricing strategy under this new paradigm? 

Matt Lindsay will address the Key Executives Mega-Conference on Tuesday, Feb. 24, during an afternoon Quick Bite session.  His topic will be: "Solving the Big Data ROI Challenge: Getting the Right Data for the Right Price." Learn more about the Mega-Conference

When advertising was 80 percent of revenue, the optimal subscription pricing model was to keep the cost low and the volumes high. Price segmentation to subscribers did exist to a limited extent with senior citizens, students and other groups receiving separate subscription offers, but for everyone else the subscription price was the same and often required seven-day home delivery. Publishers often charged for subscriptions only because the advertisers demanded paid copies, as paying customers were believed to have exhibited "wantedness" for the product and thus were more likely to engage with the advertising within.

As advertising revenue began to fall, the optimal subscription pricing model was to move towards a more conventional business-to-consumer strategy of segmenting customers and finding a subscription offer that was targeted toward their preferences and demands. Publishers began to require circulation operations become self-sufficient and, ideally, profit centers. The rules defining paid copies lagged these trends, and it took several years for the definition to move from 75 percent of full price to 50 percent to 25 percent and finally to "paid at any price," where any customer revenue was considered sufficient. Other countries' regulatory groups are moving this way, too. Germany's IVW still has a requirement that a customer must pay 85 percent of the full price for the copies to be considered "paid," but that may change soon.

As publishers began to offer differentiated pricing with many customers on promotional offers, the need to rationalize these incentives and discounts became paramount. The characteristics that help identify an individual's price elasticity fall into three primary categories: account behavior, attitudinal preferences and socio-economic factors. Characteristics that are specific to a customer's relationship with the publisher include account tenure, frequency of home delivery, payment method, subscription term and customer service calls. Socio-economic characteristics include age group, income group, education and household type (own or rent.) Attitudinal characteristics such as customer preferences and interests often are the most difficult to observe and include in a pricing strategy, but they are important nonetheless. This is particularly true when a publisher's product is targeted to a particular audience such as a magazine about cooking. In these cases, the socio-economic characteristics of the customer group are likely more homogenous, or less diversified, than they are in a general interest or news-focused publication. Those customers that are most passionate about the topic are the ones to identify and price separately. A subscription pricing strategy that does not incorporate these parameters is likely costing a publisher a tremendous amount of revenue and subscription volumes.

Publishers often feel conflicted about charging different prices across their customer base. They may believe all customers should pay the same amount for the product due to a desire for fairness. They may fear customer reactions if different prices were discovered, or they may believe the complexity of the pricing strategy is unsustainable or likely to cause implementation issues. These questions are universal and arise in businesses besides publishing. What we can observe are the benefits of segmented prices. Where a one-price strategy is employed, we find that some customers are left out of the product since they cannot afford the full price. Other customers value the product immensely and would gladly pay twice the stated price or more if other services or products were added in a bundle. By differentiating prices, publishers can serve their customers much more effectively than is possible with one price. Differentiated prices provide benefits to the publisher in the form of higher revenue and volumes than would be realized under a one-price model, and these benefits far exceed the costs of the implementation complexity and additional customer communication.

Other industries that have experienced profound disruption found enhanced pricing strategies to be an important part of their business models following their transitions to the new environment. Airlines, hotels, telecommunications firms and others use customer segmentation and targeted pricing to earn profits in markets with dynamic competition, low-cost new entrants and disruptive technology innovations. Publishers have the ability to employ similar strategies with greater accuracy and effectiveness than most other industries due to their one-to-one customer relationships over time.  In fact, they can employ these tactics to both subscription pricing and advertising customers. In both cases, once size does not fit all.

This column is the first in a series of columns to be written periodically by Matt Lindsay.

Matt Lindsay has more than 20 years of experience in helping businesses improve performance and grow revenue through economic modeling. In consulting roles over the past 15 years, he has shared this expertise and developed pricing strategies and predictive models for clients, including the Intercontinental Exchange, Gannett, The Home Depot, NRG Energy, Tribune, IHG, McClatchy, the Everglades Foundation, Walton Foundation, Dow Jones and The New York Times.

Lindsay can be reached at matt@mathereconomics.com or (770) 993-4111.