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The BLUF (Bottom Line Up Front)

1. Products exist on a spectrum between virtue products, where we over estimate our usage, and vice products, where we under estimate it

2. Virtue products tend to have greater annual discounts, even within the same category (e.g. gyms)

3. Sometimes you shouldn’t even offer a monthly or an annual plan

Time Based Pricing Theory

Last week we covered how to use data analysis to set optimal monthly to annual discounts. That’s all fine and dandy if you have data, but what if you’re relying on your gut? It turns out, we can use a general framework to set our monthly, annual, or even multi-year discounts.

Let’s dive in.

Case Study: Video Games

One of my early clients was a video game analytics platform - imagine a bot that watched you play online poker and gave you advice about what hands to play¹ . The company had a monthly, annual, and even quarterly plan. Much of our engagement was optimizing the relative discounts between the plans.

Obviously my first step was to break out the data, e.g. what was the LTV of a customer on monthly vs. annual? Typically a monthly customer has about 60% of the LTV of an annual customer, but for this video game company, I saw the weirdest thing.

The monthly customers had a higher LTV than the annual ones.

How could that be? It turned out that there were tons of monthly customers who purchased every single month, for multiple years. They had the opportunity to save money by switching to annual, but they never did. Why in the world were they not switching?

There was only 1 possible explanation - customers did not expect to use the product for a year. Customers underestimated their usage.

Virtue and Vice Products

This insight with our client led me to develop a theory around optimal monthly to annual discounts. Products exist on a spectrum from Virtue to Vice Products.

Virtue products are those that customers overestimate how much they will use them: productivity apps, gym memberships, and educational software come to mind.

Vice products are the opposite: customers underestimate their usage. Video games and media are classic examples here.

The closer you are to a virtue product, the wider your time based discounts need to be.

Example: Virtue Products - Gym Memberships

Below are the prices for my favorite gym in SF (shoutout Sunset Gym)² . I immediately notice two things about their pricing.

1. The entire price architecture uses time as a way to segment different customers’ willingness to pay. In fact, that’s really the only way that an “all access” membership, like a gym, can segment their customers

2. The time-based discounts are massive. 28% to go from monthly to annual, 63% to go from weekly to monthly, and another 65% to go from daily to weekly.

Gyms are a classic virtue product. Not to go down the gym pricing rabbit hole, but here’s 24 Hour Fitness, featuring more time-based pricing and a whopping 51% annual discount.

Below is the world’s shortest piece of research comparing the monthly to annual discount across gyms and placing them on that virtue - vice spectrum, according to their target market. Notice that as you go upmarket, people stop overestimating their gym usage, and start treating it as a utility. A gym membership is no longer a “virtue” product, it’s just a normal product, and people treat it as such.

Technically Planet Fitness and Equinox are off the charts. Neither offers the “opposite” plan (Equinox is only annual, PF is only monthly).

Example: Vice Products

Let’s look at a different product that still uses time-based pricing to segment customers. This time our mystery product has a low annual discount (13%). Can you guess what this product is???

If you guessed a subscription to the massively successful video game World of Warcraft, you’d be right!

Here are a few others:

• ESPN will set you back $12 per month or $120 per year (15%)

• The New York Times used to be priced at a 28% annual discount. By contrast, Vice is only a 22% discount, and Maxim Premium³ is only 15%.

• A Juul subscription (nicotine) earns you 15% while a subscription to AG1 (gross green vitamin drink) gets you 25%.

Should you even have a monthly / annual plan?

What happens when your virtue/vice discount is off the chart? In other words, when the monthly churn is so high that you’d be better off not offering a monthly plan at all; or the annual conversion is so high, that customers require zero incentive to convert to a long term plan.

My case study here is Netflix vs. Masterclass. Netflix, a streaming platform known for binge watching and taking up most of my Tuesday nights does not even offer an annual subscription. If Netflix offered 10% off for an annual plan, they would immediately cannibalize 10% of their revenue.

By contrast, Masterclass is a company known for providing high quality educational content to better yourself. Masterclass does not offer a monthly subscription, as their monthly churn would likely be so high that it simply isn’t worth it.

Extreme Pricing⁴ : What I learned from pricing psychic services

Here, I have two versions of “extreme pricing” - I told you we’d get to the psychics. Back in the day, I was working with a psychic market place to optimize their promotion strategy. That is an interesting case in and of itself, but this story is about time based discounts.

As part of our diagnostic, we noticed that the psychics preferred to price their services by the minute, with very few offering extended time pricing. The marketplace had learned that shorter time horizons led to greater total LTV, as customers severely underestimated how much psychic assistance they would desire.

At the same time, I was working with an executive coach who exclusively priced in 6-month intervals. What was fascinating was that on an hourly basis, the psychics and the executive coach were charging about the same amount, so this difference had nothing to do with their price, it had everything to do with their market.

Lastly, I’ll leave you with an example of what not to do: don’t let time based discounts be so overt that it becomes your entire strategy. Below is a hilarious example from Noom, the popular weight loss app.

First off, look how massive the monthly to annual discount is (80%). But more importantly, I think that pricing in this way leaves a bad taste in customers mouths⁵ because the virtue - vice spectrum is so apparent.

Get in touch

Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at [email protected] or schedule time via the button below.

1  Not poker but you get the point

2  Where organic growth is the name of the game

3  Yes, that is a thing

4  ESPN’s latest reality TV show

5  No pun intended