A Rule of Thumb: Pricing Should Be Simple

Monday, 21 March 2011

One thing many companies — in any industry — can learn from Apple is the importance of simple pricing. If you make it easy for people to understand how much they’re paying, and what they’re paying for, it is more likely that they’ll buy it. Or perhaps this is driven more by the converse: if people are confused about how much they have to pay, they’re more likely not to. The decision to purchase and the act of paying are part of the experience for any product or service, and should be designed accordingly.

Not paying is always simple.

Those companies that succeed with complex pricing schemes tend to be those with no competition (e.g. cable companies and land-line phone services) or those with a limited number of competitors, all of whom offer similarly complex pricing schemes. E.g. new car dealers and cell phone carriers. Car dealers get away with loose, uncertain “try negotiating down from a ‘sticker’ price almost no one actually pays” pricing because that’s how all other car dealers work, too — and because (at least here in the U.S.) a car is something most people need (or at least think they need). Cell phone carriers get away with confusing bills, chock-a-block with nickel-and-dime fees and charges, because there are only a handful of carriers (and as time goes on, we need fewer and fewer fingers to count them all — again, at least here in the U.S.) and, again, because cell phones are something most people consider a necessity.

For non-necessities, simplicity of pricing is key. Apple thrives at this. Their consumer products tend to follow a simple good/better/best pricing hierarchy, where the only difference is storage capacity. iPods, iPads, and iPhones all follow this model. When they deviate from this, the reasons are relatively easy to understand. For example, a regular Wi-Fi iPad costs $499/599/699 for 16/32/64 GB of storage. If you want an iPad with built-in 3G, it costs $130 extra for the iPad itself, and offers a simple no-contract two-tier pricing plan: $15/month for 250 MB data, $25 for 2 GB. Easy to sign up for, easy to cancel, no hidden fees, and several warnings before you hit your data limits.

Another great example: Netflix. You pay $8/month for Netflix streaming:

For only $7.99 a month, you can instantly watch TV episodes & movies streaming over the Internet to your TV via an Xbox 360, PS3, Wii or any other device that streams from Netflix. Watch as often as you want, anytime you want.

Are there really no late fees and no due dates?
Yes, it’s true — there really are no late fees, no due dates, and no hidden costs.

Once you sign up for a Netflix account, it works for all Netflix content from any device that supports Netflix. You don’t pay extra to use it on your iPad in addition to your iPhone. You don’t pay more to use it from both a PS3 and an Xbox 360. You pay $8/month (after a free 30-day trial, that is), and you get Netflix streaming. Easy to understand, and sounds like a great value.

This brings me to The New York Times’s new digital subscriptions. They’re neither easy-to-understand nor sound like a great value. Unlimited access to the NYT costs four times more than Netflix — $35 every four weeks. You can pay $15 or $20 every four weeks instead, but then you’ve got to choose between using a Times app on your smartphone or iPad (respectively). And how many normal people realize that if you, say, opt for the $15 plan, that you’ll be able to access the Times website from your iPad?

Netflix: one price, access from any device.

New York Times: three tiers, arbitrary division between devices based on screen size.

Both companies also have legacy businesses. Netflix’s legacy business is home delivery of DVD and Blu-ray discs. Pricing for this service starts at $2/month in addition to the basic $8/month plan. It makes sense: every Netflix customer gets a digital subscription; those that want a physical product too pay a little more. The pricing steers people toward a digital-only future.

The New York Times’s legacy business is the printed newspaper. They charge less for a print subscription than an all-inclusive digital subscription, despite the fact that all print subscriptions include an all-inclusive digital subscription. This makes no sense. You pay less but get something that intuitively bears a significant real cost: hundreds of pounds of printed newspaper delivered to your home throughout the year. The pricing steers people toward the legacy business.

I want The New York Times to thrive. It’s long been my favorite source for national and world news. But printed newspapers have a limited — perhaps very limited — future, and the digital subscription plan they’ve unveiled doesn’t look like a winner to me. I’m pretty sure it’s too expensive — that is to say, that I think The Times would make more money by charging significantly less, making up for the difference per-subscriber in the number of people who’d be willing to sign up. But even worse, it’s too complex. Further, by offering relatively generous access to the nytimes.com website for free to everyone, the Times is providing an enticement to read the Times less.

A digital NYT subscription is something few people will feel they need. Many people might want one, to one degree or another, but for few will it be a necessity. That means it ought to be priced simply. (Even necessities ought to be priced simply on general principle, I say, but they don’t need to be in order to succeed.)

I’m almost entirely in agreement with Khoi Vinh on the matter. Vinh writes:

The effects of this decision probably won’t be seen in the immediate future, but the long-term damage to the brand may be significant. The amount of notoriety that this new endeavor will receive is sure to be tremendous, but all the subtleties — and complex mathematics — of this new pay model are likely to be lost on most news consumers. Its many rules and semantics are simply too complex to be communicated effectively, and what’s more the marketing tends to use blatantly tricky language (e.g., “$15 every four weeks” — just tell me what I have to pay, already). I’m willing to bet that what most people will understand about this new development is that now you have to pay to read The New York Times. Period. With that misunderstanding, it wouldn’t surprise me if users start staying away in droves.

Jean-Louis Gassée attempts to elucidate the entirety of The Times’s new rules for accessing its digital content — what do you get for free, and what do you get for how much when you pay. It takes him eight paragraphs and 350 words. He concludes that it’s simply too complicated:

Customers don’t make decisions with their neocortex, an organ that is too easy to bullshit. They decide within deeper, comforting recesses, and they rationalize when the culture demands a seemingly logical, socially acceptable “post-plantation”.

What price do NYT’s execs put on simplicity, on ease, on reader enjoyment vs. catering to their own internal discourse? If they don’t like talking to Steve Jobs (and vice versa) they could turn to Jeff Bezos for tips on simplicity.

iTunes has taught us that customers are willing to pay for content if the process is simple if it’s easy on the mind and the wallet. One could argue that consumers aren’t paying for the content, they’re paying for the delivery service. Regard Netflix on Demand, to use another example. Restricted content, instant delivery, success.

I don’t know that a simpler, lower-priced digital subscription plan would work for The Times, but I feel strongly that it would be more likely to work than what they’ve announced. I have a bad feeling about this.