Going paid? Opt-out or forced buy are best models

Attachments

Paid content models final.xls

The attached excel spreadsheet (below this report) provides a quick way to model "what if" scenarios for converting print subscribers to paid digital content.

Most companies are using a metered model to convert digital-only subscribers, so that is included. However, up selling print subscribers is trickier, but also can be much more lucrative.

For most companies, the forced increase model shows the highest revenue gain, followed by the opt-out model and the opt-in model. For example, one company that uses an opt-in model to upsell print subscribers typically finds that "most" new subscribers are digital only. In fact, only about 20% of print subscribers will buy the extra service.  But the second company using a forced upsell via a rate increase converts 95% of print subscribers. There are, literally, millions at stake in the case of a mid-sized market. However there are other factors to consider. Here are a few of the variables and how they will impact this equation, based on interviews with both circulation managers and Mather Economics.

First, here are three models to up selling print subscribers we looked at, in combination with a metered model approach:

1. Forced upsell to a bundle - Essentially, an above average rate increase justified by additional products

2. Opt-out upsell - Same as above, although the user has an opportunity to opt-out and buy a print only or digital only subscription

3. Opt-in - The additional digital option is marketed at a discount to print subscribers

The below spreadsheet that models these three scenarios assumes a few things:

a. The Metered Model is being used to paywall block the 5% heaviest users, but allow everyone else (typically ten articles free) to flow through the site so that traffic is virtually unaffected.

There are a few exceptions, notably McNaughton Newspaper Group, which does not charge heaviest users, but, rather out-of-state users, and a few small papers who that have full paywalls on their sites. We did not model these exceptions, but the excel sheet is simple enough to alter to fit these scenarios.

b. For upselling print subscribers to an opt-in, opt-out or forced bundle, the price increase in these formulas is the amount OVER AND ABOVE the typical price increase that would be sustainable on an annual basis. Otherwise, the revenue would have been captured anyway. So when using the spreadsheet, plug in only the extra % increase. Example: If a 3% increase is typical, and the company is testing a 17% increase, then the forced increase number is 14%.

Of these three models, case studies we looked at are starting to show that the forced buy is the most profitable with a smallish drop-out rates and need for customer service out-weighed by far by the annualized increase in new revenues.

The next most profitable model is the opt-out model which converts around 60% to 70% of subscribers, according  Matt Lindsay, President of Mather Economics, compared to 20% for subscribers who opt-in. That's triple the revenues and best practice for companies in a position to use this pricing model.

Mather Economics are experts on subscription pricing and help companies create better real world models than we are attempting here. The intention with the this spread sheet is to understand the overall revenue opportunities and dimensions that affect these variables, not to provide an accurate predictive model.

Here are industry and market forces that will affect pricing variables:

a. Current pricing and pattern of price increases for the print product before conversion to paid

If prices are on the low end - say $3 a week - it's easier to sustain a forced price increase than if they are on the high end, of $7 or $8 a week, according to Lindsay. 

"If your prices are already very high, sometimes is difficult to get an incremental price increase... If it already $7 a week, you may give the digital bundle away to seven day subscribers for free, and then have (another bundle) for Sunday-only or 3-day subscribers, and charge incremental increase to those customers," Cohen suggested.

In the case of the San Francisco Chronicle, with a stellar annual subscription rate of $600, digital is bundled in for free, though only the tablet edition is sold separately.

On the other hand, a newspaper may have not had price increase in years and on the low end of the pricing scale is in a good position for a forced increase, given that they could probably raise by 3% or so without adding digital products at all.

b. Product suite that is added to the mix

The more digital products are included, the easier is it is to justify any increase, whether forced, opt-out or opt-in, because the perceived value of the digital bundle is higher. The JSEverywhere bundle is a great example of selling the value of multiple channels to the marketplace; their only regret was not including a tablet in the mix because the platforms were not created yet. But launching apps, mobile and tablets are a good time to create a forced or opt-out increase, as are market specific opportunities such as during play-offs when heavy users are more likely to both use all the platforms and perceive mobile enhancements as added value.

c. Future plans

Looking at the road map, there may be other plans besides additional products and distribution channels that affect pricing strategy. For example, if there are plans for a daily, say, to drop days, it may be smarter to choose the opt-in model that has a higher price point, in order to bundle later when day are cut - or cut days at the same time, giving a digital option and keeping prices the same. Cohen compares it to pricing strategy for food products like peanut butter, " they made the jar smaller and charge the same price."

d. Timing and customer service issues

A big launch or forced-buy  can easily increase time on phone from two to seven minutes while support explains how to turn on the computer, register and so on to a largely older, audience without a digital-first mentality. Allowing the upsells to run through the ordinary renewal process slows the cash flow,  but spreads the pain over the year to an acceptable level that can be accommodated by moderate increases in the support staff.

e. Multiple properties versus single sites

The economics of conversion to paid - while more popular original at small media companies - have larger benefits to larger companies because of the accumulative gain can finance a huge chunk of the corporate overhead.

For example, taking 10,000 circulation daily that has a price of $3 week or $150 year, and extra 10% increase for a forced upsell is $15 a year per subscriber, or $60,000. Not too shabby on an individual market basis, but taken with ten more newspapers, that's $600,000 to fund new digital initiatives that are highly leverage able, such as apps (typically in the $25,000 range each) which can be used across all markets, digital specialists, etc.

e. Simplicity
This rule applied to converting to paid, simply means that customers prefer to buy once, not make a purchase and then an add on. That is, one price for each package is best. 

According to Arvid Tchivzhel, senior analyst at Mather, one of the down-sides of opt-in pricing is that is can be perceived as another, additional price increase. Customers prefer one choice instead of two.

"The more you limit the amount of price decisions that a customer has to make,the greater the likelihood of agreement."

So keep these factors in mind when looking at the model attached. Be prepared to plug in:
*Current paid circulation
*Anticipated price increase for digital over and above current expected
price increase (we used 15%)
*Weekly pricing today
*UV's to your site

We've used some known conversion rates for opt-in, opt-out and drop off rates for the forced upsell. However, these are dynamic and can also be changed. Many thanks to Mather Economics for contributing insights to this reports, any errors and the "quick and dirty" method of calculating the opportunity are the sole responsibility of LocalMediaInisider. 

The excel spreadsheet is below:

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