Rafi Mohammed

Seeking New Profits and Growth? Offer a New Pricing Plan

Posted on December 9th, 2009 (1 Comments)

It takes a significant amount of investment (financial as well as hard work) to bring a new product to market. But no matter what product or service you provide, there is usually an opportunity to generate significant profit and growth by offering a new pricing plan. Consider the opportunities available to Sirius XM Radio.

A key strategy that the satellite radio provider is pursuing to gain new subscribers is to get its radios factory installed in as many vehicles as possible. The hope is to offer new car owners a few months of free service to hook them, and then charge a monthly fee for unlimited service. A fundamental barrier to converting free users to paid subscribers is simply not all drivers need an “all you can listen” pricing plan. Many new car owners don’t have long commutes or make cross-country road trips. For those who spend less time in their cars and trucks, it’s a challenge to justify $14 - $15 a month subscription.

Sirius XM is experimenting with product/pricing options. It is offering lower priced a la carte (you select the channels that you want) and themed bundles (family, mostly music, etc.). While a great start, the satellite radio company should also offer metered pricing options, just as cell phone companies do…consider a dollar an hour. This new pricing plan could activate dormant customers – those who like the service but have refrained from subscribing simply because the unlimited plan does not work for them. Given Sirius XM’s high fixed costs (on-air talent, satellites orbiting the earth) – revenue gained from activating pay-by-the-hour listeners will be virtually all profit.

Sirius-XM’s Q3/09 financial press release reveals that the company had approximately 3 million promotional customers (presumably on a free trial). According to a November Wall Street Journal article by Sarah McBride, roughly 45% of customers on free trials end up becoming paid subscribers. Suppose that a new pricing plan could get another 20% of trial users to pay $5 a month for 5 hours of service. Assuming minimal servicing costs, this would boost monthly income from operations by $3 million. Since Sirius XM’s most recent quarterly income from operations was $37 million, these newly activated customers would increase income by 32%. And that’s just the beginning. The benefits of offering a new pricing plan go far beyond increasing the conversion rate of trial users. This new pricing plan would also activate “low listening” new home and automobile customers – not currently on a free trial - thus generating significant additional profits and growth.

Just as Sirius XM can do, most products and services have the opportunity to offer a new pricing plan that will reap a pricing financial windfall.

Add Comment
Send to Friend
Email Signup
RSS Feed

Readers' Comments on This Blog Entry

From Steve Smith on December 9th, 2009
I received Sirius as a gift from the daughters (they knew I liked Howard Stern - a show that is much better on Sirius). I bought a lifetime subscription for $500. I'm already beyond the cost of what it sould have been monthly (pre XM)