Captain’s log, stardate 20231018
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(Dis) Incentives of “All You Can Eat” Subscription Services?
Offering an “all you can eat” deliverables-based subscription service creates an interesting twist on the normal incentives of deliverables-based pricing.
With normal non-subscription deliverables-based pricing, the client simply buys a deliverable from you.
Bob asks Alice to write a white paper for him. Alice gives Bob a price, Bob accepts the price, Alice writes it, delivers the white paper to Bob, and he approves it.
Note that in this model, Alice has a strong incentive to write the white paper very efficiently and deliver it quickly.
The faster she gets it done to Bob’s satisfaction, the better off they both are.
Now consider a subscription version of this example:
Bob agrees to pay Alice a fixed amount monthly to write white papers for him.
Bob can make as many requests as he wants, but Alice will only work on one request at a time.
In this model, there seems to be no incentive for Alice to write very efficiently and deliver the requests quickly.
The faster she gets the first white paper done to Bob’s satisfaction, the more requests he’s going to send during the same month for the same amount of money.
Do subscription services reward inefficiency?
At first glance, “all you can eat” subscription services seem to suffer from the same mismatched incentives as hourly billing (i.e., the seller is rewarded for being slow and inefficient).
But is this really the case?
Some numbers might make this a little more concrete...
Let’s say Alice is getting paid $4000/mo to write an unlimited number of white papers for Bob.
On average, Alice delivers one white paper per month, so her effective price per white paper is $4000.
If Alice is able to double her efficiency and deliver two white papers per month, her effective price per white paper is slashed in half to $2000.
So, on the face of things, it would appear that Alice has no incentive to double her efficiency, right?
Alice would still benefit from doubling her efficiency.
Consider three scenarios:
- If Bob is perfectly happy getting one white paper per month, Alice could take on twice as many clients and double her revenue.
- Bob might want more than one white paper per month but not have enough requests to keep Alice maxed out. Therefore, some months, she would write two white papers and others, she would only need to write one (or none). On average, this would increase both her revenue and profit per white paper.
- Bob might actually need two white papers every month for a long, long time, and Alice could decide to accommodate him. Doing so would make it less likely for Bob to cancel his subscription (aka ”churn”). Note that this costs Alice nothing because while her REVENUE per white paper would be cut in half, her PROFIT per white paper would stay the same. In other words, she’d be spending the same amount of time (i.e., her cost) on Bob’s requests per month for the same amount of money.
Here’s the thing...
Ultimately, I would say the incentives between buyer and seller for deliverables-based “all you can eat” subscription services are aligned but different.
- Buyer: Minimum Threshold—The buyer wants to feel like they have gotten their money’s worth, so on average, the seller needs to meet or exceed the buyer’s minimum threshold for the quality and quantity of deliverables each month.
- Seller: Minimize Churn—The seller wants to deliver enough quality and quantity each month to minimize their churn percentage across all their clients.
The moral of the story?
Once you realize that minimizing churn is a key metric when selling subscription services, becoming more efficient still makes a lot of sense.
P.S. This message was inspired by an EPIC thread in Ditcherville about the incentives, ethics, trust, profitability, and client satisfaction of the subscription software development model. It’s not too late to join the conversation »
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