Both Netflix and the average Health Insurance retail policy costs the same in India at about Rs 8,000 per year, but what makes Netflix grow so much faster than Health Insurance.
Actually, there are many more models that those two options. So, if you’ve decided that Subscription is the way for your business, here is a framework on how to structure a subscription product.
Two broad types of subscriptions
Benefit Plans: These are those subscriptions where you pay for differentiated access, and then pay for each transaction, but enjoy a special benefit with each transaction. Think Ola Select, Zomato Gold, Amazon Prime, Swiggy Super: You pay some fees to join, but for each transaction you do, you get some special benefit.
Coverage plans: The ‘all you can eat’ subscription model, where paying for the subscriptions gets you unfettered access to the benefits. Think Netflix, Health Insurance: Pay once and use all you want.
As a business, one of the key decisions is to think through which of these works better for your business.
Benefit Plans work better for companies where they want to promote frequency of use, or lock-in the user through marginal benefits, and where the value of usage is unpredictable or cannot be controlled.
For example, in Amazon Prime, it rides an existing behaviour of ordering through Amazon. Users who have Prime land up spending more on Amazon than other platforms. Same thing with Swiggy Super also or Zomato Gold.
Also in all these cases, the value of a consumer’s orders vary wildly over the duration of the membership. So, instead of providing full coverage of all transactions, which could make the subscription price prohibitively expensive, its better to pass on marginal benefits for each transaction- like free shipping, free delivery, or a free dish/drink.
Also, by passing on marginal benefits on each transaction, the consumer can technically get unlimited benefits, and the risk of overuse is limited for your business.
Coverage Plans work better when your business can estimate usage, or cap it in some way (like Health Insurance does), and can provide exhaustive coverage.
Estimating usage requires significant amounts of data, actuarial skills to assess risk at various price points & user cohorts, and under-writing capability. Health Insurance companies employ actuaries (people and algorithms) to understand risk of usage. Netflix knows the average user behaviour over millions of users, and can use that data to structure their deals correctly. This model works well when the cost is controlled.
Monthly subscription companies like Magic Crate know the cost of goods (COGS), so they can factor pricing correctly. Same for monthly beauty, food boxes.
Another example is of PingAn doctor. With its subscription, you can consult the online doctor unlimited number of times. Often the interaction is with an AI enabled chat bot that addresses the query instead of a medical practitioner, significantly reducing the costs of each interaction. Also with scale/data, they would’ve been able to plan & manage the cost of medical services, thus being able to offer it an attractive price to the consumer.
Coverage plans also require exhaustive coverage. You will not like to have a health insurance which does not cover a wide variety of ailments and hospitals/clinics.
You will not pay for netflix (like service), if it doesn’t cover enough entertainment options.
Or a doctor online consult subscription, where the doctor is not available 24x7
IMHO, Benefit Plans are easier to price for companies where the risk (cost of usage) is unknown. As you get more data and scale, it’s easier to estimate cost of usage, and move into a. Coverage Plan model.
Making your subscription successful
The point of building a subscription is to enhance your business by getting more subscribers, more revenue and more profits. This effectively is a simple question, how many customers are willing to pay for your subscription.
The customer’s willingness (W2P) to pay for a subscription, comes down to the following 4 factors:
W2P = ROI x Predictable Use x Downside / Price (>1k)
I’ll take the example of two contrasting subscriptions: Zomato Gold/Netflix and Health Insurance, to go further into these.
1. ROI (return on investment)
This is the Golden Equation of ROI
ROI = Tangible benefit of subscription / cost of subscription
ROI must be >> 1
Higher the ROI, the better.
In health insurance, a 35 yr old can pay Rs 8,000 and can get say a Rs 10L cover. That’s a high ROI = 10,00,000/8,000
For Zomato Gold, user pays Rs 999 for the year. They go out say twice a month to a Gold restaurant, and get free dish/drinks worth Rs 500 per visit. That’s a value of Rs 12,000 for paying Rs 999. Good ROI at 12.
But if your service offers 10 OPD doctor visits for Rs 3000. Assuming each doctor visit is Rs. 500, then the ROI = (500*10)/3000 = 1.6 Likely to not excite the consumer. This has been the issue with many of the OPD insurance offering in India
This is a fundamental factor at play, which is the first factor the consumer evaluates (‘kitna deti hai’).
2. Predictability of Use (over the duration)
Even with a good ROI, the propensity to pay comes down to predictability of use.
Typically most urban middle class consumers go out for a meal/drink, so the predictability of using a Zomato Gold is clear.
Whereas in Health insurance, let’s take a 25 yr old consumer. This consumer’s predictability of needing get a surgery done is extremely low, thus their propensity to buy health insurance is extremely low Where as a 35–40 year old consumer, who’s starting to face minor health issues and thus is able to predict their health needs better. Thus in India, most people buy health insurance once they cross into their 30's.
Note: This is an important factor, which helps in better targeting consumers.
3. Downside Risk (of not having it)
Objectively speaking, not having Zomato Gold/Netflix has low/medium downside risk. I may not be entertained, but I can most probably, live with it.
Not having health insurance has a high downside risk. If I get admitted into a hospital, and get a Rs 5L bill, that’s a significant outlay.
For products that have a high downside risk, they have the ability to potentially charge more. So, even if they have a low chance of utilisation, or low predictability, if the consumer recognises the downside risk, then their willingness to pay (W2P) could be high
4. Pricing (over the Rs 1k mark)
Last but not the least, this seems like the simplest factor, but its got plenty of nuance, some of which I’ve broken down below.
India is a price sensitive market. Even in the SEC A+ bracket, pricing matters.
In general, it seems that pricing below the Rs 1,000 mark is a good price point- because for a 3 digit price point, like say Rs 799, consumers are willing to take a chance and make an impulse based purchase, i.e, till Rs 799, consumers are willing to take the leap and try something new- a new brand (for a known concept), a new concept product. They’re broadly willing to lose Rs 799.
This impulse seems to reduce significantly, when the price is at Rs 1,100. Just the willingness to gamble with it is strongly reduced.
Let’s take the example of Netflix and Health Insurance.
A 35 year old couple will happily pay Rs 650 a month for Netflix, and keeps paying month-on-month, which totals up to Rs 7,800 a year.
But this same couple will deliberate a lot before paying Rs 8,000 for their health insurance.
It comes down to the pricing model. Paying Rs 650 a month doesn’t pinch as much as paying Rs 8,000 in one-go. Its a cash-flow thing.
So, while it may seem that pricing (below Rs 1k), is an emotional factor, it’s one of cash flows. Even digitally native households are more easily able to absorb an additional Rs 700 increase in expenses, vs a one-time expense of Rs 8,000.
In fact, the larger market exists at lower price points, so Netflix has introduced its Rs 199 per month offering just in India.
Now, imagine:
If you could get health insurance at the same monthly payment model of Rs 600–700. 10x more people will pay for it!
[Health insurance companies and IRDA, hope you’re paying attention] But there is a reason your health insurance its structured on a yearly basis, covered below.
So, when you’re modeling the pricing for your subscription, see how you can play around with your recharge periods, margins (risk of overuse), and introductory pricing:
Recharge period depends on Habit forming period- What is the length of period you need to have, so that the customer believes in the value of the product? Let the service come up recharge, when the consumer is Hooked (formed the habit, or recognized the benefit) Zomato Gold figured this period was 3 month.
Margins/Risk of overuse: While I earlier suggested that having a monthly payment in health insurance would be great, if the recharge period is shorter, then there is a risk of the consumer overusing and discontinuing. Thus health insurance companies prefer consumers to go with longer durations like 1 year, and even try to extend for multiple years.
Introductory Pricing/Trial Hump: Last but not the least, is overcoming trial hump. This is an important factor if you’re building a new category of subscriptions, or trying to enter a space with an established incumbent. What is the best introductory pricing you can offer to get the user to try the product- the duration of the trial hump is based on the habit forming period? Many companies offer free 1 month offer like Apple Music, 3 month offer for Netflix.
With the digital payments infrastructure significantly, it’s getting easier to do subscriptions.
Good luck with building your subscription business.
Commentaires