Where Apple Screws Up Royally (things you should avoid/learn from)
The problems above are absolutely tough to weather, even for a company as innovative as Apple. Yet, given their scope and Apple’s position in the market, Apple essentially punted on doing anything innovative or intelligent with their pricing. Instead, they opted for a road similar to their streaming competitors, but executed in a much poorer manner, particularly when it comes to leaving money on the table through a mono-price mindset and abandoning a clear freemium strategy
1. Apple’s leaving an exceptional amount of money on the table through a mono-price mindset
There’s no doubt that Apple’s going to sell subscriptions here. An aggressive three month free trial, killer acquisition experience, and the knowledge from selling over 25 Billion songs through iTunes since it’s inception means there isn’t a question. Yet, they sadly could be selling so much more with the platform they’ve built.
Take a look at the price sensitivity data below that we collected using our software from 300 music lovers regarding a music service that provided the premium features of Apple Music (more detail on the process and methodology in this article we did on Groupon's pricing). You’ll notice that Apple's $9.99 per month falls fairly close to the rock bottom price point of around $8 per month that captures the majority of the market (Point A). Yet, you’ll also notice that between points A and B, a good number of folks were willing to pay much more than the $8 per month price with about 10% of the sample willing to pay about $25/month (point B).
This doesn’t mean that Apple should have an entry level price for the service above the $9.99 per month price point (and there's an argument to be made to make it even lower), but it does mean that they’re leaving an enormous amount of money on the table from the majority of the market that’s willing to pay much more than $9.99 per month.
What’s worse is that audiophiles are willing to pay even more. We surveyed another 100 music lovers who were hardcore audiophiles, identifying themselves as individuals who listen to music constantly as a passionate hobby, not just as a means to shaking their bum on the weekend. These individuals fell into two groups - one that’s willing to pay roughly around where the main group is (point C below) and another that’s willing to pay 6-8x what the casual listeners are willing to pay.
Without doing even an ounce more analysis, this data is compelling enough to suggest at least two tiers of service that captures revenue from both the casual entry-level listener and the audiophile. This is a basic tenet of proper pricing - you need to align your tiers to your personas, giving them an entry point and a place to grow.
Naysayers out there may be thinking, “well Apple wanted to keep things simple as Apple is prone to do.” Having multiple tiers of service doesn’t mean things need to be super complicated, particularly in the consumer space. Additionally, Apple's roll out is already super confusing with two versions of their single tier ($9.99 solo and $14.99 for up to 6 people), a free version that offers some limited functionality, and very unclear language around what you exactly get with the premium versus free tier.
Netflix does multiple tiers in consumer SaaS exceptionally well by differentiating streaming quality and number of concurrent streaming locations. In an additional analysis you can see below we ran amongst the audiophiles, the most basic differentiating factor was sound quality. Simply offering a premium bitrate would be enough to hook those premium users to upgrade to a higher level of service. Mixing in a few additional perks would convert and retain even more (here's more information on running feature value analyses).
The bottom line how we’d make changes: Apple needs better persona-pricing alignment and to not crush themselves under the mono-price mindset. We’d have a tier at $10/month and a tier at $25/month+ for the premium audiophiles. All this allows them to sweep up much more of the cash out there for services like these, especially considering our look at the market showed audiophiles could be as much as 15% of buyers. Having 1 or more out of every 10 customers giving you 2.5x+ Monthly Recurring Revenue (MRR) does amazing things to your Lifetime Value (LTV) to CAC ratio. We’d need to do some more analysis to truly know where that premium price point should be and which features to differentiate on, although bitrate looks exceptionally promising.
2. Apple’s wrongfully abandoned a clear freemium strategy
As mentioned above, Apple’s facing a potential problem with a staunch competitor with a very enticing freemium strategy (Spotify) in the context of a main target buyer generation that doesn’t like paying much, if anything, for music. As we’ve discussed previously freemium is an acquisition strategy, not a revenue model that needs to be used like a scalpel in SaaS. With Apple being behind, it’s perplexing why they aren’t buttressing their freemium offer, even if it’s not as feature rich as Spotify’s. Without it, they're forcing themselves into an upward CAC battle riddled with landmines of active usage woes.
In the consumer SaaS space, free trials are typically a weak way to convert users, as you want to constantly be nurturing a lead for as long as it takes to convert them. For instance, if I try a product on a free trial tomorrow there may not be enough hooks to get me as an active user within the first 15-30 days, let alone for me to be triggered enough to want to purchase within or after those 30 days. Plus, my attention span may distract me from interacting with your product beyond a day or two. As a result, if you’re only giving us 15-30 days to date, the liklihood that I’m going to marry you with my credit card is very low in consumer SaaS following a trial.
Freemium on the other hand keeps me warm constantly, and allows you to barrage me with messaging to make me move from "free inactive" to "free active" and then different triggers to make me "premium active."You own the lead and can refine your funnels constantly based off the free interaction, because there’s simply no end date.
Apple doesn't have free as a core competency, but leading with their free trial (even if it is 90 days) and not buttressing their free plan shows a lack of foresight around truly understanding their funnel enough out of the gate. They aren’t in a space where their powers of hardware or mass distribution can save them from proper acquisition modeling, especially with Spotify who has such a far reaching head start.
The bottom line how we’d make changes: The free trial should still exist for the premium offering, but Apple should lead with free as the gateway drug to premium. Even with the limited features, there’s enough there to keep folks hooked and even to bring some diehards over from some of the other services. Yet, this won’t work if a prospect’s conversion from another service starts with a ticking trial clock.