Pricing Models for the “Digital Omnivore”

Shortcomings of “all-you-can-eat” subscription and alternative ways of pricing digital content

My friend James Riney, VC at DeNA, recently published a post on the “Digital Omnivore” — a term coined by Deloitte to describe the contemporary content consumer’s tendency to use all 3 screens (phone, tablet, desktop). James concludes that since content consumption has almost doubled year-over-year, “all-you-can-eat” pricing (ie. Amazon Prime, Netflix, Hulu, Oyster) will be most palatable for the consumer.

All-you-can-eat subscription models, however, aren’t without their challenges. Here are a few:

1. Misalignment of incentives: Think of the buffet owner and customer. My goal as a diner would be to take full advantage, maybe even abuse the privilege of “all-you-can-eat”. The restaurant owner is trying to cut costs while getting as many feet into the door as possible. The Management may be inclined to increased high-margin, low-cost items and stretch the maximum capacity. In fact, a content provider like Netflix would want you to consume as few videos as possible — but just enough so that you are happy to stay a subscriber.
2. Lack of customer segmentation: “All-you-can-eat” pricing doesn’t allow you to separate the power users from the casual ones — every user is treated the same. There will always be the problem of the casual users subsidizing the cost of power users. Telecommunication companies have dealt with this problem by throttling power users; media companies have dealt with this by tiering service.
3. Difficulty in price setting: Netflix made news recently when it announced a $1 or $2 price increase — its first attempt in changing their pricing model since introducing the streaming-only plan in 2011. Amazon made a similar move in announcing an increase of $20 for Prime membership. The lesson here is this: changing “all-you-can-eat” pricing is a difficult task, and most companies rarely get it right the first time.
4. Paradox of choice: Numerous psychology studies show that increased choice doesn't always increase consumer satisfaction. Personally, when I’m browsing through Netflix or Oyster, I find myself overwhelmed by the sheer volume of content and take much longer than usual to make a choice. When I do make a choice, I often end up hopping around and starting another movie before I finish the last one.

If we look at pricing models from the consumer point of view, the key factor that makes “all-you-can-eat” pricing appealing is this: as content consumption increases, expenditure can be remain more-or-less the same. Here are a couple of alternative pricing methods that would allow consumers that same budgetary discipline without the same challenges as the “all-you-can-eat” pricing model:

1. Pay-as-you-go: If you allow consumers to pay for only the content they consume, you help align incentives between providers and consumers. The key is making it ubiquitously available and drop-dead simple. Amazon’s Kindle books is the poster child here; you can find almost any book in Kindle format and their Kindle devices makes purchasing friction-less.
2. Pay-what-you-want: Louis CK and Radiohead both sold their content on a “pay-what-you-want” basis. This pricing model more accurately reflects the value that a consumer gets from the content. It’s also akin to charging a relative price instead of an absolute one —the content deemed “more valuable” will naturally generate the most revenue.
3. Pay-for-premium: The New York Times paywall has helped the company generate new revenue while facing industry headwinds. This is the easiest way to segment casual users from power users while maintaining reach. Content providers can also get creative with this model, such as keeping recently released content free and charging for access to archived and/or bonus material, or providing both an ad-free and ad-supported versions.

There is something hugely appealing about “all-you-can-eat” pricing — as James put it: “ If I plan on eating a lot, I should opt for a buffet instead of à la carte.” However, in today’s world of seemingly infinite content, what the consumer needs isn’t an all-access pass, but ways to consume only the best and most relevant pieces of content. These alternative pricing models emphasize consumption of only the content consumers actually want.