January 7, 2014
Scott Kelby just announced his new pricing initiative which combines NAPP and Kelby Training memberships into one product — appropriately named KelbyOne. Previously, you had to subscribe to NAPP to get Photoshop User magazine and Kelby Training to get access to the online courses. Both are great products. Now one subscription covers both services — so far, so good. The details of his new offering are here: http://scottkelby.com/2014/creatives-unite-at-kelbyone/.
Now the tricky part, pricing. NAPP membership has been $99/year; Kelby Training membership was $199/year. The new combined service is $249/year. If you are a subscriber to both services (as I am), you save money. The problem for Kelby is how many of his current NAPP subscribers would upgrade to a $249 subscription? Probably not many. He risks losing many of his lower-tier subscribers.
Price Discrimination Strategy
The answer to this Kelby’s dilemma comes from a marketing strategy known as price discrimination. Companies use price discrimination every day. Movie theaters give senior citizen discounts. Grocery stores charge different prices for the same items at different store locations. Airlines charge different prices for the same flight. Price discrimination works best when there is information asymmetry; that is, when customers don’t know what other customers are paying. It can also work when customers feel like their chance at the lower price will come, as in senior citizen discounts. Economists love price discrimination, because it maximizes the price each customer pays for the same good or service. Each person will pay a price near their maximum. This maximizes revenue for the firm.
Price discrimination tends to create problems when there is high information availability or there is a sense of randomness to the pricing level. Kelby’s new initiative falls into both categories. Kelby has grandfathered NAPP subscribers into the new service at $99/year. From his perspective, this is a good move. It doesn’t cost much to cover an additional subscriber once the fixed costs of the operation are met. Economists would say that the marginal cost of an additional subscriber is near 0. To keep Kelby Training subscribers happy, he has grandfathered them in at $199. If you had both services, you get charged the price related to the service you had first. If you were a Kelby Training subscriber first, you get charged $199. If you were a NAPP subscriber first, you get charged $99. Seems a bit random, doesn’t it? Moreover, everyone knows what the other customers are paying.
What Should He Do?
Kelby has a few choices here. He can weather the storm and hope that this blows over. It may, but I doubt it. He can also respond to the loud complainers by handling them on case-by-case basis and giving them the $99 deal. The problem with this approach is that as soon as he does this for a few, it will be all over social media. Information asymmetry is very difficult to maintain in today’s connected world. My recommendation is that he give all of his current subscribers the $99 deal. Discriminating based on which service a person signed up for first seems too random for customers that had Kelby Training subscriptions first. This is especially true when the price for Kelby Training subscribers is twice that of NAPP members. Maintaining three very different price points ($99, $199, and $249) for the exact same service will just seem unfair to customers that don’t get the $99 price. New customers will understand, but loyal customers will not feel warm and fuzzy about this situation.
Kelby’s New Coke
Like Coca Cola many years ago, Kelby has launched a new product that will likely create a public relations nightmare. To solve this problem and maintain goodwill, he needs to take public corrective action quickly. As I stated above, my suggestion is that he give all of his current subscribers the $99 deal and move on. It hurts revenue in the short run, but he maintains his loyal customer base and becomes a hero to his subscribers. Moreover, subscriber attrition in this grandfathered group will be significantly less going forward. He could even go a step further and offer the $99 price to all that sign up before January 31st. Although it sounds overly generous, those customers are likely to maintain their subscriptions for a much longer period than those that pay the $249 price. Only Kelby can run the numbers to see if this makes sense. Either way, he needs to get ahead of this issue quickly.