Keeping the cost of an SVOD service low with no commitment lowers the barrier to consumers giving it a try, but there is a dark side to this pricing strategy. It can end up making the service unprofitable.
The proliferation of SVOD services continues, but figuring out what to charge consumers is anything but obvious. In advance of the free webinar “Good Business Sense Could Be Killing Your OTT Video Service” this Thursday June 16th at 11AM Pacific, here are three reasons charging too little and allowing only month-to-month subscriptions could be hurting an online video provider’s (OVP’s) business.
For many SVOD services the ideal place for a viewer to watch is on the TV. Increasingly, consumers are opting to use their connected television to watch. For example, between March 2015 and March 2016 the number of people using a connected television to watch BBC iPlayer online almost quadrupled, from 3.2% to 12.5%. Unfortunately, some popular streaming media player makers take a very large junk of the subscription amount in fees.
Apple takes 30% of the monthly subscription as a service fee when a user signs up for SVOD through an iOS device, like the Apple TV. This enormous fee is a huge problem for SVOD providers, because they often exist on much smaller margins than traditional pay television. It is impossible for most OVPs to absorb the fee, leaving them with a stark choice: charge more for customers that sign-up through iOS, or force the customer to sign up through a web portal or some more friendly platform.
Apple has just lowered the charges somewhat. After an SVOD customer has been subscribed for 1 year the fee drops to 15%. However, that will be of little help to many of the smaller SVOD providers because of the next item on our challenges list: dip-in-dip-out.
According to David Mowrey of Clearleap, SVOD providers are very likely to cancel SVOD services.* Nearly a third of users have cancelled service, but the smaller a service is the more likely cancellation will occur. 30% of Netflix users say they have cancelled an SVOD service, but 40% of Amazon Prime Video and 42% of Hulu users say this. What’s more, half say they subsequently re-subscribed to the service they previously cancelled. This suggest consumers are very comfortable with the idea of subscribing to and cancelling a service multiple times. This dip-in-dip-out (DIDO) behavior has some important implications for SVOD providers.
The biggest cost an OVP faces is content licensing. It far exceeds variable costs like streaming and encoding. These content costs are fixed and an OVP must set subscription rates high enough to cover licensing fees plus a healthy profit margin. However, if subscribers dip-in-and-out multiple times a year that effectively reduces their average monthly subscription rate. To compensate, an OVP must charge more or sign-up more subscribers.
Credit card chargebacks
Gene Hoffman, CEO of Vindicia, says that credit card chargebacks can turn good revenue into bad. When a customer challenges a fee on a credit card bill, the credit card company must investigate. The company may then credit the customer, reverse the payment to the OVP and tack on a hefty fee for doing it. This chargeback fee can be $5 or more per transaction. Mr. Hoffman says chargebacks occur on between 0.3-0.8% of transactions.
Mr. Hoffman has a number of suggestions on how to positively impact the three issues discussed. For example, rather than raising prices, an OVP can encourage potential customers to sign up for 3 or 6 months with a small discount over the monthly rate. This approach should reduce dip-in-dip-out, cut credit card chargebacks, and get more people passed the 1-year mark on Apple devices.
To hear more problems and their solutions, join the free webinar “Good Business Sense Could Be Killing Your OTT Video Service” this Thursday at 11AM Pacific. Bob Terzotis, Executive Vice President at Mather Economics will discuss more pitfalls in SVOD pricing, and Gene Hoffman, CEO of Vindicia, will reveal more ways to improve your revenue picture.
Why it matters
The current trend is to price SVOD services very low, at $5 or less, and only require a month commitment.
This can cause problems for online video providers.
TV platform fees, did-in-dip-out behavior, and credit card chargebacks can quickly send profitable businesses into the red.
*From a presentation Mr. Mowrey gave at NAB 2016