Dynamic Pricing for Subscription Services

Abstract

This paper investigates the use of pricing schemes in subscription services that consist of various combinations of activation, subscription, and cancellation fees as applied in certain industries. It is assumed that customer attrition limits the diffusion of the service, but may also generate revenues. The authors demonstrate that, depending on the size of the service network, and the industry and market characteristics, such as customer activation and maintenance costs and customer sensitivities to different pricing components, the monopolist may find it optimal to choose any of the following pricing schemes: activation, subscription and cancellation fees; subscription and cancellation fees; subscription and activation fees; activation and cancellation fees; and a single activation fee, and a single subscription fee. Using a parametric model, the authors further show that, regardless of the chosen pricing scheme, when customers disregard the effect of the cancellation fee at the subscription and the effect of the activation fee at the termination stage, the activation fee starts low and increases as the network grows (penetration strategy), whereas the cancellation fee starts high and decreases as the network grows (skimming strategy). The activation and cancellation fees can take various other forms when customers consider their full effects. The subscription fee remains very low at the early stages and starts increasing only when a reasonable number of subscribers is secured. Finally, the authors discuss the theoretical and managerial implications of their findings.