3 Types of Fans, 4 Myths of Bundles & 2 Ways Subscription Businesses Increase Revenue| Shishir Mehrotra on Invest Like the Best

Check Out the Invest Like The Best Podcast Episode Page & Show Notes

Key Takeaways

  • There are 3 types of audiences:
    • Superfans: They pay retail price for a product and will look for your product
    • Casual fans: They only have one of the criteria listed above
    • Non-fans: Have none of the traits listed above
  • The 4 Myths of Bundling:
    • 1) Bundling is bad for consumers and providers
      • Truth: By bundling, you produce value in 2 ways: providers get access to casual fans and consumers get access to products they may become a fan of
    • 2) Revenue from bundles should be allocated based on usage
      • Truth: When dividing up revenue, you have to look at the Marginal Churn Contribution or how many customers would leave the bundle if a single service was removed
    • 3) Bundles will always feel like a rip-off to consumers since they represent a lack of choice
      • Truth: Because there is a lack of transparency about the price of each component in a bundle, people sometimes feel they’re being rip-offed when they’re actually getting a good deal
    • 4) The best bundles are narrow and have very similar products so they make sense to consumers
      • Truth: The best bundles maximize casual fan overlap and minimize superfan overlap 
  • When you have a bundle, there are two main ways of increasing revenue:
    • Getting more subscribers
    • Raising the subscription price
  • As an investor, don’t look for subscription companies that try to leverage their price, look for companies that maintain price but find ways to add more users
    •  “When you start seeing a subscription service increase prices, people look at it as a willingness to pay indicator, I look at it as a, I saturated my ability to continue growing my base and I now have to monetize my existing base more” – Shishir Mehrotra

Intro

  • Shishir Mehrotra (@shishirmehrotra) is the CEO and Co-Founder of Coda, Inc. He served as Vice President of Product and Engineering, Youtube/Video at Google Inc.
  • Host – Patrick O’Shaughnessy (@patrick_oshag)

About Shishir Mehrota

  • Shishir is the CEO of Coda and before that, he spent 6 years at Google, before that, he spent 6 years at Microsoft
    • When Shishir joined YouTube, the company was actually losing a lot of money
      • At that time, it wasn’t clear what the best strategy was for YouTube to make money
        • One experiment that Shishir ran at YouTube generated only $100 total 
  • Shishir is also an investor and sits on the board of directors at Spotify

Different Types of Fans

  • There are 3 types of audiences:
    • Superfans: They pay retail price for a product and will look for your product
    • Casual fans: They only have one of the criteria listed above
    • Non-fans: Have zero of the traits listed above
  • When you sell a product a-la-carte, your customers will be mostly superfans
  • When you sell a product in a bundle, your customers will be mostly casual fans
    • Think of cable, you pay for a lot of things but you really only want a few of the channels
  • Most non-fan businesses use ads to monetize their customers
  • Music used to be a superfan business: People would only buy the CDs of artists that they enjoyed
    • Spotify turned it into a bundle that attracted both superfans and casual fans
      • Spotify also cross bundles by offering Hulu to its customers

The 4 Myths of Bundling

  • 1) Bundling is bad for consumers and providers
    • Truth: By bundling, you produce value in 2 ways: providers get access to casual fans and consumers get access to products they may become a fans of
      • Bundling produces more value to businesses because it introduces them to more casual fans  
  • 2) Revenue from bundles should be allocated based on usage
    • The myth here is that revenue from bundles should be allocated by usage. If people are using one service more than any other, that service should get the lion’s share of the revenue.
      • E.g: ESPN makes about $4 per subscriber while the History Channel makes around $0.25
        • Truth: When dividing up revenue, you have to look at the Marginal Churn Contribution or how many customers would leave the bundle if a single service was removed
          • It’s not just usage that you have to look at, but also anchor value
      • Look at health insurance, most people rarely use it but everyone wants it 
        • “For the whole health industry to work…bundle healthy people with sick people. People need to contribute even though they are not using it or the whole system doesn’t work.” – Shishir Mehrotra
  • 3) Bundles will always feel like a rip-off to consumers since they represent a lack of choice
    • Truth: Because there is a lack of transparency about the price of each component in a bundle, people sometimes feel they’re being rip-offed when they’re actually getting a good deal
      • “People’s ability to understand a bundle starts from their ability to understand the components of a bundle” – Shishir Mehrotra
  • 4) The best bundles are narrow and have very similar products so they make sense to consumers
    • Truth: The best bundles maximize casual fan overlap and minimize superfan overlap 
      • Superfans tend to stick to a single product while casual fans tend to use multiple products
        • E.g: The Spotify and Hulu bundle was incredibly profitable for both companies

The 2 Ways Subscriptions Increase Revenue

  • When you have a bundle, there are two main ways of increasing revenue:
    • Getting more subscribers
    • Raising the subscription price
  • Netflix held its price constant even though they continued to add more and more shows,
    • This forced employees to think of ways to get more subscribers and they did that by creating amazing original shows
      • Amazon did the same thing, they kept the same price while adding more features (music, kindle, etc.)
  • As an investor, don’t look for subscription companies that try to leverage their price, look for companies that maintain price but find ways to add more users
    •  “When you start seeing a subscription service increase prices, people look at it as a willingness to pay indicator, I look at it as a, I saturated my ability to continue growing my base and I now have to monetize my existing base more” – Shishir Mehrotra
  • Subscriptions have great economies of scale which make them a great business. You create something once and sell it to the next customer for next to nothing.

Additional Notes

  • “I think…we’re heading towards much, much more bundles than we have today” – Shishir Mehrotra
    • There will be bundles of products that we never imagined would be put together such as dry cleaning and healthcare
  • In the future, there will be companies that survive only because they are part of a bundle
  • If you’re good at framing problems, you tend to be very good at addressing new challenges
Invest Like the Best : , , ,
Notes By Alex Wiec

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