[Video] Microtransactions Roundtable

This morning, I sat down with some of our pricing leaders to discuss recent pricing trends and what the future could look like with micotransactions. Video below, and you can also find a transcript of the conversation included.

T: This is Tracy Dent with Jeet Mukherjee, Pete Morelli and Adnan Akbari from Holden Advisors. Our topic on the table today is microtransactions! A couple things… let's start with, what are microtransactions? This term was originally in reference to free apps that have small charges after you're playing the game. If you have kids, Roblox, you pay to have additional features of the characters, things like that. Then this concept got some more excitement, some more heat when BMW got a bunch of press a couple of weeks ago. 

T: They were testing out after-purchase features, as a subscription. For example, you buy the car, you have the capability for heated seats in the car, but you pay a separate fee to have them work. This has been kicked around a bit with the pricing team for the last few weeks, and we figured… why don't we hop on video, do a little round table, and talk about implications. What could this look like for B2B? So why don't we start with an example. Where have we seen this already at play in B2B? 

P: Before we even get there, I think the neat thing about the microtransactions is just how prevalent it is. I don't know that everyone realizes on the Apple and Google stores, 30% of total revenue is just from these add-on in-app purchases. That's pretty substantial. So BMW is trying to just dip its toe with that example in that market. 

P: I think one distinguishing characteristic that's different than just a regular subscription with these microtransactions, is the concept of the optionality. It's not a required purchase, but it's an additional add on that you can buy afterwards. With BMW, one of the cool things about it, at least conceptually, is that it effectively changes the decision from the one you can only make at the time of purchase for that person that say might live in Florida, and they don't need heated seats. And then the car gets sold to someone in northern Canada, and they want to buy it for five months of the year. Now BMW is able to monetize that person, maybe 10 years later that they couldn't front. So that's kind of an interesting concept.

P: But one way just kind of a transition transitionary way, it's Office 365 or Microsoft 365. You can buy it up front as a desktop license, but the more common way is a subscription. But even then, it's not just a one size fits all subscription. You can upgrade, so you can have different Excel features, and kind of additional Single Sign On or B2B features. It's both can be sold as a family version, like if you just want it for school or for your house, but also businesses. Holden Advisors purchases this. And you can have many different versions of it, and you could change it month to month.

T: I was originally thinking in that example, if you think about like budget approval and things like this, it’s almost like “these aren't the line items you're looking for.” That’s in terms of speaking in smaller price points and things like that. But it could give more flexibility and an expansion of the breadth of purchase decision. It gives both the buyer and the seller more optionality there.

A: I agree. I think there's a lot there. Initially upon the purchase, there is an agreement made between the buyer and the seller. That agreement is going to set the stage for these future types of purchases. And that benefit can often be that the seller now has the ability to start to push additional functionality over time. That may not have been the case. Right? 

A: The example we often see is within the software world, getting back to what you originally said when this kind of originated in the world of gaming and in app purchases. You think about a model like Tesla for example, where they can go in and make software updates for an upsell over time. And the reason that they can make those software updates is because the hardware, meaning the car, was originally purchased. You may not even know exactly what that software is going to look like over time. And then that changes the purchase decision. When you think about this in the context of B2B, there's a lot of different use cases that come to mind. A common one that I like to reference is around hardware and how hardware can set the stage for future analytics in the software world.

J: I love that example Adnan. It makes me wonder you know, in the past, the differentiation in most companies was in the hardware piece of it. And I think it's going to software. So the longevity, the lifecycle of your hardware now is a little bit longer, but the differentiation is going to exist in the software and the upgrade cycle was there or evolves over time, as your consumer needs change. 

J: They can quickly pivot to those needs and change to those needs. I also love the fact that you know in a model like that, companies, be it B2C or B2B, gets to test different features and functionalities. It gives a very easy way to just see, “okay, maybe only 1% of the population opted into this one upgrade of some type, but let's see what they think.” Yeah, and then we can tweak it and either choose to make it as part of the core offering or keep it this ala carte moving forward. It does give a nice platform to test different things as R&D develops.

A: Absolutely, and I think the scenario can often be that this can expand the market size. So the example that Pete gave, in BMW, right, again B2C, but in that scenario, you now have access to a portion of the market that you previously could not sell to the seat. So obviously there's been some backlash and kind of comments on BMWs model, but in the intention behind it is right secondhand buyers, that wanted heated seats for a car that was previously in Florida. Now in Calgary, you have the ability to do that. Don't say you have to put it you have. It's that optionality that comes into play. 

P: Probably also worth noting that with microtransactions, the concept of large they are obviously micro means small, but you know, in app purchases can be 50 cents or $1. I think in the case of B2B, you could even talk about hundreds of thousands, or millions of dollars, but relative to the initial purchase, I think it's still fractional. 

P: Adnan to your example, even in industrial automation, you have these predictive analytics layers that are making maintenance, more optimized and lower costs over the lifecycle and those often are the add on component. You could have the hardware that works but if you want something that's going to give you a little bit more capability, that's the additional piece. That layer is typically not going to be you know, 80% of the initial purchase price. It's going to be a fraction of that.

J: As we chat about this, one of the things that keeps coming into my head is the notion from a consumers perspective of nickel and diming. Right, be it a B2B or a B2C. If companies don't do this the right way, I think there is a huge risk of the end customer feeling like they're being nickeled and dimed. Understanding the value of what you're putting together as the core product, that based on the needs of the customer is going to be absolutely crucial. 

J: Because if we as a consumer or end customer in a B2B environment, feel like “Hey, you took a core feature out and now I have to buy this gray box,” and whatever the key features are, I’ve got to pay incrementally on top of that, and I can't predict my usage or predict my whatever, to justify this purchase, then it becomes a huge problem. The key here is to really be able to organize what you're going to do properly before you take it to market. Otherwise, there is a risk of backlash.

A: The communication of value is incredibly important. To go a little further on that, I think it tends to work well for new features, or new let's just say analytics, where upon that initial sale, you are communicating to the buyer, that there could be uncertainty in terms of what that functionality will look like. 

A: But as you Mr. Buyer become more sophisticated, the intention is to grow with you. Meaning that if you have access to new data sets that could provide better analytics, then that can be part of the offering, right? You have to have the data to input for us to run the analytics. And then this can be more and more sophisticated over time. And we will work on a model that is mutually beneficial that's driving a return on both sides. So that has to be very apparent at the outset.

P: To stick with the 360 by example, if in Excel, you had your calculated key as kind of an upgrade, you'd be pretty pissed. But if it's a progression package that you buy after the fact, that makes sense. 

J: Yeah, I think you'd get a little bit of backlash from that cult like following that Excel has if you take that one out.

T: Based on what you said Adnan, when we work with people on good/better/best options, how do you reconcile that from a strategy perspective? Where does microtransactions fit in?

A: Good, better, best should be reflective of let's just say, functionality that meets the needs of a relatively broad audience, right? Obviously, as you go from good to better to best, the value and therefore functionality is increasing. But then in that framework, microtransactions can often be viewed as an add on, right? That mechanism to say, not every single person needs this type of functionality, but it is an option that has significant value for a segment of the market. It could provide a few different things. As an add-on service, you could you can test it out and identify that niche population. And then if that feature is something that is driving a lot of value, then perhaps that's something you bake in to your core packaging. It could be a great kind of testing round, like Jeet was saying earlier.

J: As long as the objective is met on both sides, I think that it can yield some benefits here. Objectives meaning from the company side, I think Adnan alluded to it earlier, the expansion of their market, from a company perspective is super important. I think Pete gave the example of the heated seats in the north versus no heat in the south for the initial purchases made. I think you can also look at it as a complete market segmentship. Porsche or BMW is going to go after a certain segment now from a car purchase, which is typically older men. 

J: But then if you change the metric, and you have this sort of micro transaction environment, or a subscription environment, now you're going after a different segment of the population that may not be ready to make a full purchase, but they want to try it out for two, three months. And eventually they're going to become these older men who are going to make that purchase. So you're getting to them a little bit earlier to help them test out and get the feel of the brands, the quality, the drive and all these things. 

J: It's the same way in B2B. You have a core market segment that you don't want to cannibalize, and you don't want to get away from, but you want to go attract a segment that is right on the borderline of coming into your world. It's a great way to introduce a platform that says, “Come in, test us out. No pun intended, take us for a test drive. And if you'd like it, you're eventually going to get into that larger segment that we know we're going to be in the sweet spot.”

P: Yeah, I like that Jeet. Not only does it kind of build upon the example of the two different car buyers, but just stick with that industrial automation example, think about a decade apart. You know, you could have instead of an SVP making a large capital decision, you can have maybe a 10 or 20 or $100,000 budget and say a director level employee could decide to try a feature and not have it escalated to the highest level, to procurement even, to make a decision. So it's really opening up both the time of when something's made, who the decision maker is, obviously a lot of turnover through organizations and it kind of really opens the door to that phenomena.

J: Yeah, I think that's a great point. Because I do see the procurement group changing because of this, as this becomes more of a common strategy. They do need to change, right, and they need to be able to monitor this and be able to identify any kind of egregious behavior as they move forward in terms of contract or length of time. 

J: So that's one thing, and it's interesting also is this also, in the old sort of subscription basis, this was a trick that technology companies used to get outside of the IT departments in a purchase decision. Instead of a million dollar ERP solution that you have to include IT, now It's only $50,000. It's in the cloud, so I can go around my IT department. Those are some of the questions that still need to be answered, as this becomes more of a mainstream strategy for some of these companies.

A: In some ways, it's very reflective of that shift in a CapEx spend to OpEx. With the difference being that that OpEx end may have a level of variability. So you can maybe make some prediction on what it could look like but depending on the purchase that is eventually made, it could go up or down.

A: And you're like you said, you're not reading them million dollar check, you're reading it for significantly less, and then you have the ability to commit depending on your needs at a specific time. For the buyer, that ability to make a decision at a later date and flexibility could be really beneficial. 

J:It also creates that opportunity for companies to come in to help manage all of those microtransactions right? We are seeing it now. We were joking about it yesterday, you know, I cut the cable cord and I thought I was free. And then I'm looking at my bill now. And it's like, Where did all these like Hulu and Netflix and all these subscriptions come from?”

T: Billion streaming services.

J: Yeah, that's right. And now there's a company called Truebill that's helping consumers manage all those microtransactions in order to bring some management to all these subscription services. In the B2B world, I can completely see software applications coming in and creating an opportunity for them in the market to help companies manage all these different microtransactions.

A: In that streaming example, one thing that comes to mind… if there was only a way to bundle everything that you watch together into a single subscription. In some ways, it's coming full circle.

J: You could be a cable company, don't call yourself one though.

P: Good prediction.

T: Can you think of other benefits for the buyers? Predictably, I could see from a B2C perspective, a lot of backlash for this kind of thing. And we have. But from a B2B perspective, what other ways could this really serve buyers?

J: Tracy I think it’s a great question. The backlash is there because it needs to be there, because it's not a perfect system yet. So I get it. But it's also used to train the market. You know, like we're humans, and we have some behavioral characteristics. If we're not used to doing something, it takes us a little while to get used to it. So some of these companies that are in the forefront of these changes, yeah, they're going to get some backlash. But they're learning from that, and they're trying to stay on top of it. 

J: As consumers, we're going to kick and scream, but slowly we are going to start seeing some of the benefits. One of the key benefits I know is going to happen is just our ability to test. Right now, purchasing happens online. There's this sort of a lack of being able to touch and feel a purchase. But if you can have a touch and feel experience for a month or for 30 days or 60 days or 90 days, whatever it is, then you get that feel back and you get used to it. You’re like, “Oh. This is pretty good.” Either I like it, or, “Thank God I don’t have to buy this Porsche for $100,000. I tested it for three months and didn't like it. Okay, I just saved a ton of money.” Right? So I think there is a benefit that's there from a purely test, and touch and feel perspective, that these days that we're just kind of lacking with these online purchases.

P: Same type of concept we talked about earlier, but it really gives you the opportunity to try something that you weren't even aware of that was a use case for you earlier. I think in B2B, that will happen whether we're talking about predictive analytics, or something that I just need for a few months to help with the stage of an acquisition that you're in, or some other stage of the business cycle. If you only need it a few months, why do you have to make a capital purchase? You may pay little bit of a premium for that period, but that's okay. 

J: That’s right. It also reminded me as you're speaking here, one of the biggest influencers for any purchase decision are people that we respect. So there's this peer to peer marketing concept, right? That typically is one of the more powerful things that gets us to buy. Imagine if a buddy of yours that you trust says, “Hey, try this out.” And you don't want to make a commitment for a year or two years or four years, or a CapEx commitment. But guess what, you can try it at low costs for a certain period of time. That just opens up that avenue of marketing and testing to a much greater degree. And that's something I think we'll all get benefit from as a consumer.

T: It brings like more fluidity to the early adopters too, and that whole chain of when people grab things. That's an interesting point.

T: All right! I think this is a good place to pause. It's good to see even the little beginnings of what this could mean for the future and do some predictions, and then we'll see where this takes us. Maybe we regroup in a couple months and see what's happened and look at what's next. Thank you, guys.