Applying Consumer Theory to Improve Your Monetization Strategy

Explore the nuances of consumer theory and its pivotal role in subscription app monetization. Learn how understanding user behavior can revolutionize growth and pricing strategies

Hi friends,

In today's edition, we're diving deep into how consumer theory principles can hypothetically enhance monetization strategies. Remember, all examples are just hypothetical scenarios. On the random note - over 800 of you are now part of this newsletter community, and I'm thrilled! A big thank you to everyone who has subscribed and engaged with my content. I'm introducing paid versions of the newsletter, and this one is specially crafted for our paid members. If you're intrigued, consider subscribing or starting a free trial to delve deeper. Thanks so much, and let's get started!

What’s Consumer Theory?

Consumer Theory helps us get why we choose one thing over another when shopping on a budget. It's like understanding the 'why' behind our clicks and choices online. In today's app-filled world, this is gold. Think about apps we love, like Netflix or Spotify. By diving deep into Consumer Theory, these apps can better tailor their services and pricing, making them even more irresistible to us. It's all about creating apps that truly get us and our wallets.

I. Consumer Behavior and Utility Maximization:

---

A. Understanding Consumer Preferences:

---

1. Description of the Concept of Utility:

In economics, 'utility' is a measure used to represent a consumer's satisfaction, happiness, or preference for a particular good or service. It's a way to quantify the intangible pleasure or value derived from consuming a product or service. In the context of subscription-based apps, such as Netflix or Spotify, utility could manifest as the joy derived from watching a favorite series or listening to a beloved playlist. The more utility a consumer derives from an app, the more likely they are to subscribe and remain loyal to the platform.

Mathematically, utility can often be represented as a function, U(x,y), where x and y are quantities of two goods or services. For our discussion, let xxrepresent hours of content watched on Netflix and yyrepresent hours of music listened to on Spotify. A consumer's utility would then be contingent on the combination of these two services.

---

2. Indifference Curves and Budget Constraints:

Indifference curves graphically represent combinations of two goods or services that give the consumer the same level of satisfaction. On an indifference map, a higher curve represents a higher level of utility. For a consumer oscillating between Netflix and Spotify, an indifference curve might illustrate combinations of hours spent on each platform that result in the same level of enjoyment.

The slope of an indifference curve, termed as the Marginal Rate of Substitution (MRS), indicates the rate at which a consumer is willing to trade off one good for another while maintaining the same level of utility.

\(MRS=− Δy / Δx ​ \)

In our context, the MRS would represent how many hours a consumer is willing to give up on Netflix to gain an additional hour on Spotify, without altering their overall satisfaction.

Budget constraints, on the other hand, represent the combinations of goods a consumer can afford given their income and the prices of the goods. Given the monthly subscription costs of Netflix (Px​) and Spotify (Py​), and a consumer's income I, the budget constraint can be represented as:

\(P x ​ ⋅x+P y ​ ⋅y≤I\)

Guiding Pricing Strategies:

In the context of subscription-based apps, the slope of the budget line is determined by the ratio of the prices of the two services. An alteration in pricing can pivot the budget line, leading to a new equilibrium point where the consumer maximizes their utility.

For instance, if Netflix were to increase its subscription fee, the budget line would rotate inward for consumers, making Spotify relatively more attractive. By analyzing the elasticity of the indifference curves (how much they bend), marketers can predict how consumers might shift their consumption patterns in response to price changes.

This understanding is vital when considering price hikes or reductions. If a small price increase causes a significant drop in subscribers due to a sharp turn in indifference curves, it may be more prudent to maintain current pricing or even consider bundling services to offer perceived value.

Crafting Promotional Offers:

Promotions can effectively shift both the budget constraints and perceived utility levels. Offering a discounted rate or a limited-time bundle (e.g., combining Netflix and Spotify for a reduced rate) can temporarily pivot the budget line outward, making it feasible for consumers to enjoy more of both services.

By studying where these promotional intersections occur with indifference curves, marketers can gauge the potential uptick in user engagement and retention. For instance, if a promotional offer moves the consumer's choice closer to a higher indifference curve, it signifies increased utility and satisfaction, making the promotion a likely success.

Identifying Upselling and Cross-Selling Opportunities:

Understanding the MRS (Marginal Rate of Substitution) can be particularly enlightening for upselling and cross-selling. If, for instance, the MRS between Netflix and Spotify is relatively low, it indicates that consumers might be willing to give up a little of one service for more of the other.

Growth marketers can leverage this by offering tiered services or additional features. For example, Netflix could introduce a premium tier with exclusive content, betting on the idea that users might reduce their Spotify usage slightly in favor of this new Netflix content. Similarly, if Spotify notices a high MRS value, they might consider cross-selling podcasts or exclusive interviews, anticipating that users might slightly reduce Netflix consumption for these Spotify additions.