A LOOK AT CIRCULATION PRICINGPresented to

NEACE

K Group Incjerry@kgroup.uswww.kgroup.us

(602) 315-3600

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OUTLINE

Background Results Switching and Lifetime Value Acquisition and Retention Pricing

– Price Value Segments– Thresholds– Choice the Ultimate Solution

Questions

The following is the property of K Group Inc. No part of this document, including concepts, designs, or procedures may be used for any other purpose, nor reproduced, nor disclosed to

anyone without the express written permission of the K Group.

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BACKGROUNDBACKGROUND

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K GROUP HISTORY Founded in late 1989 by a group of

experienced professionals from across the United States.

Moved from New York and Washington DC to the Arizona Center in 1992.

Worked for over 30 different newspapers over the past five years.

K Group programs have added $110 million in incremental revenue to our newspaper clients over the past 5 years -- a return of 30 times the consulting investment.

Clients hire us for our sales development expertise or to act as change agent across the entire strategic marketing arena

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SELECTED CLIENTSDOMESTIC & INTERNATIONAL

ADP - General Services

Arabian Horse Association

Doubletree Hotels

Greater Phoenix Economic Council

GTE - Business Services

Indianapolis Newspapers, Inc.

Columbus Dispatch

L A Times

Kansas City Star

Marriott Hotels and Resorts

Milwaukee Journal Sentinel

Pepsi Cola Company

Media General

Phoenix Newspapers, Inc.

San Francisco Newspaper Agency

Sacramento Bee

TIME Warner International

Virginian-Pilot (Norfolk)

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STRATEGIC MARKETING CHANGEAGENTS

AdvertisingAdvertising Pricing

Strategy Sales Force Productivity

and Activity Mapping Sales Organization

Market Potential

Sales Compensation and

Training Compensation Planning

Commission Structure

Effectiveness Training

Database Marketing

Application BuildingPredictive Models and

ScoringSoftware

Service Bureau

CirculationCirculation Pricing

ModelsContact Management

StrategyRetention Pricing

ManagementS/C Marketing

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K GROUP AND NEWSPAPER PRICING STRATEGIES

K Group introduced an entirely new pricing approach to the newspaper industry in 1993 at The Arizona Republic

Since then, K Group has built -- over 50 circulation pricing models

and over 60 advertising pricing strategies

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RESULTS ORIENTATION

RESULTS ORIENTATION

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RETURN ON INVESTMENT MENTALITY

K Group Fees: $90,000

Revenue Impact: $2.8 million

(2 years)

K Group Fees: $90,000

Revenue Impact: $2.8 million

(2 years)

Subscription Pricing Subscription Retention

K Group Fees: $250,000

Revenue Impact: $5.0 million (4 years)

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DETERMININING VALUE FOR EACH

HOUSEHOLD

DETERMININING VALUE FOR EACH

HOUSEHOLD

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VALUE-BASED RESEARCH

Marketing Sciences Institute initiated a series of invited conferences in 1988 to explore the “value proposition” in consumer products.

Advertising Research Foundation sponsored several conferences in 1993 and 1995.

K Group began offering value-based segmentation in 1994.

In 1996, K Group began scoring each household in a market based on what would “likely cause switching” to happen - - start, stop, advertise, recommend, etc.

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VALUE PROPOSITION

A customer/prospective customer will adopt the product or service that

maximizes their value proposition.

If a new product or service offering delivers a higher value (and higher satisfaction), consumers will switch.

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WHY USE VALUE SCORING MODELS

We’re not in the business of selling newspapers

……….

We’re in the business of buying time

………

Different people give up their time for different reasons

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WHAT QUESTIONS ARE BEST ANSWERED

What factors influence a buyer to choose one provider over another?

How loyal are customers to a current provider?

Which customers are most likely to switch (and under what circumstances)?

What is the role of brand vs. pricing vs. product features vs. service elements in determining market demand and competitive share?

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DIFFERENT HOUSEHOLDS =

DIFFERENT VALUE STRUCTURE Economics (Price)

Product Attributes

Service Attributes

Image Attributes

Brand Value

Competitive Set

K GROUP IS EXPERIENCED AT SCORING INDIVIDUALHOUSEHOLDS TO ACCURATELY MEASURE SWITCHING

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NEWSPAPER VALUE PROPOSITION

Price Sensitivity Tradeoff Threshold Switching

Price Sensitivity Tradeoff Threshold Switching

Service Drivers Delivery System Billing Recycling

Service Drivers Delivery System Billing Recycling

Image Drivers Masthead Quality User Imagery Community Profile

Image Drivers Masthead Quality User Imagery Community Profile

Product Offering 1 day 3 day 4 day 7 day

Product Offering 1 day 3 day 4 day 7 day

Content Drivers Story Construction Reporting Topics Day of the Week News Scope

Content Drivers Story Construction Reporting Topics Day of the Week News Scope

SWITCHING DECISION

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BUILDING LIFETIME VALUE STRATEGIES

ContactManagement

(the “bill”)

HouseholdValue

EventDrivers

MessageDrivers

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DETERMINING HOUSEHOLD VALUE*

H/D79%

S/C21%

1 Day30%

4 Day23%

7 Day47%

Under4 Months

34%

6-12Months

18%

12 Months48%

Mode of Receipt Readership Likely “Survival”

ContactManagement

HouseholdValue

EventDrivers

MessageDrivers

* Does not include advertising value

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MESSAGE DRIVERS

BrandValue

BrandValue

ImageDrivers

ImageDrivers

CustomerDrivers

CustomerDrivers

ProductDrivers

ProductDrivers

ServiceDrivers

ServiceDrivers

Price LeverPrice Lever

Value associated with a product when price, product and service are identical

Total utility (in micro-economic terms) assigned by consumers

ContactManagement

HouseholdValue

EventDrivers

MessageDrivers

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EVENT DRIVERS

New Content Introduction

Relevant News Events

Natural Events Holidays/Seasonal

Historical Events Editorial Complaint

Prior to 1st Renewal Prior to 2nd Renewal During Temporary

Stop Service Complaint Credit Card

Conversion Billing Term

Adjustment

Prior to Stop (Survival Model)

Competitor Actions Pricing Promotions

Annual Birthday Anniversary

Service News Customer

ContactManagement

HouseholdValue

EventDrivers

MessageDrivers

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CONTACT MANAGEMENT PROCESS

Surprise/DelightSurprise/Delight

LearningsLearnings

PromisesPromises

Rela

tion

ship

ContactManagement

HouseholdValue

EventDrivers

MessageDrivers

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ACQUISITION AND RETENTION PRICING MODELS

ACQUISITION AND RETENTION PRICING MODELS

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K GROUP AND NEWSPAPER PRICING MODELS

K Group introduced Pricing Models to the newspaper industry in 1993 at The Arizona Republic.

Since then K Group has built over 50 models for newspapers including: Columbus Dispatch

San Diego Union Tribune

San Francisco Newspaper Agency

Sarasota Herald Tribune

Milwaukee Journal Sentinel

Indianapolis Newspapers

LA Times (core market)

Arizona Republic

Seattle Times Company

Richmond Times Dispatch

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FLAWED PRICING PHILOSOPHY

Newspapers’ use of introductory subscription rate discounts is fundamentally flawed.

Acquisition expenses (discounts and sales cost) and policies:

– Disguise the basic demand for the product

– Starve marketing of retention dollars

– Assume that “somehow” (after reading our product) that the product’s value will increase 50 to 100%

– Are unrealistically high (versus other industries) because we limit customer choice (i.e., we assume that most of the value is with price)

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PRICING SIMULATION and SCORING MODELS

K Group’s modeling technique was borrowed from consumer packaged goods and consumer services businesses.

Where the cost (real and competitive) of testing is too high or takes too long to accomplish.

Enable the marketer to test a wide variety of product/price scenarios:– Basic Product Demand– Product Replacement– Cannibalization– New Services– Competitive Reaction

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NEWSPAPER MODELING APPLICATIONS

Premium Delivery

On-Line

Loyalty Cards

Debit/Credit Card Payment

Topic Supplements

Publishing Time (AM/PM)

New ServicesSingle Copy

PricingSubscription

Types

Sunday Only

Weekender (2 and 3 day)

4 Day

5 Day

6 Day

7 Day

Subscription Length Pricing

4 Week

5 Week

8 Week

13/16 Week

24/26 Week

52 Week

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

Price Structure Changes Price Increases Price Reductions

Models have been used to accurately simulate demand (circulation and circulation revenue impact) of a variety of current and new

products

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KEY LEARNINGSKEY LEARNINGS

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KEY LEARNINGS

Price-value segments DO exist - - but there are not hundreds of these segments.

Circulation is not linear with changes in price -- Thresholds rule.

Choice increases value:– Over-reliance on the 7-day subscription– No discounts for term– No customization (service or content)

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Price Value Segment Strategies For most mature products (like newspapers)

every consumer has figured out what the product is worth and that amount varies by segment.

Efforts to ramp up prices - - incrementally - - at the segment level produces large numbers of pricing levels in a market until consumers have no idea what a product is worth or what they should be paying.

Building consistent pricing by segment is best for the long- and the short term.

Consumer products companies recognize that price value does not change until the customer has been through NINE purchase cycles.

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BASIC NEWSPAPER VALUE MODEL

Brand60%

Price40%

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LOYAL SUBSCRIBER VALUE MODEL

Brand80%

Price20%

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“NO TIME TO READ” VALUE MODEL

Brand45%

Brand45%

Price55%

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MULTI-FAMILY DWELLING VALUE MODEL

Brand35%

Price65%

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Price Thresholds Rule!

Demand for most consumer products is NOT linear

When pricing at the segment level (where the segments are built around differences in price/value), consumers tend to all move in concert.

That is, they all stop using a product at the same price level AND they all start using a product at the same price level.

This means that picking the price for your product is one of the most important decisions you will make, because it drives the start and stop decisions in the marketplace.

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Set Prices at Thresholds

10%

(10%)

Change in Price

% Change in Circulation

(15¢) (10¢) (5¢) 5¢ 10¢ 15¢ 20¢ 25¢ 30¢ 35¢ 40¢

* Incremental Revenue Shown in Thousands (000)

($1,254)

($917)

$346

$595K$192K

EXAMPLE

Current Price

THRESHOLD

THRESHOLD

THRESHOLD

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BUILDINGCHOICE

INCREASES VALUE

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Building Choice: A Smart Strategy Offer Additional Subscription Types

7 DaySunday OnlyWeekender Packages

Offer Subscription Length Pricing

Offer Any-Day Subscriptions

EZ Pay $3.008 Week $3.4513 Week $3.3026 Week $3.1552 Week $3.00

Per Week

7 Day $3.50Any-4 Day $3.25Any-3 Day $3.10Any-2 Day $3.00Any-1 Day $2.75

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OFFER CUSTOMIZED CONTENT/SERVICE

EXAMPLE

Content Extra Local News Extra Sports Extra Business Parenting “MY” Newspaper

Service No Sunday Circulars Guaranteed Delivery

Time Guaranteed Delivery

Location

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VALUE BUILDING THROUGH CHOICE

Brand Standard Subscription Any-Day Customized Price + Subscriptions + Length Pricing + Subscriptions + Content

100

140

190 3X

ValueIndex

237

313

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DAY OF THE WEEK DEMAND

6857

97

65

8593

119

0

20

40

60

80

100

120

140

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

"Natural" Demand

EXAMPLE

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Price/Content Modifications

6857

97

65

8593

119

9991

10697 99 98

104

0

20

40

60

80

100

120

140

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

"Natural" Demand

"Price/Content-Modified" Demand

EXAMPLE

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QUESTIONS?