Over the past two decades, the Financial Times has transformed from a newspaper with 80% of revenue from print advertising to a digital service with 60% of revenues from subscriptions. This has been done while many newspapers have struggled to remain relevant, have lost readers and cut editorial staff. The Financial Times pursued a different strategy with an innovative approach to pricing. It has been able to maintain investment in editorial and improve the digital service and to fund this change from cash flow. It did not need to go outside the business for investment. How has it done this? We spoke with Financial Times Managing Director B2B Caspar de Bono who is part of the FT leadership team.
Caspar has kept a map of the key decisions they have made along the way and what the outcomes have been. The image below is a summary representation of this.
Ibbaka: Tell us a bit about your background and how you came up with the B2B pricing strategy.
Caspar: While I was doing an MBA at the London Business School I paid close attention to understanding pricing. Pricing is central to the identity of a business and is a core part of its positioning and strategy. We assume too much about why customers value a supplier and spend too much time describing the value of what we produce in terms that matter to us.
This was true in the newspaper business during the shift from print to digital. There was an assumption at the time that information should be free. I thought of this as a pricing choice. ‘Free’ is a price, not the absence of a price. Pricing was playing a fundamental part in the shift to digital. It was being driven by the desire of new entrants to gain market share not by customer need. There was a market for professionally sourced, reliable, independent news and expert analysis as well as low cost to produce, free news.
At the Financial Times, we had to move quickly and we made our choices based on our market segment. We did not set out to be a price leader for the sake of it. We went back to first principles: what business we are in, why we are in it, who are our customers and how do we get paid in the future? Given where the business was, and where we could see the industry going, we really had no choice but to act. Conforming was the bigger risk.
Ibbaka: How did you learn what you needed to know in order to make these choices?
Caspar: I joined the Financial Times in 1995 when we launched our first website. I started as a graduate trainee. I have moved around the business doing many roles. In 2004, I learned a relevant lesson while managing an FT subsidiary, a specialist magazine business. We had a market leading, advertising funded, trade publication for the 24,000 independent financial advisors (IFAs) in the UK. We found that the willingness to pay for online advertising to this audience was less than one-tenth what it was for the same audience in print and prices were falling. Advertising inventory was oversupplied and undifferentiated. This mattered; if advertising prices were going to fall to a fraction of what they had been then the specialist advertising business was in serious trouble. It would have been fantasy to assume we were going to expand the market. 23,000 out of the 24,000 IFAs in the market were already reading the publication. We could not easily expand internationally as the content was specific to the regulations and tax rules of the UK market. Volume would not make up for lower prices.
I was not alone in realizing this when I joined the FT board in 2007. We could see that specialist publishing would not be sustainable from advertising alone. At the same time, I became responsible for Intellectual Property licensing at the FT. This included the wholesaling of rights to republish FT content to news aggregators like Factiva, Lexis-Nexis and media monitoring companies. We also had a very small corporate newspaper sales team who started selling access to FT.com. However, we were told by prospective corporate customers ‘We value the Financial Times, but as we get it via the news aggregators we don’t need to buy access to FT.com from you as well.’ The Financial Times was providing value, but we, the Financial Times, were not claiming that value. We were letting news aggregators claim it.
The go-to-market strategy for consumer focussed digital business was to give away the content for free, build an audience, and fund the effort through a VC and if possible, get other people and companies to provide the content for free. Many established media organisations were also keen to play this game. Including FT.com, which was free until 2001.
There was a popular saying promoted by big tech in the period ‘that information wants to be free.’ At the Financial Times, we decided not to follow this trend and to take a different path. We were considered out of touch with the way of modern media as a result.
We agreed on three important principles in this period. (1) Our work was valuable to readers and they were prepared to pay for quality. (For example, FT news stories have to be verified by two independent sources). (2) We had to have a direct contractual relationship with readers in a digital world. (3) That first party relationship would allow us to better understand customer needs, we would measure demand in a digital world and adapt our strategy in response.
We launched our first website in 1995. By 200,1 we had a binary model. Some web published content was always free; some was subscription only. This worked for a while but then plateaued at about 90,000 subscribers by 2005. We could see the ratio of subscription revenue to customer acquisition costs heading for zero. This was not a business that was going to scale. So in 2007, we did two things. We withdrew from the wholesale B2B rights market (licensing our intellectual property to others to sell). We introduced a metered model for consumers, where readers would initially get access to any articles but the quantity was limited per month, after which they would be invited to subscribe. We began to explore how we could be more creative with the way we licensed IP. Figuring out how to manage and price our IP provided a way forward in B2B markets. It also gave us the confidence to pull out of the App Store when Apple decided to replace the publisher as vendor of subscription products.
Ibbaka: Why were you able to see this and not others?
Caspar: There were many influences. Hearing customers talk about the value and strength of our brand and my experience with the IFA product. We knew that advertising would not be enough to carry the business. There was my own upbringing. I had been taught to think in a contrarian way and to look for ideas where other people are not looking.
Ibbaka: Is this a difficult skill to cultivate?
Well, it is my father’s view (Caspar is the son of the lateral thinker Edward de Bono) that everyone can develop this ability. We each make choices about how and where to focus our attention. I decided to spend time looking at what was not being looked at, to consider alternative possibilities. A linear supply chain is only necessary for physical goods. In a digital world, goods cost almost nothing to distribute and replicate, so why not create a triangular supply chain, in a similar way to software licensing?
Ibbaka: How did you go about building the team you needed?
Caspar: Many of the B2B team have worked on this from the beginning. James Mann, our B2B sales director was also dealing with the substitution effect of news aggregators in 2007. He is the the same person who went to talk to our customers and was told “Go away, we already get the Financial Times through Factiva.” As a result, he could give first hand evidence of what customers were saying and was a strong advocate for changing our relationship with aggregators.
We created a solution that would allow the customer to continue to benefit from the various services offered via multiple aggregators, while the Financial Times contracted directly with customers for the rights to use FT journalism on any platforms.
This was an adaptive response, one that gave customers what they wanted (aggregated search, multiplatform rights, transparency of usage and pricing) and the FT what we needed (a direct relationship with the customer).
Ibbaka: This seems to me an example of that Roger Martin would call ‘integrative thinking.’
Caspar: Yes. It can be more interesting to build a business under constraints. It means improvising with what you have in response to what you hear.
Ibbaka: Were you focused on new ways to create value?
Caspar: Yes and remember we made this change as the financial crisis broke. We did not have surplus funds to invest in this transition. We could not cut off the aggregators completely because customers valued their platforms and applications. They still play an important role in helping readers find and use articles in sector specific workflows. In fact, the FT is now available via 60 third party channels under this new model, compared with 7 when we wholesaled rights. This is because there is no cost for the channel to host FT content, as the customer pays the FT directly for FT rights. In setting out to achieve the goal of separating the value of search from the value of the content, we have opened up more possibilities for how the customer can use the FT.
The direct relationship with our customers meant we could respond better to their needs.
Let me give an example. Talking with business schools, we found that although they make extensive use of case studies, they found the case studies dated and US centric. Faculty and students were using the Financial Times to complement case studies with newer information and international examples. So we made it possible to annotate articles and share them more easily across an international network.
Ibbaka: What new needs are you seeing and how will these impact your pricing?
Caspar: We have a premium digital offer priced at £8.60 per week and a standard digital offer priced at £5.35 per week.
We are using customer insights to improve our premium offer. We could see from aggregated statistics that demand for content on two topics was outpacing our supply. So we moved our China research content into FT.com premium, it had previously been a separate business to FT.com. While our colleague in editorial created an M&A sub brand for Premium FT.com called Due Diligence. As a result, we have been able to increase pricing for the premium offer at about 5% per year and maintain renewal rates.
When we sell B2B, we start with the premium price but we don’t charge for everyone who might use the service. The price for a group subscription depends on how many readers are “engaged”. Engagement based pricing is based on observations of the behaviour of B2C subscribers (Engagement Score = Frequency x Square Root of Volume over Recency +1 see Lessons from the Professional Pricing Society Spring 2018 Conference). We can see from reading and purchasing behaviour that readers who are engaged are getting value from our journalism. It is worth subscribing. Our goal has been to help readers find relevant content consistently and thereby grow engagement. We share near real time and detailed usage statistics with our corporate customers on the utilisation of their group subscriptions. This empowers the customer to manage their licence and get the most out of our service. We demonstrate transparency by sharing the usage data so we can explain and evidence the connection between engagement and the value of the license.
Now we are exploring how we might add further value to our corporate customers and how to price these services. It has taken a while for us as an organisation to expand our definition of the customer. Our standard perception is that customers means individual readers as consumers. It is a persona we all relate to. However, we also have 5,000 organisations as the customer, for example, a consultancy or central bank. This will have to be based on the value we bring to the company or team as a whole and not just to the individual. We are learning about corporate needs that are not held by consumers and that creates opportunities to differentiate our services and invest where there is additional demand.
Ibbaka: What have you been learning from other industries?
Caspar: I deliberately look for inspiration outside of my own industry. RFV (to calculate engagement) is a concept we adapted from retail and catalogue direct marketing. Usage based pricing is borrowed from the software as a service industry; although, what I am seeing as a buyer of business software is “any usage is assumed to be valuable” rather than a threshold or type of usage that is aligned to customer value.
We are using engagement as a proxy to value. We are exploring how to get closer to value in the way that Rolls Royce has done with its Power by the Hour program (see the Wharton article ‘Power by the Hour’: Can Paying Only for Performance Redefine How Products Are Sold and Serviced?) We are searching for parallels to this. We believe our current ideas are the least worse so far. We expect to find better answers by asking customers, considering ideas from other industries, working creatively within constraints, and looking at the situation differently.