Subscription pricing: worked out examples

The interviewer shares Exhibit 1: the customer cohort and monthly unit economics. Use these inputs to compare holding the current price with making the proposed increase:

Assume all 10,000 would remain at the old price over the compared month, all are eligible for the new price at the same time, and fixed costs do not change. The initial question is how many must remain to preserve monthly contribution.

Those assumptions define the comparison. Later we will relax the renewal-timing and plan-mix assumptions.

Current contribution per customer is £15 − £7 = £8. Across 10,000 customers, total contribution is £80,000 per month.

At the proposed price, each retained customer contributes £16 − £7 = £9. Required retained customers are:

£80,000 ÷ £9 = 8,888.89.

You need at least 8,889 whole customers, or about 88.9% retention, to preserve contribution. In continuous percentage terms, the maximum tolerable loss is about 11.11%.

That is an economic threshold, not a prediction of customer behaviour. The next piece of evidence should test whether the proposal can clear it.

Current revenue is 10,000 × £15 = £150,000 monthly. To preserve revenue at £16, the business needs £150,000 ÷ £16 = 9,375 customers, or 93.75% retention.

The revenue threshold is higher because losing a customer also avoids £7 of variable service cost. Contribution captures that avoided cost; revenue does not.

For a sensitivity check, assume 90% retention, or 9,000 customers. The calculated comparison below uses the original £7 service cost and assumes every retained customer pays £16. This is a scenario, not a retention forecast:

Revenue falls £6,000, while contribution rises £1,000. With fixed costs unchanged, operating profit also improves £1,000 in this simplified comparison.

A strong answer preserves both facts: “At 90% retention, the increase improves monthly contribution by £1,000 even though revenue falls 4%.”

Suppose 9,000 customers remain, but 500 choose a lower plan contributing only £7 each. The other 8,500 remain on the new £16 plan and contribute £9 each.

Total contribution becomes 8,500 × £9 + 500 × £7 = £80,000. The £1,000 gain disappears, even though headline customer retention remains 90%.

This is why I would track retained contribution by plan, rather than treating every retained customer as economically identical. Discounts and changes in service usage can have the same effect.

As a separate sensitivity, return to customers staying on the proposed plan with no downgrades, but raise its variable cost from £7 to £8. Contribution per customer returns to £8, so all 10,000 must stay to preserve £80,000. The tolerable customer loss is now zero.

Now test renewal timing separately, using the original £7 cost and no downgrades. Suppose only 1,000 of the 10,000 customers renew this month. The other 9,000 remain on the old terms for the whole month.

If 90% of the eligible group renews at £16, monthly contribution is:

• Unexposed customers: 9,000 × £8 = £72,000.
• Renewed customers: 900 × £9 = £8,100.
• Total: £80,100, compared with £80,000 under the stated old-price baseline.

The immediate monthly gain is £100, not £1,000. Applying the increase to the full customer base would bring future changes into the present.

Use the communication and billing dates supplied in the case. A price announcement does not change every customer's economics immediately; renewals and notifications can determine when the new price takes effect.

Our initial baseline assumed all 10,000 would stay at the old price. If the business already expects some customers to leave, use the old-price expected cohort as the comparison.

For this separate baseline check, assume all customers face renewal together and use the original £7 service cost. Suppose 9,500 would remain at £15. Their contribution would be 9,500 × £8 = £76,000. Preserving that amount at £9 contribution requires about 8,445 whole customers at the new price.

You would still want to understand whether a pricing test is comparing similar customers at the same renewal stage. A naturally weak renewal month should not be attributed entirely to price, and a favourable customer mix should not be credited entirely to the new offer.

Follow comparable customer groups through the same renewal period so that changes in the customer mix do not obscure the effect of the price.

For the original assumptions, I would say:

“The increase preserves monthly contribution if at least about 88.9% of the cohort stays on the proposed economics. At 90% retention it adds only £1,000, so the cushion is small. I would test paid renewal and plan mix before expanding it, then apply the result according to each cohort's renewal date.”

Try the subscription price-increase drill next. Confirm whether the question asks you to preserve revenue or contribution before calculating the retention threshold.