Plan, Pricing Flexibility Could Boost Sirius XM’s Business

Satellite radio provider has room for growth, but needs to take creative approach on service terms

It takes a significant amount of investment — financial as well as hard work — to bring a new product to market.

But no matter what product or service you provide, there usually is an opportunity to generate significant profit and growth by offering a new pricing plan.

Consider the opportunities available to satellite radio provider Sirius XM Radio.

A key strategy Sirius XM is pursuing to gain new subscribers is to get its radios factory-installed in as many vehicles as possible. The hope is to offer new car owners a few months of free service to hook them, and then charge a monthly fee for unlimited service.

A key barrier to converting trial users to paid subscribers is that not all drivers need an “all you can eat” pricing plan. All new car owners don’t have long commutes or make cross-country road trips. For those who spend less time in their cars and trucks, it’s a challenge to justify paying $14 or $15 a month for that kind of subscription.

Sirius XM is experimenting with product and pricing options, offering lower-priced a la carte (you select the channels that you want) and themed bundles (family, mostly music, etc.).

That’s a great start, but the company also should offer metered pricing options, just as cell phone companies do.

Consider pricing Sirius XM at a dollar an hour. This new pricing plan could activate dormant customers – those who like the service but have refrained from subscribing simply because the unlimited plan does not work for them.

Given Sirius XM’s high fixed costs — on-air talent, satellites orbiting the earth — revenue gained from activating pay-by-the-hour listeners will be virtually all profit.

Sirius XM’s third-quarter 2009 results statement reveals that the company had approximately 3 million promotional customers (presumably on a free trial).

According to a November Wall Street Journal article by Sarah McBride, roughly 45% of customers on free trials end up becoming paid subscribers.

Suppose that a new pricing plan could get another 20% of trial users to pay $5 a month for five hours of service. Assuming minimal servicing costs, this would boost monthly income from operations by $3 million.

Since Sirius XM’s most recent quarterly income from operations was $37 million, these newly activated customers would increase income by 32%.

That said, the benefits of offering a new pricing plan go far beyond increasing the conversion rate of trial users. This new pricing plan also would activate new home and automobile customers – not currently on a free trial – thus generating significant additional profits and growth.

As entertainment products become increasingly digitized, there are more opportunities to offer new pricing plans – just as Sirius XM can – to reap a financial windfall.