If you want to see a company that understands how the subscription model works, look no further than Rent the Runway. The profitable, $100 million revenue e-commerce company already has eight million customers. They understand that great differentiation and brand experience is what acquires customers, keeps customers, and grows customers.
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In the episode of Pricing Page Teardown, Patrick and Peter look at how RTR is able to move customers up from the entry tiers and keep them happy even with higher prices. In this video, there are lessons that every B2B SaaS company needs to know.
Even at these prices, Rent the Runway is leaving money on the table
The fashion market is growing. By 2022, it is projected to be twice the size it was just two years ago. That growth is coming from the expansion into new markets, such as the burgeoning Chinese middle class, and from the growth of completely new sectors, such as fast fashion and online retail:
This isn't the only good news from our data for Rent the Runway. Our survey of 15,783 consumers shows that subscription retail services are also growing. In the US,
Over 17% of millennials have rented clothing or accessories
Over 11% have tried a subscription clothing service
18% have used a beauty subscription service
Over 30% have tried a grocery or food subscription service
Rent the Runway is in a great place at a great time—at the intersection of a growing fashion market and a growing subscription market. As pioneers in this space there is risk, but also the opportunity to grab a lot of the initial market for themselves.
Rent the Runway's pricing is doing a great job of capturing this market. Even though the pricing is high in comparison with other consumer subscription brands, the data shows their customers still think it is great value:
The current pricing for four pieces in the RTR Update plan is $89 per month. But the median willingness to pay for this plan, from the 3,423 Rent the Runway customers we surveyed, is over $100. They are basically leaving $10 on the table for each customer with this plan.
For the RTR Unlimited plan, the willingness to pay initially looks right on the money. The plan's pricing is $159 and the median willingness to pay is $155. But there is an opportunity with the upper quartile of customers. They are willing to pay over $200 for the RTR Unlimited plan. Again, money left on the table that could be RTR's.
Patrick and Peter's advice? Pick up the lower plan pricing, but leave the Unlimited plan pricing alone. As Patrick says:
“There are these natural barriers that occur right around the $99 mark, the $150 mark, and the $200 mark. Essentially, if you are an $89 product, you should just be a $99 product.”
Because of the higher willingness to pay and the fact that the natural anchor price point is $99, Rent the Runway can increase the pricing in their Update plan without problem to capture more of that value from their customers. They could bump up the Unlimited as well, but then they risk leaving too far a gap between the Update and Unlimited plans and damaging the brand.
The answer: “Premium premium.” An offering for “things that feel really, really important but that are also low-cost as they are already in your infrastructure,” as Patrick puts it. This doesn't scare away customers looking to move up from the Update plan to Unlimited, but also offers Rent the Runway an opportunity to boost ARPU from those customers that are willing to pay for that something special.
Perfectly building the experience with the brand
Rent the Runway is taking great advantage of their position in the market. As Patrick says of the subscription model:
“This is the first business model in the history of mankind that connects you directly to the customer. The relationship is built right into the revenue model. Every month, if they haven't built that relationship enough, people are going to say, 'I don't need this.'”
For subscription companies, whether B2B or B2C, every month is an audition. Subscription growth is changing to focus entirely around the customer. You have to constantly show value to customers if you want them to keep paying. Rent the Runway is doing exactly that. In particular, their differentiation allows them to grow customers, just as we see in B2B SaaS. As Patrick puts it:
“You can come in at any level and start to get interactions with the brand. Like freemium.”
Rent the Runway is building entry points for brand experience.
The lowest tier on Rent the Runway isn't free, but it offers the same low-friction introduction to the service and brand. For just $30/rental the RTR Reserve tier gets customers that might be skeptical in the door. All they then need is one or two successes with the brand—someone telling them they look great in that outfit on a night out, looking awesome on an Instagram post—and they are ready for the upgrade.
The next tier at $89 is expensive in comparison, but any customer can quickly do the math. That is only just over $20 per rental. For designer clothing. As long as the customer has had that initial success, this is an easy move.
The Unlimited plan again is a big step up. At that point, a customer is spending almost $2,000 per year with Rent the Runway. But if that allows you to completely replace designer shopping with subscription services, then the cost difference is marginal.
RTR is a perfect example of price tiering in action. Get them low, then allow them to grow.
A B2C lesson for B2B
Any SaaS company can learn from Rent the Runway. They understand their core value and how to build an experience with customers and use that information in their pricing strategy. They can charge a premium at their highest tier because of the groundwork they have laid in the earlier tiers. You get great value from the RTR Reserve plan—you just get more of it as you go up.
This should be how you run your packaging. Even in a free tier, the value has to be there for the customer. If they cannot use your product successfully they will have no reason to upgrade. You can use Rent the Runway successfully, at the lowest price point the very first time you use it. This is how it should be with your product.