Pricing in a One-Size-Fits-None World


Dual pricing in Slovakia

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As we’ve seen in the 123’s of Pricing, there are some best practices to follow when pricing a product (whether new or not) in the marketplace.  First, you DO NO HARM, followed by BE PREPARED and BE YOURSELF.  That’s all well and good if you want to become a Boy Scout/Doctor/Hippie, but in the real world we may need to dig a little deeper.

Every situation is unique, in some way, and I certainly cannot cover all contingencies here.  But there are always ways to slice with Occam’s Razor.  Depending on your product/service, your industry, your market position and so many other factors, you may or may not be best served by any combination or permutation of the suggestions below.  But again, there are best practices, guidelines to follow to help balance minimum risk with maximum potential.

Frequently pricing grows organically – a sales rep negotiates a certain discount, a customer asks for a specific model – and that is alright.  If this happens that’s a good sign – it is a strong indicator of success in the marketplace.  You may be leaving money on the table when these approaches occur organically, though, and it is best to try to push the boundaries a little bit.

Perhaps your oldest, most loyal customer is receiving a grandfathered rate for a product.  That’s understandable, and maintaining that customer loyalty might be your first priority.  But what if the first 50, first 1000 customers to buy your product are still receiving an introductory rate?  Perhaps you test that loyalty with a slightly higher-than standard price increase, see how that affects your renewals. 

In most subscription businesses, the aim is to have renewals make up the bulk of your revenue – it requires less investment to maintain a relationship than to create a new one.  It is also easier to monitor for risk, whether through usage of your product, existing relationships with the customers, and monitoring of renewal rates and other data elements.  Once you’ve secured a customer at a given rate, then you have a basis on which to build the remainder of your business relationship.

So we can address some renewal scenarios below, but let’s focus our energies on some strategies for obtaining new/repeat customers using pricing.  And really there are three basic areas on which we’ll focus today, Pricing Models, Price Points and Discounts.

PRICING MODELS

The first step necessary in setting a price is determining what business model you will be using.  In some cases this is simple enough – if you’re selling magazines, you start with a News Stand price, offering a subscription model as well.  (Actually, the trend these days is more to follow the new New York Times model and give away the new content for free, while charging for historic data.  Depending on the actual industry, you might be able to charge for both – the New England Journal of Medicine, for example.)  If you’re a massage therapist, you’ll be charging by the hour, and that’s that. 

Pricing Models seem to vary almost as much as the products and services they represent.  Some products lean in one direction, others lean in the other direction – when combining add-on offers, discounts and hybrid models, not to mention a lack of transparency in many markets, you’re left with an indecipherable mass of tangled numbers.

But there are some basics.  You have a one-time purchase model – a single price for a single product/service, rights sold in perpetuity.  This goes for the vast majority of products in the marketplace – from buying apples at the grocery store to hiring a prostitute, almost every transaction is considered a one-time purchase.   A natural outgrowth of the one-time model is the add-on sale.

With the add-on (“would you like fries with that?”), the model is built on a central product (the cheeseburger), and it is assumed that other products are associated with the central product (shake, McNuggets … ).  The relative value to the customer between the products is key here – that burger will taste much better with fries on the side … of course that leads to the purchase of a soda, and perhaps a fried apple pie to top it all off.  A printer is useless without toner, but additional pages for your photo albums are still an add-on to the central product. 

Another model familiar to businesses is the subscription model.  One (discounted) fee gets you not only the one-time product you purchase above, but recurring provision of the product in the future.  So while a magazine subscription may fit this business model quite obviously, so should Netflix and your fruit-of-the-month club (or any club, for that matter).  Some may be obscured by providing additional extra services – the animal hospital which offers you free checkups throughout the year – but in the end they come down to the same recurring model.  Whether you call it a subscription or a contract, you are providing access (limited or unlimited) for a specified period of time. 

You do need to keep an eye on costs, for example, but getting creative with a business model can solve a lot of problems.  Consider leasing your product instead of licensing it, for example.  You can charge a much lower price point, but customers will have to come back to use the rights to reproduce your dataset, for example.  Move your one-time product to a recurring one – although your per-item sales figures will likely go down, the higher volume should more than make up for this despite the lower price.  Guaranteed revenue is money in the bank. 

Your pricing model says a lot about how you position your product, and how you differentiate yourself (or not) from your competition.  But in the end, customers are looking at their bottom line, and not necessarily considering what they’re getting for it.  They only have $10 in their pocket, so no matter how cool your $11 product is, and what value you’re providing, you’re out of luck.  That’s why a great deal of focus is expended on

PRICE POINTS

Nothing is more important to most customers than the bottom line.   The market generally equates the price point with value – if you go in too low, you may be at an attractive rate for the value, or you might just be “cheap”.  If you go in too high, you might be “unrealistic”, “money-grubbing” or, if successful, “brilliant”, but you just might create the Rolls Royce image for yourself in the marketplace.

There is a place for every price point, and value perception is a key driver here.  Especially for newly launched products – the more unique it is, the more you hear “I must have your widget”, the higher a price point you can set.  Just as you can leverage your business model to hit an attractive price point (“Just $199 a month to lease the car of your dreams!”), you can package your product to hit that price point as well.  (“GoobStick peanut better now in the new 12-ounce jar – at the same price as for the old 16-ounce jar.  Save space in your fridge!”) 

This is the fun part of pricing – choosing that price point.  I chose $0.99 for pricing my e-book, for example.  I could have charged $9.99 for the Kindle version, but who would have paid that?  At the same time, had I charged a nickel for each copy, my royalty would be absurdly low and in the end, not close to worth my time.  While that’s a huge range, my decision was fairly easy – the market for self-published authors generally has a price range for e-books between 49 cents and $2.50 or so.  I knew that, for me, that point was to sell some copies of the book, get my name, and my story, out into the world.  Charging more than $2 would be absurd here – nobody’s heard of me, so a lower price point makes sense.  But dropping down to four bits would mean a royalty of like 17 cents a book – still a pretty low rate of return.

When I compared those rates against the US Dollar, my decision was quite clear.  Charging half a dollar might get me more sales than at a buck, but not twice the sales.  And charging two bucks for the book would also not get me the (at-least) 50% success rate I would need to be more profitable than at a dollar.  99 cents is just to sound a little better than a buck – my royalty is exactly the same either way, but it just sounds, feels cheaper to be 99 cents than a dollar.  (Studies have shown that this does not necessarily work in the marketplace, overall, but that it is justifiable in certain circumstances.)  99 cents also happens to be the most common price point for other self-published e-books on Amazon, and my goal was to try to fit in with that crowd. 

Of course I’m monitoring sales activities, and were I really interested in marketing the thing, I would also be doing some testing of not only marketing messages, but price points as well.  I have no say over the pricing model – it is a one-time purchase after all – but I have complete say over the price point of my book.

Not everyone has the same control, or as simple an issue as this.  Everything is much more complex, I get it.  But does it really have to be more complicated?  Sure, you want to test, you need to justify, but if your price is actually working, why change it?  I was once, on a job interview, given the following scenario, and asked how I would react:

“We (a publishing company) own the exclusive rights to certain data we are making available online.  In six months, we will lose exclusivity – much like if a generic drug is allowed to be introduced to the market.  What do you do with the price?”

Obviously I hedged – there are too many variables to make this call without a LOT more information: how “must-have” is this data? what add-on, unique value to you bring to the dataset?  will the “generic” versions in fact be comparable, and do those companies have the relationships to steal away our customer base?  But there are some basics here.  Following the 123’s of Pricing, I was able to answer fairly non-committally:

First, I wouldn’t change a thing – DO NO HARM.  Until we see how the market reacts to the new generic product (“of course I’ll leave you unless you half the price” vs “but they won’t be able to offer it alongside these other data you can”) there is no point in making any changes.  Don’t jump to re-“act” before there is any “act” in the first place.  Secondly, I would BE PREPARED, i.e. collect as much data as possible – customer feedback, market intelligence, historic purchasing trends in similar industry cases, or even softer data such as “gut feelings” and “educated guesses”.  In the end, this may be all you have at your disposal.  Finally, the pricing professional should BE YOURSELF – follow where the data lead.  If you really are the market leader, providing a platform and editorial content which eclipses anything the generic competition could do, you may do nothing.  Heck, if the generic competition prices high enough, you could raise your prices.

There could be the opposite effect as well – if your data shows you will lose the majority of your customer base within, say, five years, you might shift to a “milk” strategy, i.e. try to get every last dime you can out of the customer base.  They’re going to leave anyway, so let’s try to hope they don’t compare prices against last year and squeeze them until there’s no more juice left.  Obviously there are other risks in this plan – if too many customers figure out this angle then you can be in deep trouble, losing what respect your brand did have in the marketplace.  But it does offer the chance to maximize revenue at the same time.

But that’s an unusual case – in the market today, brands are jockeying for position.  Sales is always demanding a lower price so they can do more volume and maximize on their own quotas.  Customers, of course, will not say a price is too low, but you will hear it if/when they think your price is too high.  It’s only natural to want to change your price point in order to pick these low-hanging fruit, but there are better ways to go about it.  Namely, discounting.

DISCOUNTS

Discounts fall into two categories: standard and temporary.  In the end, the concept is the same – a lower price than usual is being offered with the goal of securing greater volume.  This may be targeted to a specific market segment (kids shoes 20% off!), or it may be a permanent offer to the marketplace (“buy three tires, get the fourth free!”).  But the point is that you are offering a lower price than you originally set above, in order to increase volume and, hopefully, revenue.

Where to draw the line – how much of a discount to offer – is basically the same as setting initial price points.  The real challenge in discounting is setting parameters – unless you effectively want to make your “special offer” become the “new price!”, you need to be very careful how you approach pricing discounts, and how they are presented to the market.

Such obvious factors as “limited time deal!” and “only for select customers” fit this bill, but so do “discretionary discounts” (such as, reps on the sales floor can discount up to 5%, their managers up to 10%) and tiered structures (e.g. “students and seniors, one low price!”).  In fact, the more structure you create around pricing discounts – how much, for how long – and how closely your sales organization adheres to the structure, the more power and control you  have to push the levers and twist the knobs when the machine needs a little gas.

That is not to say that your structure should be complex – simpler is almost always better, and the most perfect solutions are, in some ways, the simplest of all.  Your sales team needs to be able to understand and apply the structure, or else it is a useless appendage just causing trouble for them.  You (and your finance department) may know the trouble of dealing with Sarbanes-Oxley auditors, but your sales reps probably couldn’t care less.

Bulk discounts, bundling, subscription rates, renewal rates – all could fall under Discounting, but also could be classified under the sections for Pricing Models and Price Points.  But the key, again, is to define things clearly and consistently.  Because once the rubber hits the road and the negotiations begin, you are bound to lose some control over the situation.  Price takes on a life of its own, and only by documenting and organizing the process can you hope to maintain that remaining control.

Set your Models, Price Points and Discounts logically, based on the data before you.  Test, test, and test again – if the market will allow.  Do what sells, and stop doing what doesn’t work.  Remember your 123’s of Pricing, and DO NO HARM, BE PREPARED and BE YOURSELF.

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  1. […] It is not uncommon for a pricing tactic to precede the strategic direction for a company.  Pricing has a long history of testing market waters – usually with special introductory offers, which may include up to free provision of a product in order to garner market feedback.  Companies have also used pricing to impel customers to purchase another product.  (For more information on how Pricing Models can drive business strategy, see Pricing In A One-Size-Fits-None World.) […]

  2. […] Pricing in a One-Size-Fits-None World (dougnewmanpro.wordpress.com) […]



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