The more I think about it, the more awe-struck I get with the idea of pricing. There are many decision areas for a firm but pricing is perhaps the single most important one. After all which other parameter can answer varied and important questions like:
- How will your financial numbers look like – revenues, profits, margins, investor returns, etc.
- What type of customers you will get? High income, low income or somewhere in between?
- How many customers you will get? We need to remember that beyond the revenue impact, this question has wide implications for the overall “design” of the firm. A bigger customer base means a bigger stress on your Customer Support, HR, Purchasing, IT and other support departments resulting in higher costs and higher complexities in running operations.
- How will your product/service be perceived by customers? In short what will be its “positioning”?
- Will your pricing model be amenable to future expansion with the help of channel partners, franchisors etc?
Above questions are no doubt important and typically make the foundation of a pricing strategy. However, in my (admittedly limited!) experience of deciding and then operationilizing the pricing of cloud backup products, I have realized that the above classic marketing analysis is important but not sufficient. When it comes to finalizing pricing, there is a “softer” side which one must factor in too.
The softer side of Pricing
This simply means that the pricing should:
- “Sound” right: This basically means that there is no dissonance in your pricing story. The pricing dimensions make sense, numbers sound reasonable and consistent with what your prospects expect to see. For example, if you are positioned as a “cost leader”, pricing one of the services higher than the competition will cause some dissonance. Another example – if you are offering an “addon” service on top of an existing service, people don’t expect to pay a higher price than the underlying service. For more food for thought, you can refer to the second paragraph of this excellent article by Eric Sink: http://www.ericsink.com/bos/Product_Pricing.html
- Be easy to communicate: It is no secret that attention spans are increasingly getting shorter in our fast paced world. The high levels of competition and ambient noise mean that if your pricing page is not able to drive home the point in first 10 seconds, you are going to miss the “selling window”. The idea here is simple, choose a simple pricing model and find a concise way to communicate it. The more words you use (red flags for conditional words such as “if”, “however” etc.) the more you need to rethink.
Simple pricing model:
There can be several dimensions in which your service might be adding value to customers. But choosing pricing dimensions which a customer finds easier to understand and control, is generally a better bet. For instance, think NetFlix. As a customer, would you want to pay for each movie you watch or the size of streamed data a movie requires?
Concise description of pricing:
Let’s take an example. I won’t go too far – we introduced a new version of our cloud backup product recently and here is the pricing page we came up with:
Though this is more text that what I’d call “ideal” but still it serves my purpose. The text in red boxes indicates the main points. You can see that we have chosen a single pricing dimension (GB storage) and have explicitly made it clear (the box at the bottom) that that is indeed the only dimension we are going to charge for.
Let me take one more example here. In fact a comparison. Here is what the pricing page of the popular DropBox service looks like:
Notice how they have also decided a single pricing dimension (again GB storage) and neatly laid out their different plans. Each plan has a catchy description (again, within 10 words or so) and they have managed to even insert slightly “advanced” items such as “billing frequency” and an optional feature without adding any more complications for the customers. Hats off to simplicity!
On the other hand, let’s look at the pricing of Google Drive, a service which aims to compete with DropBox:
See the red boxes above? The “geek” writing this pricing page seems to have gotten almost everything wrong – the page is verbose, has many conditional sentences, talks about other non-core services (that likely won’t be of interest to most targeted users) and has complex pricing exclusions in place.
The trouble is – this kind of pricing not only makes life difficult for your prospective customers, but also for your own sales team. I have seen so called “strategic meetings” that begin with pricing and end with it.
- Be easy to operationalize: While this looks like it, but this really shouldn’t be an afterthought since certain things look good in paper but fall flat in the real world. Some of the challenges here can be:
Setting up your billing processes: You need to provide the agreed upon service while enforcing agreed upon limitations. For doing this, the billing process needs to be accurate, polite, responsive and user friendly. A complex billing processes will open up different cases you may not have imagined, leading to different operational challenges. In the above case of Google Drive, for e.g. a user may want to know – “ I have no interest in Gmail, Picasa et al. Can I just buy storage for the sync service?”
Preparing your sales team and channel partners: Your sales team needs to know not only the pricing but also the rational behind it. They will need this more than anybody else, since they will be the ones facing the fire in the actual market.
Also, if your service/product is going to need a lot of active selling then you also need to bake in the sales commissions in your pricing.
Likewise, the channel partners need some motivation too. One suggestion – always have some room for discounts or promotions in your pricing. You may be convinced that your product will literally fly off the shelves due to your aggressive pricing, but you never know. Some additional leeway for incentivizing the channel when needed, can come handy.
- Be future ready: While it is impossible to do this 100%, one should at least try. At least consider the long term trends. Some of the potential mistakes here:
Choosing a strictly “derivative” pricing model: Suppose you are building a “call a cab” service and plan to charge your customers a 10% fee on top of the actual fare. This pricing model is advertised to be derived from the cab fares and hence vulnerable to all risk factors that affect the same. Suppose due to competition from alternative modes of travel, cab fares go down. Since your pricing model locks you down to a % value on top of this fare, it would essentially mean that for the same value addition to your customers, your net income could be much lower. This obviously is dangerous.
Over reliance on multiple sources or pricing dimensions: So you are lucky to find multiple sources of revenue or charge for multiple pricing dimensions? Here is an advice – do not add all these streams up to finalize your pricing numers. Have a clear idea of what is the main revenue stream and which ones are secondary.
Let me try an example. Suppose you find are running a platform where two kind of users (say suppliers and customers) meet up. And instead of charging a single group a hefty amount, you decide to charge both of them a little. After-all when you add up these two revenue streams, your numbers look healthy so why make a section of users unhappy?
But suppose in near future, market forces dictate that you can longer charge one user group (say customers). To meet your goals, you will need to hike the fee your charge the other group. But is that really an option once you have set a reference price for your customers?
The easy thumb rule – try to charge users for the value addition you are making to them. Why leave money on the table?
What are your experiences with pricing your products or service? Did you experience any of the above or are your experiences different? I would love to hear from you in the comments section.