On Pricing High

On one hand you find advice about giving your product away in the hope of monetizing them later. On the other hand, more recently, you find articles like this and this on the need to price it high. The latter article even goes on to say customers will be happier if you charged them more. I find these latter class of articles do even more disservice than the former.

These simply take the exact opposite position to the free idea and make it sound these are based on evidence. Simply showing a numerical example is not evidence.

None of these one size fits all advice columnists tell you to start with customers – find the different segments, what they value, what they are willing to pay for, which segments you should target and with what offering.

If you do not know your customers or why they are hiring your product how can you say they are happy because they are paying more?

 

What do you charge for a service that you just made up?

We all would like to believe there is nothing like our product or service. After all we are innovators and our vision is to change the way people do things. The investor pitch deck from a startup, Everest, sums up this attitude

Let us take all such claims at face value and treat every one of these products and services as new. Then we face the key monetization question
What do we charge for a service that we just made up?

To make this question more meaningful let us use a simple yet real life case study instead of talking about hypothetical product. The case study comes to us from NPR Planet Money, (Don’t read the full story yet, I will take you to the middle of the story to set up the case)

Two guys offer visa form printing services in front of the New York Chinese consulate.Visa applicants, turned away at the visa counter for filling they wrong forms, come to these guys who have computer and printer in a RV parked right outside the consulate. No such service existed before. They just made this up. How do you think they should price this innovative service?

As I wrote in the past, there are two places to start to answer the pricing question – even for something we’re building just now, Product or Customers. My recommended starting point is, Customers.

Even if the product is innovative and what you are building doesn’t exist yet, the needs are not.  The needs are why the customers are hiring your products for (Christensen). If needs indeed exist then they are currently addressed by different customers differently.

In general there are always different customer segments. For some  the needs may go unaddressed for others the needs may be addressed through alternatives, however sub-optimal they may be. There may not be a competitor product but there are always incumbents. In some sense, doing nothing is an alternative too (for Intuit’s TurboTax, they defined their incumbent as paper and pencil).

In the Chinese visa case the alternative is walking to the closest internet cafe and paying for printing or coming back another day (like those with low opportunity cost for their time).

You can’t serve all segments, at least not initially. You need to choose your segments, those that offer the best return with your limited resources. After all strategy is about making choices.

Say you choose the segment that used to walk to nearest internet cafe.  By choosing this segment you already know they are willing to pay for printing the forms at the internet cafe and they incur additional pain to make the round trip.

Your next step  is to position the product in the minds of the target segment. Positioning your product is not about how innovative it is but about what job you want them to hire it for and why your product is better than anything else that customers hire now. If you can’t position your product you can’t control its pricing.

Once you perfect the positioning, pricing is the next logical step. Hiring your product over the alternative adds incremental value to customers (like avoiding round-trip walk) and you price your service to capture your share of the value created.

How do you quantify the value created and how do you know your right share that customer will willingly part with? Some customers know, some don’t. It is up to you to do the value creation math and show it to them. Then you rely on quantitative methods, pricing experiments and signaling to find your fair share – the price customer is willing to pay without pain.

In general,  cases where you have repeat customers it is important to get the first pricing correct. Choose too low, you forgo profits. Choose two high and continue to drop prices, you lose credibility. That said, if you have done the Segmentation right, Targeting right and Positioning right, the pricing can’t be far from right.

Let us come back to the case study. They had no repeat customers. They chose to experiment. They charged $10, the same price charged by internet cafe and found the demand overwhelming. Next they went to $40 and found drop in sales. Now they charge $20.

Be it a software product,  magical delivery service or Visa form printing service – you need to worry about monetization. Otherwise why do it, however innovative the service is?

So what do you charge for a service that you just made up?


Readings:

  1. NPR Planet Money Story http://www.npr.org/blogs/money/2012/01/04/144636898/a-man-a-van-a-surprising-business-plan
  2. Segmentation
  3. Startups and Segmentation
  4. An entrepreneur will not always succeed in positioning his latest innovation the next “new thing.” http://www.chicagobooth.edu/capideas/oct09/5.aspx

Note 1: Note that the pricing for the service did not take into account the cost to rent the van, opportunity cost of the two guys operating it, or the cost of printing. Pricing comes before costing. If you cannot deliver the service profitably at the price customer is willing to pay you need to explore options.

Note 2: The price $10 set by internet cafe is the reference price in the minds of customers. Even if that price is wrong (cost based) you are stuck with it unless you can shift the reference.

Do not restrict! Innovate and Monetize!

Market Place tells us about how Indonesians work around the 3 per car rule in certain Jakarta roads. The rule requires 3 people in a car during rush hours in certain roads. Entrepreneurial citizens, called jockeys,  ride with complete strangers for a fee so the latter can use the road without breaking the letter of the law.

for little more than a dollar they (jockeys) will sit with you in your car. That way you comply with the three-in-one rule, a policy requiring three people in a car during rush hour on a few major Jakarta streets

The drivers are circumventing a law that was intended to reduce congestion. So one would think that the Government should go after these drivers and add more regulations about letting strangers ride. But quite the opposite, the Government sees the use of jockeys as an opportunity for monetization.

Who are using the jockeys? The usage cuts across the demographics but the common factor is these are  customers who value the drive more than the price they pay for the jockeys. The fact that some of the drivers are willing to pay to use the “product” presents an opportunity for targeting.

Whenever you use jockey, your money goes to somebody else; it doesn’t go to the government.

Since these customers stepped forward and revealed their willingness to pay the Government wants to implement a toll system to replace the 3-in-1 rule. In many sense this will be a better product to the drivers than the uncertainty of getting someone to ride with them. Which in effect (if priced correctly) will achieve the congestion reduction goal and deliver profit.

What does this mean to you as a marketer?

See a third party App or people providing an add-on to your customers using your API and platform and capturing all that value?  Do not restrict. Innovate! Provide a better integrated offering and capture the value for yourself. Eliminate the reason for the third-party.

 

 

Free To Fee

Sooner or later businesses are going to realize the difficulties in running a high fixed cost business and free business model. Specifically newspapers that have been giving away their online version for free.  The free online version not only cannibalizes print sales but also sets a low reference price that makes moving from free to fee difficult if not downright impossible. For any neswpaper the simplified revenue model can be written as:

Revenue =  Subscription revenue + Single copy revenue + Ad Revenue

In the past, newspapers made the assumption that Ad Revenues are going to grow and drive total revenue, hence they did everything they can to increase “eyeballs” and number of page views. What they failed to see is what they are giving up and whether the increase in Ad Revenue is better than loss from subscription revenue.

The question is ,

Is ↑Δ Ad Revenue  > ↓Δ Subscription revenue?  Or is this an assumption they used to make the newspapers free.

As the assumptions turned out to be false, they are starting to look at subscription revenue (online and paper versions). There are two challenges to this reversal to pay-to-read scheme:

The first problem is the reference price. Readers have been getting it for free and will be reluctant to pay for what used to be free despite the value they get. Any price increase that does not first focus on improving the reference price in the minds of customers will fail.

The second problem is making sure the newspapers offer unique and differentiated content that is not available for free elsewhere. Editor of Financial Times, which charges for complete  access to its online version FT.com, has  this to say

“If they feel it’s distinctive enough … you’ve got to be different” … “it’s the people in the mediocre middle that are going to be the meat in the sandwich”.

Let us look at these problems with The New York Times as our case study.

Recently The New York Times is polling its readers for their willingness to pay. They asked their website readers if they are willing to pay $2.50 to $5 per month for access.  Instead of asking their readers for their willingness to pay for a monthly fee, NYTimes should focus on improving the reference price for access to the web version.

One way is to have a “value meter” that is running prominently in each page and showing how much a reader saved from the free version. This is similar to what Amazon.com does with free shipping.  There are many other ways to improve reference price. ( I admire Amazon.com for its strategy and decision making based on analytics rather than on fads and gut feels).

Regarding unique and differentiated content, it is a hard task. One way could be is to create scarcity. For instance they could make available only the current day edition free and charge for access to all archives including the previous day version. If the article is adds value to readers even after a day, week, month or year then they should be willing to pay for it.

Going from free to fee is an uphill battle. Unfortunately all these could have been avoided if the newspapers have did the analysis and scenario planning before they made their online versions free.