Why you should not hard code non-linear pricing

Take a look at this very nicely done price estimation tool of Dropbox business edition.

Dropbox Single User

The entry price is $795/year – either you want 1 or 5 users you pay that single price. Clearly it makes no economic sense for a 1,2 or even 3 member team to pay for this version. However if there exists such a team that values the features available only in the Business edition they would pay. But Dropbox decided not to unbundle it any further and make $795 the entry price for a 5 member team. Makes very good sense as it assures a floor price and makes sure the revenue is aligned with fixed cost to serve these business customers.

Then it gets tricky and complex. Having adopted  $795 as the base price Dropbox has created multiple price tiers based on different number of users. While it possible to license for any arbitrary number of users past 5, the tiers act as price boundaries. After 25, 50, 100 etc. users the price per user drops.  Take a look.

dropbox-non-linear

 

The price per user that for all practical purposes starts at $159/user starts sloping down and reaches the lowest value of $127/user with three other price points in between ($132, $128 and $127).

This is classic example of non-linear pricing where the total price does not increase linearly with units but curves down as volume increases. You have seen this from cereal packages you buy to the group discounts you get when you register for conferences. Non-linear pricing is great but it introduces operational complexity to marketer and cognitive complexity to customer.

For what these costs mean let me take you back to my article from four years ago – 4 Costs of Versioning. The many different choices you offer to customers at different price points introduce four different costs (some on you and some on your customers). These versioning costs should not be confused with costs to make and serve the customer. These costs are incurred in completing the transaction.

If the non-linear pricing requires two (or three) price tiers then most of the versioning costs are manageable. But  after two tiers the  costs to customer starts to go up. As a refresher customer cost means-

This is the cost incurred by your customers in understanding all your many different versions to make a choice. These are also the costs you have least control over. The costs may not be incurred in the form of dollars but there are definitely cognitive costs and opportunity cost to the customer. Worse, the effects of these costs do not end after version selection.

I do not mean here Dropbox should not practice non-linear pricing by reducing unit prices for larger customers. There is no need however to programatically (buying program that is) hard code the multiple price tiers to explicitly state the non-linear price curve. Far from helping customers with that decision it will only complicate their choice.

Dropbix could easily provide better pricing to these high volume customers if the customers were to call and ask for it(or provide the sales discount hierarchy for the sales team). That is leave it up to the customers to ask there by making it a better form of price discrimination. Why give programmed discount when customers do not ask? Why complicate pricing with all the hardcoded discounts?

As a contrast I would like to point you to another business that is very close to Dropbox – Box.net (for business customers both Dropbox and Box.net are trying to address the same jobs the customers are trying to get done and hence they are  alternatives).

box-pricin

Box pricing starts at $45 base ($15/user but the minimum users is 3). This is very similar to Dropbox’s minimum limit of 5 users.

Before you compare the two prices please note Dropbox prices are listed on yearly basis while Box lists per month price. Regarding which option is better, that is for another day.

 

After the minimum, Box provides very simple scalable model of $15/user/month up to 500 users. No other pricing tiers in between keeping it simple. But I bet if you are signing up 200 users you will negotiate a better price than $15/user. It is just not hard coded non-linear pricing.

If we did per month pricing for Dropbox, the price difference from non-linear pricing does not even seem significant for all its versioning costs.

When it comes to non-linear pricing, by all means do it as long as it keeps your multiple editions simple to manage and simple for customers to choose. Anything more than 2, don’t hard code. Leave it up to your customers to ask for it.

 

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