How to price premium and standard versions of your product?

It is time to repeat the old statement that I believe Pigou said but adopted by me

If one price is good, two are better.

In general, when customers’ needs are different, how they value the product are different and most importantly how they value  certain benefits of a product are different,  two prices are indeed more profitable than single price.

There is a performing arts theater in the Bay Area that rents outs its venue. For those segments wanting to hire the venue for events there are two options. Both are rented in three hour chunks. Read the brief product features below and think about the price difference between the two.

Version 1: Main Theater

Features:

  1. Ideal for live performances
  2. Steinway  (Model D, 9 ‘) concert piano on stage
  3. Stage: 40 X 20 X 12
  4. Outstanding acoustics
  5. Seats 338 people
  6. Dressing room with private bathroom
  7. Portable P/A system with three microphones

The Steinway piano you see on stage has a usage fee of $150.

Version 2:

Features:

  1. Perfect for small recitals, meetings and presentations
  2. Steinway (Model B 7′) grand piano
  3. Stage: 23.5 X 17.5 X 12.5
  4. Intimate and ideal acoustics

The piano has a usage fee of $100.

Model B grand piano costs about one fourth the price of Model D concert piano.

Go ahead and compare these options as a product manager would and give an estimate of the price difference between the two.

Now think about these options as customers would and  give another estimate.

Since thinking in relative pricing is difficult let me give you the price for Recital Hall – it is $300 for three hours.

Do I have your answer?

My answer was 50% – 100% difference (I do not give single number estimate.)

The real answer it turns out is just $50. That is the Main Theater with all its benefits costs only $50 more than the $300 price for the Recital Hall. This is the same difference you saw between a $100,000 piano usage fee and $25,000 piano usage fee.

This is not so right pricing. While two prices are likely better than one price it is highly likely both prices are wrong – wrong in the sense of profit maximization.

Before I point out why it is wrong let me point out things that are done right

  1. The two different versions differ nicely on many key customer dimensions – number of people, ambience, image, piano option and end use (customer job to be done)
  2. The piano usage fee is additional – perfect unbundling since some may want it just for the scene while others may really want to use it.
  3. The concert piano option is available only with Main Theater – if you value it more you cannot choose the Recital Hall.

(Note: Think of these three pricing levers for your freemium webapp – can you unbundle the right feature? can you think of a feature that will not be available in lower priced version? …)

All these are great but the price difference is wrong for these reasons

  1. If the goal is to make it affordable to most then the lower priced version should be even lower. At just $50 difference it is not a huge discount compared to $350 version. Those who can afford $300, will most  likely upgrade to the Main Theater. This would leave to poor resource utilization and dismal monetization.
  2. If the goal is to maximize profit the Main Theater is priced too low compared to the Recital Hall. Just  by the sheer number of audience it can accommodate,  stage and other benefits this offers lot more value to customers hiring it for performances. The theater is leaving money on the table.

The way to fix this is not just take my 50-100% number but study the customer segments – find out the jobs they are hiring the two auditoriums for, how they value the different features and come up with a price. (Can you say conjoint analysis? Or lean startup conjoint using weight allocation method.)

It is highly likely we are seeing a case of cost based pricing – the venue amortizing its mortgage and other costs over the two options rather than pricing these based on customers and value.

In that case, if one price is not good, two are not going to fix it.

 

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