Pricing Products With Future Benefits

I wrote about the human tendency to underestimate future benefits compared to near term benefits even though the net present value of the future benefits is better than that of the near term benefits. This has implications to a marketer trying to price a product whose benefits are either delayed or distributed over a period of time.

If you are doing pricing for a CFL or LED light how can you charge $35 price when a customer can buy an ordinary bulb for $0.42? You would try to make a value proposition based on the higher economic value added by your offering over the incandescent bulb and hence would justify a higher price premium. But if the customers are discounting the future benefits how can a marketer get to charge price premium?

  1. Segmentation: Do not treat all customers alike. Not all customers incur just the cost of purchase. There are always other present costs like service and maintenance. In the light bulb case, some incur high cost of changing light bulbs and would prefer a bulb that they do not have to change every year. Some may be under severe electricity limitations and would prefer a light bulb that consumes much less of it.
  2. Versioning: Can you introduce versions that appeal to the cost conscious segment that makes decisions based on price of the product and not total economic value?
  3. Subscription: Why charge all the price at once? Can you change your business model to match your payout with benefits? A classic example is GE’s subscription model for its aircraft engines, instead of charging one time purchase price GE charged its customers a subscription fee based on hours of operations. This is not easy for light bulbs but possible.

What it would take for WSJ to be free?

In the continuing discussion on charging for online newspaper and unbundling the newspaper, the next question is what it would take for the WSJ to be free?

Current online  subscribers:     1 million

Subscription revenue/subscriber (average) :   $80/year

Lost subscription revenue:  $80 million/year

Current page views:     20 million/month

Expected incremental growth in page views:    180 million/month (10 fold increase)

Required CPM (cost per mille) for WSJ to be indifferent between the two options:  $37

This is more than twice that of sites with 200 million page views per month bring in. So unless the page views increase 20 fold to 400 million a  month or WSJ’s differentiated unique readership can command a CPM of $37 or more, there is no reason to give it away for free.