It’s been quite a year, complete with Gangnam style, a Facebook IPO, and even a looming fiscal cliff. What’s great is that it’s also been quite the year for pricing. More and more businesses are realizing the importance of understanding their value and optimizing their prices over time, especially as many wade through the fog of their “big data” hangovers grasping for some “hair of the dog” in the form of meaningful, actionable insights.
Don’t get me wrong, we’re still the pricing nerds staying at home to crunch economics problem sets on a Friday night (even though we graduated years ago), but at least folks are finally listening when we show them that a 1% improvement in price optimization results in an 11% boost in operating profit. Yea, it’s that huge. We’re not crunching these numbers for nothing.
Enough chit chat though. You’re here to learn. As such, let’s go through three of the biggest pricing strategy wins from 2012, which include attention to design, utilizing a value metric, and culling actionable data directly from target customers.
Pricing success #1: Boosting value with design - Wistia
Every once in awhile you fall head over heels for something. Most of the time it’s a significant other, but for us it’s a pricing page. We've covered them before when chronicling the best pricing pages, but in our minds, Wistia’s pricing page is the equivalent of cuddling up with a puppy and eating a bowl of ice cream after a rough day. It’s that good.
The biggest lesson here is that when you’re designing your pricing page, design truly matters. Take it seriously, because well designed pricing pages result in not only more conversions, but conversions at much higher price points. Wistia took the task so seriously, the crew actually hired an outside architect (the building kind) to approach the process from an entirely different angle.
The bottom line: Your pricing page is the most important page on your site, because everything leads to the gateway to conversion. Don’t skimp on simply copying some template. Truly take the time to build trust and optimize for value.
Pricing success #2: Best use of a value metric - 37 Signals
Our software isn’t built using Ruby on Rails, but that doesn’t mean we don’t love 37 signals. There’s a lot to love about them. After all, they’ve built a monster of a software company by sticking to the fundamentals and simply building great products.
Yet, their beauty, from our standpoint, truly lies in their straightforward, simple pricing that scales along a true value metric, fulfilling the major pricing phenomenon of value based pricing. A value metric is essentially the core units of value the customer is getting out of your product. A proper revenue model scales along these units, meaning if the customer is getting more value out of the product, then the company is charging them more. I can’t stress to you enough the importance of this concept. Utilizing a value metric allows you to capture small, medium, and large customers who embed themselves deeply within your product, because their usage and revenue contributions are growing alongside one another.
The bottom line: Simply put, if you’re not utilizing a proper value metric, you’re leaving money on the table.
Pricing success #3: Culling actionable data - Quirky
Pricing is not easy, which is why we consistently preach that pricing is a process. Yet, many organizations end up breaking down within their pricing process, because they hit a birck wall when it comes to culling target customer willingness to pay data. This breakdown is especially difficult when so many companies hold on to the myth that you should never have pricing and value conversations with customers.
Fortunately, Quirky, the famed crowdsourced industrial design company, went full throttle in the direction of using their user base to guide their pricing. The company relies heavily on their community for coming up with concepts, designing the products, and even determining distribution. For all of these activities, users gain “influence points”, which are useful and redeemable throughout the site. Utilizing the same reward process they use for other feeback, Quirky began to cull ranged pricing data from their users to fuel their own value based pricing engine. In this manner, users get rewarded and Quirky gets real data they can then use to avoid any voids in their pricing process.
The bottom line: Don’t play coy with your customers when it comes to pricing. Bring them into the conversation, but find a creative way to coax the conversation forward to ensure honest feedback.
2012 was a great year, but 2013 is looking to be even better (or at least that's what everyone says). To learn more about how you can join this crew of pricing rockstars, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!
This article is a guest post from Nick Beske, the lead creative and founder of Point Click Productions, a design and marketing agency focused on helping small businesses make a big impact.
Clicking on an ad for a product or service you're interested in, you stumble upon a landing page with three different products at three different prices. You quickly scan the list and make a choice: all by yourself. Think again. Odds are, the colors, sizes, and placement of the price you chose were all carefully selected by a brilliant graphic designer.
Design can play a huge role in subliminally suggesting price options to consumers, and to your pricing strategy as a whole. Price Intelligently already covered some general tips and tricks for software pricing pages in their pricing page blog post. Yet, we'd like to dig a bit deeper and show you how you can make a design element, such as a preferred price option, stand out to customers with a few simple tricks.
Color By Number: Utilize color to guide users to your optimal products and tiers
You can't have a conversation about design without voicing opinions about color. Color theory is a psychologist's pillow talk. Warm colors increase energy; cool colors evoke feelings of calm and meditation. Green makes people hungry. Blue makes them feel full. Is there any evidence to support this? Actually, there is, but you don't really want your pricing strategy to make people's stomachs start growling. Instead, you want to draw the eye to the preferred pricing bracket for your products and services.
Primary colors, that's red, blue, and yellow for all you Art 101 dropouts, are the colors generally thought to be the most eye-catching. A website filled with just the primaries, though, will look like a crayon explosion. Instead, we recommend a color technique known as "split complementary." Complementary colors are colors opposite from each other on the color wheel: red and green, blue and orange, and yellow and purple. Instead of using just these two colors, choose a primary color and surround it by several hues from the opposing side. This technique will make your primary color pop off the page, emphasizing whatever text you choose.
Take a look at Zcope for an interesting example of this concept. Where does your eye dart?
Is Bigger Really Better?: Subtly differentiating the size of target tiers/products
There's a lot of disagreement in the design industry about size. Some designers will swear up and down that the bigger the font or banner featuring a price option, the more likely a customer is to examine and choose that option. Others will roll their eyes and say that customers are not so easily fooled. From a purely psychological standpoint: yes, a bigger font and banner will attract more attention. There's a fine line, however, between big enough to attract attention and so enormous that a customer feels like you're trying to pull a "fast one." Happy, middle ground: that's what we're after.
Shopify is exceptionally subtle with their size differentiation here, but I guarantee you that tier at least gets more clicks, if not more full conversions.
The Lazy Eye: Centering ideal products yields results
Here's something you need to know about the human body: it's a machine, and a very efficient machine, at that. In fact, you might go so far as to say the human body is so efficient it's practically lazy. If the body can skip over an unnecessary task, it will. If the brain can come to a conclusion with minimal data input, it will. If the eye can focus on a price that seems reasonable without having to rove around a webpage, it will.
The "lazy eye" can be a web designer's best friend. When you're designing a website that offers multiple products or services in different pricing brackets, put the preferred pricing option smack dab in the center of the page. The eye immediately absorbs the information that's right in front of it. So, your preferred pricing option is ideally the one seen first by the eye.
Shopify above employed this method with that iteration of their page, combining it with nice color differentiation. Take a look at Basecamp below. There's a clear plan meant just for you.
Now, we're not suggesting that you're going to fool anyone with this technique. Customers are going to see all your pricing options, and shrewd consumers are going to choose a pricing option that they think is best. Subliminally, though, you will be affecting the customer's decision. Because the center option is likely to be seen first, customers will assume the middle pricing option is the most popular, the most recommended, and maybe the most likely to suit their purposes.
In all, design is exceptionally important to your pricing strategy, because it buttresses your entire pricing page. Just like pricing though, design is a process, something that needs to be tweaked, adjusted, and updated over time to suit anf fit your customer's needs and values.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!
I remember my first microeconomics class. The lesson was on supply and demand curves in a perfect market. I’ll spare you the yawn inducing details, but we were taught that a higher price correlated to lower supply and greater demand, and a lower price to the opposite. Yet, no matter the market, the point at which the two curves crossed was known as the equilibrium price, the perfect price point for that particular market. Sounds like wonderful, balanced bliss, doesn’t it?
Well, as many of you know, the real world of pricing does not occur in a perfect market, at least one that we can see since we don’t have perfect information at our disposal. If we did, pricing would be exceptionally easy and profitable. The question then becomes, how can you take advantage of working within imperfect market forces? The answer exists in the main difference between a Microeconomics 101 textbook and the realities of doing business: Product differentiation.
Product differentiation: It’s all about being a unique snowflake (or at least appearing like one)
Why do you drink Snapple and not Minute Maid? Why do you buy shoes from Nordstrom and not from Sears? It might be because Snapple has cool facts on their caps, and Nordstrom has employees waiting on you hand and foot. These are all forms of product differentiation: the ability to make what you sell unique among the plethora of similar goods.
The goal is to entice consumers and create the perception that there isn't a perfect substitute for what you offer through price differentiation and price bundling. For example, I could buy a cup of coffee from almost anywhere, but the big comfy couches and gorgeous latte boy at the off the beaten path café drive me to their location over the local Starbucks. Even though either would probably do the trick of my morning jolt, those simple additions means I won't switch brands.
Only when products are different can there be varying prices. In simplistic examples of a perfect market, the main assumption is that every product is a perfect substitution for another. If that were the case, consumers would simply switch sellers when one raised its price. Perceived or actual difference, however, is what justifies sticking with something even though it might be a little more expensive.
More specifically, how do you differentiate?
There are two types of product differentiation: vertical and horizontal. Vertical differentiation is based on superior versus inferior goods. The markers for this category include characteristics like quality, durability, reliability and service. There is a measurable scale for vertical differentiation: it's possible to quantify if Brand X of tires will last longer than Brand Y. Vertical differentiation is also marked by a positive price curve. If you're getting a better quality product, it makes more sense to pay more for it. So this type of differentiation segments the market into consumers who are looking for a bargain, ones will settle for nothing but the finest, and the multiple groups in between.
Horizontal differentiation is a separate category because its methods of differentiation can’t be measured through the same lens. This group mainly includes things like style, taste, and preference of functions. I may want a fuchsia cell phone instead of a black one, or I might like Ben & Jerry's Chunky Monkey ice cream better than the Half Baked flavor. That doesn't mean that an obnoxiously bright mobile device is superior, or that Half Baked is a worse concoction. Horizontal differentiation is more about personal preference than strict measurement of quality.
Four ways to differentiate immediately
An important note about product differentiation is that perceived value difference is what is important. There doesn’t really have to be a huge difference in function or quality between you and your competitor, but consumers need to have that perception. If you want to do even better, then take a look at your competitors’ offerings, cross reference them with your target customer’s needs, and build what your customers want that your competitors don’t have in their arsenal. Of course that takes some time, but here’s a good breakdown of what to attack for product differentiation:
1. Target Untapped Customer Personas
Remember, there are entire spectrums of customers that want or need your product. Many competitors will focus on the premium pricing customers with Cadillac offerings, while others will focus on discount customers with freemium and inexpensive offerings. There are thousands of pockets of customers in between these two groups. Find them and build, market, and sell to them. Very few industries have a behemoth competitor being everything to all people.
2. Soft skills (Design, service, etc.) go a long way
Large businesses have difficulty providing individualized service to their target personas. A lot of companies big and small have trouble looking pretty and keeping design top of mind. Take advantage of this and be the Twilio, Wistia, or Help Scout of your industry. All three of those companies are in fairly competitive industries, but they’ve taken to high-class service, design, and brand to carve out their niches.
3. A little branding goes a long way, too
You don’t need to be Coke or Pepsi, but putting an afternoon’s worth of time into developing your brand can go a long way. Who are you to what group and why? You’d be surprised at how many companies we come into contact with can’t answer that question. As soon as you can, use the message to unify your messaging and go after the right market.
4. Understand your customers and Differentiate your features
We alluded to this above, but figure out what your customers need or what they don’t need and shape your product towards those needs, rather than those of your competitors. Help Scout has done beautifully with this approach by bringing the world an exceptionally simple help desk when their competitors have been developing Frankenstein monsters of products. It’s gotten so bad that Help Scout has been able to successfully use the tag line, “A help desk that does 99% less.” They know that their target customer wants simplicity, so they’ve built the product for them in that manner.
Product differentiation is crucial for any business. Most likely, given the ease of starting a business, you are entering into a market that already has strong competition. We’ve already discussed the pros and cons of competitor based pricing, and why competing on price is a poor strategy. Product differentiation and value based pricing is the healthiest alternative to boost revenue and grow your base. Just keep asking yourself: what can you offer or build that others can’t?
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!
Some ethical issues are extremely easy to understand: don’t steal, treat others with respect, and always put down the toilet seat for your lady friends. However, when it comes to the market, the concept of what is right and wrong is a bit blurrier. Of course you can’t exploit children for a lbaor force, but Is it a business’s right to price however they want? After all, if the number is too high or the marketing too egregious, then consumers won’t buy right?
Well, not exactly. Over the years, governments have put laws on the books for the most heinous of fraudulent pricing strategies, but even then some tactics are considered quite unethical, and you may be committing these missteps without even knowing. We touched a bit on the ethics of natural disaster price optimization in a previous post, but in order to fully understand the scopes of pricing ethics let’s take a look at a brief overview before diving into five main concepts you should stay far away from in your business.
Pricing: More ethics than legality
There is a general consensus that marketing strategies must not infringe on values like honesty, transparency, and autonomy. As such, the main crux of pricing ethics concerns the establishment of a balance of power (through information) between the producer and the consumer. In a completely free market, producers often have the upper hand because they are in control of their products and processes. This potentially lead to unethical practices (using cheap or harmful materials, lying about benefits, etc.), which are deemed harmful for society as a whole.
Interestingly enough though, even with this possibility only a handful of pricing practices are regulated by the government, mainly because you’re not really sure someone had broken a pricing law until you see results. For example, while predatory pricing, aka pricing extremely low to drive competitors out the market, is illegal, it’s difficult to prove that the price decreases had such an intention and were not simply the result of competitor based pricing. It’s like telling a child that he can have a cookie only if he finishes his vegetables, but with no way to discern if the kid ate the peas or if they were slipped to the dog. Essentially, most laws blindly attempt to curb motivations for doing things, rather than results.
As a result, pricing ethics and legality sit in a grey area, constantly ebbing and flowing between right and wrong. To better protect you and your business, here are some of the most common pricing practices that sit on a razor’s edge of ethics and legality.
1. Price fixing: Collusion at its worse
Price fixing involves the an agreement between a group of people on the same side of a market to buy or sell a good or service at a fixed price. Typically, competition between these participants for consumers drives down prices for goods. Yet, imagine a world where every ice cream shop in America vowed that all single scoops were now $15. Consumers would lost out, because we’d find alternatives or shell out an exorbitant amount of cash, as we couldn’t go to another neighborhood joint to battle the high prices/low quality offering of another.
The potential blow to consumers is why horizontal price fixing is illegal, which means corporations on the same level of the supply chain cannot agree on a target, maximum, or minimum price (among other things). This form of fraud can be prosecuted under the Sherman Anti-Trust Act. The Supreme Court did rule, however, that vertical price fixing is allowed. For example, wholesale companies can limit how much retailers charge for clothes.
The bottom line: Look at your competitors to understand the market, but don’t get in a room with them and try to take advantage of consumers. Check out more about competitor based pricing.
2. Bid rigging: Favoritism
This one’s more for the proposal crows, but bid rigging involves promising a commercial contract to one group, even though you make it look like multiple parties had the opportunity to submit a bid. Not only is this a moral no no, but it’s also one of the few the government follows up on, especially within their own ranks, because of the number of bids and contracts the government deals with on a yearly bases. This practice hurts consumers considerably, because the best producer doesn’t receive the work necessarily.
There are many variations of this offense, and all include some pre-determined agreements between corporations involved in securing a contract. Considered a form of collusion, big rigging is illegal under the Sherman Act, our government's rockstar market regulator.
The bottom line: Even if “you know a guy” keep the bidding process honest on both sides. Everyone will end up better off.
3. Price discrimination: Anti-favoritism
Price discrimination is the strategy of selling the same product at different prices to different groups of consumers, usually based on the maximum they are willing to pay. The practice also surfaces in hiding lower priced items from customers who have a higher willingness to pay. This one is a little tricky, because it is socially accepted in some cases, yet rejected in others. For example, very few people would complain that the 80 year old man and his 2 year old great-granddaughter pay $10 less to enter the carnival. Yet, only showing the more expensive hotels to more affluent customers caused an enormous amount of PR backlash for travel site Orbitz.
Clearly, there are a lot of different manifestations of price discrimination. Legally, the main law on the books, the Robinson-Patman Act of 1936, is exceptionally outdated and has more holes than my favorite swiss cheese.
The bottom line: Charge different types of customers differently through product differentiation, bundling, and the like, but be exceptionally careful about communicating differences in price. Sometimes a PR backlash can hurt much more than a legal one. Check out more on communicating price changes (article is a bit tangential, but educational).
4. Price skimming: Discriminating through time
Once again, another shady area. Price skimming is when the price for a product is first sold at a very high price and then gradually lowered. The goal here is pretty obvious, producers want to capture each step on the demand curve; consumers who are willing to pay more buy the product first, and then a new groups’ purchases are triggered with each decrease in price.
This strategy is most commonly seen in the tech industry, as some consumers are willing to pay a premium price for the newest gadgets. Apple is a prime example, as prices drop within months of a release and new iterations happen within six to 12 months. Like price discrimination, this practice isn’t illegal, but if too obvious and not tested enough, it can trigger an unfortunate PR backlash. Apple received a lot of flack for cutting their production cycle on the latest iPad, instantly lowering the prices of the older models.
The bottom line: Find ways to lower prices to new tranches of customers discreetly. Coupons, promotions, and lightweight versions of a product are all exceptionally effective while keeping the same number on the page. Check out more on how Apple crushed the latest iPhone price optimization.
5. Supra competitive pricing: Monopoly gouging
Sometimes the value that consumers place on a good is much greater than the cost of producing that good. In such cases, there is controversy about whether the corporation is justified in charging a much higher price and matches the perceived value. This situation can take place during a shortage, such as the price of food or fresh water after a hurricane, or when a certain product is the only one of its kind available. Pharmaceuticals and the patents that surround them are a great example.
Producers in these instances can charge an exorbitant amount of money, but should they? I think we’d agree that setting skyrocketing prices for food or generators following a hurricanse is wrong (and some states have laws against it), but most software costs are relatively cheap compared to the value provided to a customer. Very different contexts, but more generally, some consider taking advantage of consumers' needs unethical, while others feel like it's an inevitable result of a free market and a just reward for innovation.
The bottom line: This is a common sense scenario, but a good litmus is to ask yourself if the pricing change hinders an individuals’ necessities. Software products are phenomenal for improving efficiency, but if the Internet blew up tomorrow, we’d still need food and water.
In summary, see the forest for the trees
Don’t do anything illegal when setting or changing your prices, but even with the questionable practices, always step back and think about what the price looks like from a customer’s perspective. You’re not building a quick sale business. You’re building something sustainable, so make sure to avoid any and all pricing PR disasters.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization solutions.
This post comes in the wake of Customer Success 2012, an event we've been asked to be a part of to debate the key drivers of customer success. We're honored to represent the world of pricing.
We champion pricing here as the most important aspect of your business. After all, 1% of price optimization results in a boost of 11% in profits. That's huge and unmatched by any other part of your business, including increasing volume.
Yet, in all our pricing and value revelry, it seems we've started a battle that rivals the great debates of Lincoln and Douglass (or Romney and Obama for our contemporary readers). It seems that some feel user experience, clickstream analytics, or an engaged user community drive more success than an effective pricing strategy. Of course, these concepts are not mutually exclusive, but we're happy to announce we're having a great debate on November 29th that you can attend in Boston or online through a live stream. We're ready to settle the score and defend pricing's seat at the table for measuring and driving customer success.
In the mean time, we're going to lay out the two main planks in our platform for pricing being the key indicator of success. Feel free to add to the argument (or detract from it) in the comments or at the event with pointed pricing questions.
True measure of customer satisfaction
Pricing and customer value data is the leading indicator of how much your customers or potential customers actually value the solution you've created. Everything else, including user experience, analytics, etc., support the number you're putting down in pixels to charge your customers every single month. Yet, no amount of marketing, design, or the like will matter if your prospects can't get past their first month of being a customer, churning out and sending your value plummeting.
The secret becomes measuring the value you're providing your customers and moving your pricing model to a point where every unit of value you provide equates to the price your target customers are willing to pay for that value. Yes, this is the holy grail for a company, and yes, this doesn't happen overnight (pricing is a process). But, measuring your customer satisfaction based on "happiness" or nebulous things like net promoter scores won't get you anywhere. Your customers are paying for your value, but you can only measure that value in the form of dollar bills. After all, that's what they're exchanging for your value and the only cell on your spreadsheet that truly matters each month.
Value information tells you what customers want
The beauty of software resides in our ability to create almost anything and everything. The horrible part of software resides in our ability to create almost anything and everything. The simple fact is when you're not taking your customer's needs and wants in mind, you end up with frankenstein monsters of products with little to no direction and an unenthusiastic customer base.
How do you determine what your customers want? Well, you can run interviews, track their behaviors, or assess their needs based on your gut feelings…or you can actually ask them in an educated manner. Most product managers aren't putting their target customers in a position to make value based decisions about new features. Take a look at the output below. You have no idea what feature should be built next, because customers will want everything if you present them with the opportunity to indicate they can have everything.
Instead, you must present them with the opportunity to make tradeoffs, which results in true value based information, indicating what should be built next and what they actually care about from the next aspects of your product. Take a look at the output below. From here, you know where you're headed, because your customers have indicated what's important and what's not (for more on the process behind this analysis, check out our pricing strategy ebook).
Pricing is key, but analytics, UX, and community are too
Overall, we realize that customer success cannot be defined by one particular aspect of a business. The interplay between analytics, UX, feedback, and value all remain crucial. Yet, understanding your value is synonymous with understanding your customer, because value is integral to why your customer cares about who you are and why you're trying to get them to use your product. Think of value as the foundation that you build retention, evangelism, and happiness on. With this frame of reference, you're able to see that you're not always paying attention to the foundation, but it always needs to buttress everything else.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization solutions.
Since the time when we were all junior economists, we’ve been told that the world is driven by supply and demand. Our jobs in business were simple: create a form of value that fills a void that someone demanded. We even take this a step further through the world of marketing by creating hope, anxiety, peace of mind, or all three in order to sell our wares.
Yet, at what point should this predatory, business instinct be turned off? We’re a couple of weeks out of Hurricane Sandy, and thankfully the devastation has begun to subside in the wake of rebuilding. Yet, we’ve seen absolute outrage pour over several businesses that have dared to raise their prices on their own dwindling supply in the wake of the devastation. They’ve been labeled price gougers, full of predatory greed to profit on the suffering, and many of them have begun to receive lawsuits from the state of New Jersey. After all, raising prices during a state of emergency is a crime.
Can you price gouge before a disaster?
What’s interesting though isn’t what happened after Hurricane Sandy, but rather what happened before. We’re located in Boston, MA, receiving next to no damage compared to what happened south of us. Yet, prior to Sandy you would have thought Boston was falling into nuclear winter, at least from the atmosphere at the local Whole Foods. Gallons of water were loaded into carts, some shoving and eye rolls occurred, and Whole Foods even took advantage of the situation with some very interesting signs reading, “Stock Up For Sandy.”
Was Whole Foods breaking the law? Not technically, because the prices didn’t change. Were they taking advantage of a looming natural disaster? Sort of. The news and hype surrounding the storm were already causing troubling amounts of people to flock to the store, but clearly some thought was put into the signs. When I asked a Whole Foods employee why the signs existed, I was told, “...this is a lot of produce and meat that we’ll have to throw out if the power goes out, so we’d rather sell it quickly. Plus, people are already stocking up big, so we’d love to upsell them.” Interestingly enough, if the power went out, the food would go bad anyways, just in Whole Foods customers’ freezers.
Does allocative efficiency have a limit?
Neoliberal economists fight any price gouging laws out there, claiming that any artificial price floors or ceilings stifle the market and many of the fundamental teachings of this blog would echo those supply/demand sentiments. After all, your pricing strategy should center around what your customer's willingness to pay truly is for a product or service. In the case of those individuals in a disaster zone, the willingness to pay is quite high when fuel, power, water, and food are needed.
Yet, there’s a certain point where raising prices to an “efficient” level becomes distasteful (and of course, illegal in some states), and the PR and legal ramifications of raising your prices to that level become counterproductive to your business' success. Even utilizing fear in marketing has it’s limit, as Whole Foods found after numerous individuals questioned their signs, causing them to take them down. You always need to keep in mind not only the value perception, but the perception of your company in pricing.
Of course, most of our readers work in the software space, so there's not a lot of price gouging that takes place, because supply is only limited by cloud or disk space. Yet, keep this little anecdote in mind in your marketing, and always remember there's a point where you need to step back from the trees (data) to see the larger picture.
Is there a good litmus test for pricing or marketing that you use or is it something you push until you have a PR or legal backlash? Let us know in the comments!
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization solutions.
This article is a guest post from Jack McDermott, Co-Founder and CEO of Balbus Speech, one of the market leaders for effective speech therapy apps and tools. Here he writes about his experience in Apple's app store.
Anyone dealing with software pricing knows one thing in particular: it’s really, really tough. Most companies struggle to find the ideal balance between price, value and user acquisition costs. Not to mention most software products come without recurring revenue—so you better make your one sale count and not leave cash on the table.
It’s even more challenging when you’re selling apps on the App Store, where nearly 9 out of 10 downloads are free apps. Price Intelligently has already written a great post on freemium here, but with well over 700,000 apps, the iTunes App Store is a pricing battleground that favors the lowest possible price: free. For independent developers, it’s sometimes impossible to stand out from all the rest. But, just like catchy marketing or a refreshing user experience, pricing is another way to attract new customers.
At my startup, Balbus Speech, we develop speech therapy iPad apps. In a specialty market like ours, prices on the App Store range from free to upwards of $99. Our apps, Speech4Good and Speech4Good Lite, are targeted at speech therapists looking to spend between $5-20—no easy feat when the entire marketplace is sunken with free to 99 cent apps. As a result, pricing our apps has been a constant evolution of “trial and error”—our prices have moved anywhere from free to $29.99. Yet through the trials (and with a little help from Price Intelligently), we have learned two key takeaways:
1. Be goal-orientated: Turn "free" into "free to download"
Your app pricing should reflect your company’s goals. With our apps, we recognized that our market is highly selective and comfortable paying for therapy resources. Yet, we also recognize that users can only improve their speech if they have access to our technology. Clearly, we need to think of our pricing structure as a combination of affordable value as well as widespread accessibility—which is evidence of our full-featured version ($19.99) and our “Lite” stripped-down version ($4.99).
On the other hand, if you’re marketing a viral game or music/video app, you may want to compete on features and user experience, not price (most are free to download anyway). Unlike special education apps, these apps have different goals: most often, free to download with restricted features or levels that require an in-app purchase—remember: “freemium” is a marketing strategy, not a pricing strategy.
2. Get creative: correct price points and targeted flash sales
It’s time to change how you think about sales on the App Store. Your goal should be minimal: what value in price do I need to portray to get a potential user to make two clicks and type in a password? This is often all that’s needed and it’s how you should think about your App Store product. In fact, by lowering our price 33% from $29.99 to $19.99, app sales increased by over 200%--making this pricing change a valuable long-term strategy.
What about getting creative with flash sales? We tend to avoid quick sales—which usually hope to spike downloads and make your app rank higher on the App Store. Our market is less elastic in this sense, as speech therapists and students typically research and compare apps before purchasing. But if you’re looking to temporarily drop your price, do it with a clear purpose. For instance, we recently partnered with “Apps for Children with Special Needs” to promote a back-to-school app sale—this way we maximized our marketing reach with a partner while also promoting an event or occasion as the reason for our sale.
In summary: Iteration in any pricing strategy is key
So with these ideas in mind, there’s only one thing left to do: try it for your app. We've been able to refine our pricing strategy so we can do less “trial and error” and make more sales. Pricing is a process just like marketing, product development or even sales. The sooner you treat your price strategy this way, the sooner your app sales will exceed your goals.
To learn more, check out Price Intelligently's Pricing Strategy ebook, their Pricing Page Bootcamp (it’s free!), or learn more about their price optimization software.
Please note: This post is the fourth post in a four part series on the main pricing methodologies, highlighting the pros and cons of each. Check out the first post on cost plus pricing, second post on competitor based pricing, or third post on value based pricing.
We’re beginning every one of these posts with the same statement: “Pricing is the most important aspect of your business.” No other lever has a higher impact on improving profits. We elaborated on this assertion in a previous pricing strategy post, but realize that a 1% improvement in price optimization results in an average boost of 11.1% in profits. That’s no small change (pun intended).
Remember what we’ve been saying throughout our existence, pricing is a process that utilizes data to eliminate as much doubt as possible for key stakeholders to make a profit maximizing decision. There is no silver bullet, but with data you’ll have a nice barrel full of lead. The metaphor we’ve been using (some of you like it, some of you don’t) is a dartboard where you’re trying to hit a bullseye with the perfect price, but there’s all that extra space “distracting” your dart. Data and these methodologies eliminate that space, guiding your dart to the ideal price point.
So far, we’ve already learned about cost plus pricing, competitor based pricing, and value based pricing in depth. We learned that cost plus and competitive pricing can be useful, but they’re fairly weak overall, particularly in the SaaS or software space. We also learned that value based pricing, although it has its quirks provides valuable data to shrink the dartboard when done correctly. To recap for those of you who don’t want to read the other posts, let’s review each methodology and give you the top level findings to utilize immediately.
Cost plus pricing: The oldest and simplest (mostly) method of setting prices
Cost plus pricing is the simplest method of determining price, and embodies the basic idea behind doing business. You make something, sell it for more than you spent making it (because you’ve added value by providing the product), and buy something nice with the difference. In practice, a lot of companies calculate their cost of production, determine their desired profit margin by pulling a number out of thin air, slap the two numbers together and then stick it on a couple thousand widgets. It’s really that simple. This method involves very little market research, and also doesn't take into consideration consumer demands and competitor strategies.
Fortunately, cost-plus pricing is really simple, requires few resources and hedges against incomplete knowledge by covering the entirety of a product’s costs. Yet unfortunately, it’s horribly inefficient, because it creates a culture of isolationism and doesn’t take a single ounce of customer perspective to determine prices.
Overall though, cost plus pricing isn’t ideal for most businesses, unless you truly cannot spend some extra time on the most important aspect of your business, which sometimes happens when you’re bogged down by fulfilling orders or just getting off the ground. Regardless of ease, no software or SaaS company should use cost plus pricing, because the value you’re providing is traditionally much more than your costs of doing business.
Competitive based pricing: Essentially, ineffective plagiarism
Competitive based pricing is a lot like plagiarism - you decide not to do your homework, so you copy that of those who have already done some work (or that you’re assuming have done some work). Obviously the market doesn’t dole out suspensions for copying prices, but the processes of swiping an essay and competitor based pricing are pretty similar. Also called strategic pricing, this method involves looking at the prices set by other businesses in the same sector, and then adopting those numbers, plus or minus a few percent according to how your product looks that day. The dartboard gets smaller, because there’s more data here, allowing you to rely on your competitors to do the work for you (as long as you trust they actually know what’s going on in the market).
Competitive based pricing remains a simple, low risk way of quickly gauging prices, and in some cases it can be fairly accurate. Yet, it leads to enormously large missed opportunities, because companies employing the strategy end up not assessing their true value and get caught in a race to the bottom through industry group think.
To summarize though, certain businesses need to use competitor based pricing extensively, because consumers price compare with switching costs from buying a product at store X or store Y remaining exceptionally low. Yet, for most businesses, especially in the software or SaaS space, competitor data should not be the central tenet of your pricing strategy, because there are too many other variables to consider when you’re not comparing congruent products.
Value based pricing: It's all about the customer (and the benjamins)
A value based pricing strategy works to determine the true willingness to pay of a target customer for a particular product by utilizing customer data. Most common pricing strategies and methodologies forget about the customer, instead focusing on internal reasons and/or competitive metrics to justify prices. Yet, customers don’t care how much something cost you to make or your competitors, they care how much value they’re receiving at a particular price. By maintaining this customer focus, value based pricing provides real data, helps you develop higher quality products, and even improves customer loyalty. Simply put, you have the greatest amount of data to make an informed decision about your profit maximizing price. Thus, shrinking down the dartboard.
Of course, value based pricing isn’t perfect. The process requires time and resources, along with consistent dedication, not just a “set it and forget it” mentality, especially because the willingness to pay differs for different customer personas, regions, and even offers. A 100% accurate prediction is impossible, but we can get pretty darn close.
To summarize, almost everyone in the software and SaaS space will benefit from value based pricing. Even individuals in retail, media, etc. can benefit from the methodology. It takes dedication, but when done right, provides enormous benefits in terms of more profit, better and more competitive products, and customer oriented marketing and development.
Remember, pricing is a process
We repeat this notion, because it’s true, but also because we know how daunting approaching pricing can be for a business that doesn’t have someone fully dedicated to their pricing strategy. Pricing is a black box that can only be illuminated through a process. Take this knowledge, apply what’s useful, scrap what’s not, but just systematize your pricing to the point that you're capturing more cash from the table. If you don’t, then you’re losing an enormous amount of money, and that hurts no one, but you.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software.
Please note: This post is the third post in a five part series on the main pricing methodologies, highlighting the pros and cons of each. Check out the first post on cost plus pricing and second post on competitor based pricing.
We’re beginning every one of these posts with the same statement: “Pricing is the most important aspect of your business.” No other lever has a higher impact on improving profits. We elaborated on this assertion in a previous pricing strategy post, but realize that a 1% improvement in price optimization results in an average boost of 11.1% in profits. That’s no small change.
Value based pricing is the pinnacle of pricing if you can figure out how to get there (more on this below). Remember what we said last time, pricing is a process that utilizes data to eliminate as much doubt as possible for key stakeholders to make a profit maximizing decision. The metaphor we’ve been using (some of you like it, some of you don’t) is a dartboard where you’re trying to hit a bullseye with the perfect price, but there’s all that extra space “distracting” your dart. Data and these methodologies eliminate that space, guiding your dart to the ideal price point.
We’ve already learned that cost plus pricing and competitor based pricing can be useful, but they’re fairly weak overall, especially in the SaaS or software space. Fortunately, value based pricing, when done correctly, provides valuable data to shrink that dartboard down tremendously. Yet, like all methodologies, it has some quirks.
To understand value based pricing, let's take a look at what value based pricing entails, uncover the methodology's pros and cons, before exploring who should and shouldn't utilize value based pricing.
Value based pricing: It's all about the customer (and the benjamins)
To consumers, price is a numerical evaluation of how much they value what you are selling. For example, if I needed a new winter hat, I could get one from the local GoodWill store for a dollar or I could go to Macy’s and buy one for $25. If I only cared about covering my head, Goodwill would win, but since I care about my fashion sense, Macy’s wins. My willingngess to pay is contingent upon the value I place into the product I want and need, which depends on hundreds of different aspects of my psyche and situation. Essentially, value based pricing cuts through the red tape of this scenario to determine the true willingness to pay of a target customer for a particular product.
Unfortunately, the most common pricing strategies and methodologies forget about the customer. Instead, people in charge of pricing justify price points based on internal reasons or simply adopting existing market prices. Newsflash: customers don’t care how much something cost you to make or your competitors, they care how much value they’re receiving at a particular price.
Value based pricing requires a lot of research, which is right up there with working overtime while your friends are at the bar (or just bring the work to the bar). However, unlike cost plus and competitor based pricing, it is impossible to fabricate a number that correctly reflects how consumers feel. Plus, unlike pricing done by market norms, this method focuses on isolating qualities that distinguish the product in question from the 85 look a-likes on the market.
Value based pricing models and software utilize customer data, as well as breakdowns of the relative value of different features within your offering. You’ll also need to conduct an analysis of competing goods, because once you have the data, you’ll want to know the other options consumers have open to them. In the end though, you have the greatest amount of data to make an informed decision about your profit maximizing price (unless you’re in a market based pricing situation, which will talk more about tomorrow). Thus, shrinking down the dartboard.
Pros of value based pricing
1. It provides real willingness to pay data.
Most companies shy away from diving into pricing, because they’re afraid of the process and end up rushing to solve other problems facing the business, because they at least know how to test different landing pages. Yet, even though there’s work involved, value based pricing provides real data that forces you into a profit generating price within your pricing strategy.
Simply put, if done correctly, value based pricing helps you generate the most profit.
2. It helps you develop higher quality products.
Value based pricing not only determines a more accurate price for the end product, but the process will also benefit your business. The heavy emphasis on research is like sweating on a treadmill; not only do you burn off those appletinis (don’t think our CEO, Patrick, doesn’t drink them), but you are also healthier.
Exploring your competition will help you understand the advantages of your product, which is where marketing should focus on, and its disadvantages, the parts that should be altered. Taking on a consumer perspective will also help you discover what clients are really looking for in your solution. Products and features will be driven by consumer demand, which raises perceived value, thereby resulting in a higher price.
3. It allows you to provide phenomenal customer service.
Much of the customer data in value based pricing is collected through customer surveys or interviews. The responses we’ve seen to simply bringing customers into the discussion of value have been extraordinarily positive and appreciated.
This attention to consumer opinions and wants will result in more personable and considerate services. This can be the difference between one time customers and loyal clients who develop a bond with the company and always come back, because they trust you’re providing the value you continue to claim you are in your price.
Cons of value based pricing
1. It takes time and resources.
The method can be simplified and quickened, but it’s not necessarily as quick as Googling your competitors or calculating your costs and pulling a margin number out of thin air. You can also be a bit intimidated by the method, because pricing isn’t something they teach us Businesses 101.
For this reason, many businesses shy away from the most important aspect of their business (Fun fact: In business school they tell you how important pricing is to profit, but they never tell you how to optimize pricing.). Businesses also think only extremely large and wealthy businesses can afford to do things this way. However, there are in fact ways to find perceived value without breaking the bank.
2. It’s a science, just not an exact science.
The secret is out: Unless you’re dealing with a very saturated product where market based pricing works, there is no silver bullet for pricing. Thus, value based pricing is more of a process that requires consistent dedication, not just a “set it and forget it” mentality.
Think about it, willingness to pay differs between different customer personas, regions, and even offer. A 100% accurate prediction is impossible, but we can get pretty darn close.
Summary: Value based pricing should be a part of almost everyone’s pricing strategy, but you shouldn’t shy away from other methodologies
To summarize, almost everyone in the software and SaaS space will benefit from value based pricing. Even individuals outside of this space (retail, media, etc.) would benefit from the methodology, because even with staunch competition you can determine the value of profit maximizing, differentiated features for your product. Think about toilet paper. I totally pay more for quilted sheets.
Remember though, value based pricing takes dedication. Yet, when done right, provides enormous benefits in terms of more profit, better and more competitive products, and customer oriented marketing and development.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software. Also, check back tomorrow to learn more about market based pricing. .
Please note: This post is the second post in a five part series on the main pricing methodologies, highlighting the pros and cons of each. Check out the first post on cost plus pricing.
We’re beginning every one of these posts with the same statement: “Pricing is the most important aspect of your business.” No other lever has a higher impact on improving profits. We elaborated on this assertion in a previous pricing strategy post, but realize that a 1% improvement in price optimization results in an average boost of 11.1% in profits. That’s a huge boost!
Competitor based pricing can help you get there if done correctly. Remember, pricing is a process that works to eliminate as much doubt as possible for a key stakeholder to make a profit maximizing decision. Think of pricing as a game of darts where you’re trying to hit a bullseye with the perfect price, but there’s all that extra space to “distract” your dart. Data eliminates that space, paring down the dartboard as much as possible to guide your dart.
Last time we learned that cost plus pricing provides some data for the pricing process, but overall it’s a pretty weak pricing strategy even in the retail industry where it’s primarily used. Fortunately, competitor based pricing is a little bit better, but as we’ll learn not perfect.
To understand competitor based pricing, let's take a look at what competitor based pricing entails, uncover the methodology's pros and cons, before exploring who should and shouldn't utilize competitor based pricing.
Competitor based pricing: Ethical, but ineffective plagiarism
Competitor based pricing is a lot like a bad case of plagiarism in a college class. You’ve partied a little too hard the night before, forgot about the paper you were supposed to write, and then think it’s a good idea to paraphrase the wikipedia article you found on Botswana economics. Obviously the market doesn’t dole out suspensions for copying prices, but the processes of swiping an essay and competitor based pricing are pretty similar.
Also called strategic pricing, this method involves looking at the prices set by other businesses in the same sector, and then adopting those numbers, plus or minus a few percent according to how your product looks that day. The dartboard gets smaller, because there’s more data here, allowing you to rely on your competitors to do the work for you (as long as you trust they actually know what’s going on in the market).
Another way to think about it: imagine stacking all of your competitors on a totem pole with the most premium or luxury brand on top and the bargain brand on the bottom. You then decide where on the pole you fit, place yourself in there, and set your price accordingly. Wait though, isn’t that a bit arbitrary? Of course it is, which is why we’ll take a look at the pros and cons of competitor based pricing next.
Pros of competitor based pricing
1. It’s fairly simple.
If you’re in an industry with even one or two direct competitors you can implement a reasonable competitor based pricing strategy. In most industries marketing and product managers will then have to do relatively little research to find a price. It is also possible to make adjustments in prices by following tweaks made by competitors. Keep in mind though that this gets much more complicated when you’re not comparing congruent goods, which is often what happens in the software space.
2. It’s low risk.
It’s rare to royally screw up using this form of pricing. If you have a fairly solid grasp on your product’s quality, target audience and cost of production, this method will most likely never lead to bankruptcy. It’s kept your competitors afloat, so similarly, it should do the same for you.
3. It can be accurate.
In saturated industries like retail, competitor based pricing can be fairly accurate. After all, for most consumer products there are millions of customers and enough data to move pricing closer towards a market based methodology. Unfortunately, software doesn’t tend to have this same luxury.
Cons of comeptitor based pricing
1. It leads to large missed opportunities.
The most common ways businesses raise profits are by increasing sales, decreasing cost of production, and lowering overhead. Pricing is often neglected, which is a shame, because it’s their main consideration (sometimes an incentive but more often a barrier) before purchasing your product. Simply copying your market’s prices leads to a lot of wrong prices and lost profits, even if you do think you’re doing well. The goal of your business should be to maximize revenue and profits, even if it does take a little bit of extra work on the pricing front.
2. It’s done by everyone, which creates pricing group think.
Competitor based pricing operates off the assumption that businesses already in the market have the correct answer and that every decision competitors’ make is intelligent. This can be a fair strategy if only one business determines its price after taking into consideration the variety of prices existing at the time. However, if a large portion of companies all use this tactic, then with time competitor based pricing can lead to the entire industry losing touch with demand. You’ll end up either keeping the same price forever, because competitor A hasn’t changed her price or you’ll simply raise or lower prices in response to trigger happy competitors.
Remember though, it’s your business, your product, and your revenue. Every customer a competitor serves is an opportunity lost for you. Why would you let fellows in the other end zone determine the baseline for your price?
3. It can lead to tunnel vision and a race to the bottom.
Maintaining a lower price than your competitors isn’t always the best way to attract consumers, but competitor based pricing exacerbates that idea by simplifying price as a barrier that constantly must be lowered. Yet, the lowering of prices in most industries leads to doubts about quality and lower revenue from tiny profit margins even though customers would be willing to pay more.
As we alluded to before, competitor based pricing also gives you too much of a “set it and forget it” mentality. Pricing is a process that requires data and attention. If you’re not changing your prices and differentiating your product over time, you’re like a shark who’s stopped swimming: dead in the water.
Summary: Competitor based pricing should be a part of everyone’s pricing process, but not the central pillar
To summarize, certain businesses need to use competitor based pricing extensively, because consumers price compare and their switching costs from buying a product at store X or store Y are exceptionally low. Yet, for most businesses, especially in the software or SaaS space, competitor data should not be the central tenet of your pricing strategy, because there are too many other variables to consider when you’re not comparing congruent products.
Look at the help desk space. Zendesk, Help Scout, Fresh Desk, Salesforce, and the dozens of other competitors are all drastically different and geared towards different customer personas. As such, Help Scout shouldn’t peg their prices with Zendesk and vis versa. Of course, the two should keep an eye on one another, but only to guide their market strategies.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software. Also, check back in next week to learn about value based pricing.