6 Tips for Choosing the Right Price Model

In an earlier article, “Tools of the Trade”, I laid out a number of different tools that are available in a subscription business to construct a pricing model. In this article I present 6 tips for getting the pricing model right.

Simplicity

The age old acronym KISS (Keep It Simple, Stupid!) applies to two fold pricing. The more you make your customer have to think about their purchase decision, the fewer people will make the purchase. I remember a year or two ago considering pay-as-you-go phone plans for my son’s phone. I was presented by a completely baffling set of rules there was a fixed charge for the first time you used the phone each day, different rates at weekends and evenings, a charge for the first incoming call per day and a complex set of top-up rules which included the fact that unused credit was consumed automatically after three months. I had no way to understand how much the plan would cost me, nor even what kinds of usage patterns would save money. I didn’t buy a plan.

Keep your pricing simple so that customers can understand it.

Reflect customer value

The more value a customer derives from your product, the more they will be prepared to pay for it. A great example of this is the pricing Amazon have chosen for the Kindle Fire. Jeff Bezo said at launch, “We want to make money when people use our devices, not when they bu…” The Fire competes with the much more costly iPad but Amazon is proposing to make money, not on the device itself, but on the Amazon books and movies that people will consume using it. So, people will pay more, the more they use it. Or in other words people will pay more, the more value they get from it. Amazon believe that this pricing strategy can beat Apple.

Don’t be afraid to charge high prices

Companies often undervalue their products. You often find that low-end customers are the least satisfied with your product and the most expensive to support. It is important to be aware of these costs and consider pricing such customers out of your market. Ramit Sethi and Patrick McKenzie explain this well in their article on “Why Your Customers Would Be Happier If You Charged More.”

Lower Barriers to Entry

Even though you want to have a high price for your product make sure there are ways for your customer to sample the goods and get an idea of the value. Incrementally more aggressive ways of doing this are:

  • A free version of the product
  • A free, but time limited, trial of the full product
  • A time limited money-back guarantee

There are obviously trade-offs to be made between these different techniques and they set different expectations with the customer. It is important to remember that a free version of a product is a very different thing from a cheap version. Once people start paying their expectations for support and features go up exponentially.

 

Discount your long term pricing

Annual customers are typically worth far more than monthly customers simply because a lot of monthly customers are likely to churn before they get to their first anniversary. For this reason it makes a lot of sense to encourage adoption of annual plans and giving deductions of as much as 20% is common. Many sites will emphasis this cost saving by presenting the annual price as its monthly equivalent and encourage customers to adopt it by making it the default choice.

Differentiation vs Alignment of Price Models

Your pricing and price model is an important area for differentiation of your product from your competition. If you can provide a price model that is simpler or better aligned with customer value for a particular segment of the market that can provide an important reason for customers to choose your product. On the other hand if you choose a different pricing model from the competitors in your market it can become harder for customers to compare. An interesting example of this is a cloud hosting provide, GoGrid. GoGrid use to charge based on the number of Gigahertz Hours that were used. Gigahertz hours represent the amount of CPU cycles that are actually used. In comparison its major competitors, such as Amazon EC2, charge based on the number of hours you have access to the CPU, regardless of whether you use it or not. GoGrid’s pricing model turns out to be cheaper for most customers. However, it was difficult for customers to understand and compare with the competition. Once they adopted a model comparable to the rest of the market they found their sales increased significantly and the sales team was no longer spending most of their time explaining the way their pricing worked.