How can entrepreneurs determine an appropriate price for their product?

Take-aways from a talk in the Trust Center on 7/20/16

Pricing formula – measuring your added value

Va – Pa > Vb – Pb

Pa < Pb + (Va-Vb)

Where:

Va = the value your customers get from using your product

Vb = the value your customers get from using other products (competition/ do-nothing)

Pa = the price your customers will pay you

Pb = the price your customers pay currently (competition/ do-nothing)

 

  • Remember – pricing is $! The value should be translated to numbers.
  • Easier to quantify the value in the B2B space (can use analytics, cost savings…)
  • If your competitors already have a product out there, their price will serve as an anchor.
    • Could be beneficial if they are more expensive - customers are not surprised.
    • Be careful not to price too low - your price signals the quality of your product: if you start with low price it might be harder for you to move to high end adjacent markets.
  • A few techniques that will help you put $ when demonstrating the value to business customers:
    • Demonstrate cost saving - learn what your customer is spending money on today. For example: increase in consumer loyalty to save money: “I will save you $X in customer acquisition cost”
    • Creating new revenue streams for your customer – how can your technology be leveraged to gain more money - for example: earning more from advertising.

Platform business (two sided markets)

  • In your pricing model focus on the side that is the paying customer
  • Think about WHO you want to attract. You shouldn’t only think of the people who are willing to pay.  Also think: who really cares about the # of people already on the platform or cares about WHO’s on the platform. These customers might join after they see enough scale/ other influencers connected.
  • You need to think not only about pricing one unit (like in tangible products) but about creating revenue long term (how will I be X times more profitable in 2 years than month zero?)

Consumer markets

  • Framing your price is crucial for creating the right consumer perspective.
  • Two things to consider:
    • How many prices do we want a customer to see? The best answer is 3! When you have 3 price points, the majority of customers will choose the middle one. (psychological effect- the compromise effect). So they price you really aim for should be the middle one.
    • Presenting your prices as a signal for your value.
      • Your price signals your product’s value: people bought 25% more for $39 priced dress than they did for $34 (same product).
      • People associate even ending with product quality (99% will go for a laser surgery priced $1000 than the same one for $999)
      • In B2B – which one is better? $2.99/$3.00/$3.XX ? - Companies will in most cases choose $3.XX priced products because they seem more complicated- it seems like the price is based on some complicated model and this gives credibility.
      • The “pennies per day strategy”- You can change people’s price perception by presenting your price in small fractions (example: per day instead of per year…)

Pricing architecture: who/ what/ how?

  • You need to think of pricing from the perspective of your customers. How much is your product going to save him? Add value to him? What model makes sense for him?
  • Recurring payments: per week/ month/ season?
  • The “taxi meter effect” - this is a horrible experience for customers and they will actually pay more to avoid this experience. The more you can make your service all-inclusive this is great.
  • What’s hard to change is the HOW - the pricing model. It is easier to change the actual prices but the model is sticky.
  • You can always add “feel prices” without adding free products. For example: adding free customer support.

Pricing differently for different price segments

  • Learning about consumers’ willingness to pay through asking them can be challenging: people will not always say their true WTP:
    • Give low prices to get better deals.
    • Say they’re WTP is high to be nice to you but will not actually pay this price.
  • Instead of asking directly, use a technique called monadic survey: divide your pool of respondents to 1/3, 1/3, 1/3 (randomized). Ask each team about a different price points (3 price points) but every person can only see one price point.
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