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Pricing for a Subscription Business
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Building InnovativeSubscription-based
BusinessesBUS-185
Lecture 3: Pricing for a Subscription Business
Martin Westhead
Strategic Pricing How to think about pricing
Subscription Pricing models Tools of the Trade Pricing model tips
Ning’s Price Story
Managing Change
Strategic Pricing“The Strategy and Tactics of Pricing”
Nagle, Hogan, Zale
How not to price Cost-plus pricing
Costs plus margin (fair price)
Customer-driven pricing
What does customer think its worth?
Market share-driven pricing
Set price to drive market share targets
Strategic Pricing Objective: profitability
Holistic approach Product definition Differentiated benefit -> “fair” premium price Creative revenue collection to reflect value Varying price to use fixed costs optimally Mitigate aggressive competitors and buyers
Three Principles of Strategic Pricing
Value-based Prices should be set and changed to reflect value
Proactive Anticipate disruptive events
Customer negotiations Competitive threat Technological change
Develop strategies in advance to deal with them
Profit-driven Success is defined by earnings Not revenue vs competition
Strategic Pricing Pyramid
Value Creation
Product-Led
Customer-Led
Price Structure Simple: price per unit
$ per gallon $ per month
Add complexity to value-segment customers Each segment derives different value Airline tickets pleasure vs. business Ryanair
€5 print ticket, €20 stroller, €3 front of line 6 extra seats by removing 2 of 3 toilets on 737 C.E.O plan to charge for the bathroom
Add complexity to establish reference price
Price and Value Communication
Justify prices in terms of value Ads: “I am a Mac” Sales process: 10-15% revenue increase
Search Goods vs. Experience Goods Specific and general differentiation
respectively
Psychological vs. monetary benefits Implicit vs. explicit
Stage in the buying process Value to price
Pricing policy Customer price resistance caused by
Product not offering expected value Customer does not understand value Price too high relative to value Customer learned: Resistance => Lower
prices
Pricing Policy Rules or habits for varying price Empower sales team to hold price but offer
deals E.g. unbundling features, lowering SLA etc.
Price Level Pricing objective
Skimming, neutral, penetration
Price/Volume trade-offs
Estimating Response (Price sensitivity) Experimentation Intention surveys Structured inference Incremental implementation Simulation
Concepts: “Fair” price Public perceptions
Dark ages: merchants hung for exceeding “just price” Today: criticism, public boycotts, regulatory issues Oil companies: “gouging” after Hurricane Katrina Disney World: expensive, profitable, acceptable
Beer test – friend to buy beer: Grocery store $1.50 Resort hotel: $2.65
Sellers motivation
Necessities vs. luxuries
Key lesson: Set regular price high and discount Instead of adding charges
Concepts: Reference price Reasonable price for a product
Benefit of adding a top tier price point Shifts reference price up
Explicit reference price “Was $1000, Now $799” “Their price $1000, Our price $799”
Order of price presentation
Subscription Pricing ToolsHints and tips
Pricing models Recurring payment
Billing Period Term
Fixed Charges
Tiered plans
Add-on Plans
Advanced vs Arrears
Usage Based
Credits and Virtual Currency
Trials and Discounts
Tools of the Trade
Pricing Model tips Simplicity
Reflect customer value
Don’t be afraid to charge high prices Ramit Sethi,Patrick McKenzie"Why
Your Customers Would Be Happier If You Charged More.”
Let customers sample the value Trials, Fremium
Discount your long term pricing
http://chargethru.com/profiles/blogs/6-tips-for-choosing-the-right-pricing-model
Price presentation tips End With a 9
Shorter Prices Look Less Expensive $49 looks a lot more appealing than $49.00 $1,000 looks more expensive than $1000
Anchor Your Price "The best place to sell a $500 pen is next to a
$10,000 pen.”
Offer Multiple Choices 3 versions: bare bones, choice, VIP
Always Be Testing
http://www.quora.com/How-should-one-go-about-pricing-their-software-product
Ning’s Pricing StoryGoldilocks and the Three Price Points
Freemium Ning
Subscription Ning
Price Change
New Top Tier
Usage based pricing
Managing Change Netflix
$8B market cap loss After announcing price change Opps!
Subscriptions are relationship focused
Ning 3 changes Strong customer community Foster customer supporters Manage communication Message value
Further Reading Pricing Parade
Secrets to Innovative Pricing and Packaging
Guest Lecturer
Andy WoodsProduct Manager,
Zuora
Exercise 1: Choose a business
Next Week Discussion Forum on ChargeThru
Choose a subscription business: A start up or established Digital or non-digital product Real or speculative Innovative use of subscription
Presentation to the class on: Outline of the business model Why did you choose it (what’s innovative) Details about their use of subscription