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PRICING STRATEGIES
FOR STARTUPS
OMAR MOHOUT
GROWTH ENGINEER
Omar Mohout 2
ONE TWO THREE FOUR
Contents
FIVE SIX SEVEN
PRICING PRICING METHODS MULTI-AXIS PRICING PRICING STRATEGIES
FREE OR PAID FINAL WORDS CONCLUSIONS
Slides 3-9 Slides 10-13 Slides 14-17 Slides 18-21
Slides 22-25 Slides 26-27 Slides 28-29
PRICING
You can always pay cheaper,
but is this what you want?
Pricing Determines Your Market Position
Commitment of money is
a very powerful validation of
your business model.
The price your customers are willing to
pay validates to which degree you have
nailed the solution.
Pricing is one of the most sensitive
topics in business. It will determine your
market position, whether or not your
customers can buy from you, the sales
and distribution channels and whether
or not you can provide the level of
service expected by your customers.
Most of us determine prices using
competitive research and / or cost
estimates. A high price may result in less
customers whereas a lower price can be
seen as leaving money on the table.
Often, the price stays where it is, never
knowing how many more customers you
could have had or how much money
you're leaving on the table.
Price is the dominant factor for
your profitability.
Omar Mohout 4
A price increase of 1% results
in 11% increase in profit.
1%
11%
Omar Mohout 5
The Relationship between Price and Customers
A higher price means less customers.
At a $10 price point: 500
customers will buy.
At a $20 price point: 300
customers will buy.
At a $50 price point: 50
customers will buy.
At a $100 price point: 5
customers will buy.
$10 $20 $50 $100
500
300
50
5
The Optimal Price-Customers Tandem
Omar Mohout 6
$100
$50
$20
$10
500300505
Correlating price points with potential clients is
called in economics, the demand curve.
$6.000
$5.000
$2.500
$0
50030050
Multiply the number of potential clients with
the respective price points to find the optimal
price-customers tandem to maximize revenue
$20 is the optimal price
The optimal price provides the maximumrevenue
not the highest margin or the largest number of customers.
Setting the Right Price
Price is not what you think you
can charge, but what your
customers are willing to pay
based on the perceived value.
Traditionally, the price is the sum between
cost and profit, which means that in order
to determine your profit, you need to
subtract the cost from the price, which
is known as lean thinking.
A better way to determine your profit is :
Sales – Fixed cost – Variable cost.
The better way for Start-ups to improve
margins is to increase volume with the
same fixed costs and less variable costs.
It should go without saying that the price
must always be higher than costs.
Omar Mohout 7
Before setting the price, you need to ask
yourself the right questions:
• Why would people pay for my services
or products?
• What value will customers get from my
offering?
Once you identify the reason why
potential customers are willing to pay, you
can create a business model to capture
that value. In doing so, you need to have a
clear understanding of your product’s or
service’s value before you set the right
price.
Omar Mohout 8
Delivering Value
What type of value are you
delivering? Make sure your
product or service offers more
than what the customers pay for.
The value hierarchy is the order of values
that influence business decision making.
Those values are:
Features
A product’s features represent the basic
level of value delivered.
Advantage
The advantage that a product offers.
This is a characteristic that competitive
products don’t have.
Benefit
The benefit is the impact of your product
on the customers’ business often
measured as Return on Investment (ROI).
Benefit of the Benefit
At the end of the day, the decision maker
is a person that will take a risk with
adopting your product in the organization.
Often it’s important to understand what’s
in it for them to make the decision. This
value is called the benefit of the benefit
The Pain of the Pain
The pain of the pain is having a solution
for a problem that is a pain in itself.
INCREASE
REVENUE
DECREASE
COSTS
REDUCE
RISK
Omar Mohout 9
Factors Influencing Pricing
For a trader, selling is buying.
The purchase cost drives 80% of
the sales price.
For a manufacturer, selling is production-
efficiency. The production cost drives
80% of the sales price.
For products based on Intellectual
Property, such as software, SaaS and
web services, cost is driven by two major
factors: the cost of sales and the level of
support you want to provide.
VALUE
Need (B2C) vs. Pain (B2B)
Return on Investment (ROI)
Must Have vs. Nice to Have
CLIENT ALTERNATIVES
Doing nothing is #1 alternative
Alternative is often the use of
Excel
COST
Variable Cost
Fixed Cost
Internal Cost Structure
MARKET
Type and Length of Contracts
Competition
Regulation
$$$
PRICING
METHODS
There are 11 different pricing methods you can use
Omar Mohout 11
Pricing Methods
1. SILICON VALLEY RULE OF THUMB
We charge this much because our
customers get at least 10 times that much
value. In other words the ROI is at least
10:1. You need to really understand
your customers and the value you
are delivering.
2. CUSTOMER INTERVIEWS
Don’t ask the customers for ballpark
pricing. It is better to explain your pricing
model. Usually the right price is the one
your customers accept, but with a little
resistance. Keep in mind that Price
Objection is in fact Value Objection.
It’s not the price that they are not happy
with. It’s the value they don’t like. You
need to know the customers’ willingness
to pay (value perception) and their ability
to pay (how, when, why, where, how).
5. GOOGLE-ADS
Lookup the cost per click for relevant
search words, using Katalict. The price
of a “word” is a starting point to calculate
the cost of sales.
Fill in an estimate of your sales funnel
costs, conversion rates and the lead value.
The ratio between the cost estimate and
revenue estimate is the ROI for the sales
funnel. The simulation will result in the
cost of sales, often the largest cost driver
for Start-ups.
3. INDUSTRY BENCHMARK
The license model typically charges about
3 to 5 times as much as the SaaS model
for a lifetime license.
Calculate back, based on industry gross
margins: Software = 70 - 95%,
SaaS =60 - 80%.
This is a very effective method but it
requires that you know your cost
structure very well.
4. BREAK-EVEN POINT
You need to determine the potential
revenue, costs and margins. What is
the right price which ensures you have
a viable business? Simulate with halved
assumptions as Start-ups tend to
overestimate revenue and
underestimate costs.
LINK : KATALICT
7. DECOY EFFECT
Consider 2 USB keys. The majority will buy
USB key B since it provides much more
value for money comparing it to Key A.
When adding a cheaper USB key than the
initial two, the purchase will shift to Key A
thanks to the introduction of the Key C
decoy.
Omar Mohout 12
Pricing Methods
8. “BUY VS. BUILD” PSYCHOLOGY
Using this method, you can price your
product—on an annual basis—at 10% of
the equivalent "build" price if the
customers want to build it themselves.
For example, if the customer has to pay
$100,000 for building a similar product,
you can price your product at $10,000 per
year. In other words, you will provide your
customers 10 years of outsourced value
without a huge upfront cost.
As additional benefit, the customers get a
product that will continually improve,
compared to a static product they build
themselves.
6. ANCHORING BENCHMARK
People can only understand relative value,
not the absolute one. Anchoring is
probably the most powerful force in
today’s economics as you can compare
your product or service to something
much expensive.
Take Steve Jobs for example. He
compared the $499 iPad versus a $999
laptop, making the iPad seem
inexpensive. Retailers are mastering this
art of using “suggested retail price” as
anchor, making your “special” price look
like a good deal.
A B
32GB
$29 $39
64GB
A B C
32GB
$29 $39
64GB 8GB
$25
Omar Mohout 13
Pricing Methods
9. PRICING – DISTRIBUTION FIT
You need to ensure you have the margins
to accommodate resellers, distributors,
agents or affiliates. If you have a 40%
gross profit margin and a distributor
needs a 70% discount off the price, you’re
forever limited to direct-to-consumer.
You can still increase your pricing and
margins after-the-fact, or launch new
"premium" products to fix this problem.
10. COMPETITION
You stack all of your competitors on a
pricing spectrum and decide where you
want to position yourself. The benefit of
this method is the use of external data
indicators that guide the pricing process.
Part of it is still guessing, because most
products are not completely the same.
You should never underestimate the
pricing power of established brands when
setting your price. At least you have a
fairly accurate view of the market.
11. INDUSTRY AVERAGE
The monthly average price point on a per
user basis, is between $26 and $75, with
the initial sale ranging from 6 to 50 users.
Typical discounts are 7-15% to those
customers that opt for longer agreements.
You should remember that churn is the
number 1 SaaS killer*.
*Source: Softletter Research
MULTI-AXIS
PRICING
A must for a freemium business model
Omar Mohout 15
Features, Users and Usage
The aim of multi-axis pricing is to increase
revenue. It allows you to capture more
revenue without putting off smaller
(budget) customers. In addition, it enables
to grow revenue from existing customers.
Multi-axis pricing is aligning value creation
with pricing as there are different types of
users extracting different levels of value
from your product or service. If done well,
it will lower the threshold for purchasing
while maintaining a path to grow the
customers as the usage increases.
Multi-axis pricing is often around the
following axis: Product Features,
Users and Usage.
Don't use more than 3 axis as
the human brain cannot process
more than 3 dimensions.
1. PRODUCT FEATURES
This is the most common way.
More functionality means higher price.
2. USERS
The more users using the product, the
higher the value creation and therefore
they pay a higher price (note that the price
per user is going down in this scenario).
3. USAGE
More disk-space (Dropbox), more email
addresses (MailChimp), etc. are indications
of a higher value creation and therefore
justifies a higher price.
The most common axis of pricing
Omar Mohout 16
Features, Users and Usage
These 3 axis are the most common ones.
But it is perfectly possible to have pricing
based on a service level agreement axis
as well:
Free: users need to find answers to their
questions in a FAQ.
Price X: users can email questions and
receive an answer within a number of
working days.
Price Y: users can call a hotline during
office hours in the specific time zone of
the company (not according to the
customer location)
Price Z: users can call a hotline 24x7x365
FEATURES
USERS
Basic Edition
Professional Edition
Enterprise Edition
DEPTH OF USAGE
Mailing List Size
Database Size
Amount of Storage Used
Note that the Users and the Usage axis,
also impact your cost structure, so it
makes perfect sense to put some limits or,
even better, capture additional revenue.
Omar Mohout 17
Salesforce.com is the biggest SaaS company in the
world and active since 1999. It’s an excellent case
as a benchmark for best practices. The pricing of
Salesforce.com is based on 2 axis : Features and
User Limitation.
Salesforce.com is using 1 and 2 year contracts and
their monthly pricing is purely a marketing feature.
It’s not because of the fact that the Salesforce.com
pricing is displayed on the website that it’s fixed.
You can contact the call centre to negotiate
a volume discount.
For Salesforce.com, providing support and training
to their customers is not a cost but an additional
source of revenue.
Case Study
The Pricing Model of Salesforce.Com
“Basic Support” is included in the price but in reality this is just FAQ.
“Premier Support” is +15% (except for Unlimited Editions)
“Premier Training” is available.
Contact Manager
Group
Professional
Enterprise
Unlimited Editions
FEATURES
5 Maximum for Group
and Contact Manager editions
USER LIMITATION
PRICING
STRATEGIES
Additional elements to consider for your pricing strategy
Omar Mohout 19
Set a Reasonable Price
PRICE ELASTICITY
Visit the graveyard to see companies that cut prices by 15%
to 20% to “cross the chasm”. Without doubt you need a
“reasonable” price. Reducing it further might not cause
sales growth but it will surely damage margins.
Instead of cutting prices, consider reducing adoption risk
by offering a performance guarantee or an attractive low-risk
financing package.
NEGOTIATING B2B “BIGGER DEALS” PRICING
In order to negotiate bigger B2B pricing deals you need to make
sure you understand the market, your options and the other side’s.
You should also identify your absolute walk-away outcome and
decide on your ideal outcome.
It’s the side that has the most information who controls the deal.
Just ask questions and don't make statements. Everything is
negotiable, so negotiate everything. If the price is “too high”,
ask the following key questions:
• What is the number the customer is thinking of ?
• How did they come up with that number ?
“Instead of cutting prices, consider reducing
adoption risk.”
“It’s the side that has the most information who
controls the deal.”
Omar Mohout 20
Discounts and “Special” Prices
DISCOUNTS
Discounts work well for companies that compete based on price
and not on differentiation. Start-ups should give temporary
discounts only to prove product value (it is not lowering the price,
it is lowering the order for the specific time period).
Discounts are linked to upfront payments (i.e. pay for 12 months
and get 2 months free). The formula is simple: if the discount is
lower than the cost of capital, go ahead and bootstrap the
customer to finance your growth.
PILOT CUSTOMERS
When dealing with pricing for pilot customers, you should never
do it for free. Instead negotiate a cost and a margin deal to pilot
the service. Keep in mind that an important condition for a pilot is
to build a relationship based on mutual trust.
It’s is ok for you to make money on the deal, businesses that don't
make money don't stick around to work with them in the future.
“Discounts work well for companies that compete
based on price”
“Negotiate a cost and a margin deal to pilot the
service”
Omar Mohout 21
In a two-sided marketplaces, the side with the highest
price sensitivity receives a subsidy in order to stimulate
demand from the other side.
AIRBNB
The host received a fee to cover the cost of processing
customer payments (subsidy). Why? There are free
listing services in the market which create a barrier for
hosts to pay Airbnb high listing rates. Buyers are price
sensitive too, but Airbnb often is well below higher
priced market alternatives (e.g., hotels / BnBs).
PAYPAL
The existing customers receive a subsidy ($10) for each
new user they invite. At the same time, those new
users get $10 too. The merchant gets a better deal
compared to the transaction cost of credit cards.
Two-Sided Marketplaces : Airbnb & Paypal
AIRBNB PAYPAL
Case Study
FREE OR PAID
Should your customers pay for using your product?
Omar Mohout 23
The Freemium Approach
Make sure you establish the purpose of
your free package. Is it aiding viral growth
or is it hooking customers onto your
product and upsell them other products
later on?
You should also determine your ideal
ratio of free vs paid customers, in order
for you to run a sustainable and scalable
business.
Your goal should be eating up your
competitor's market share and NOT
cannibalizing your own offer. Often
freemium is a way to go from B2C (free)
to B2B (premium).
The freemium approach is Tease, Please and Seize.
There isn't a standard template solution.
B2B is twice of B2C
(i.e. Evernote = 6%; Yammer = 15% conversion)
A typical Freemium service is 0.5% to 5% conversion range
TEASE PLEASE SEIZE
Omar Mohout 24
The Freemium Approach
“A good free plan ideally should
be similarly to a free trial.”
Start with the premium part of freemium
first. Since your eventual goal is to charge
for your product anyway, why not start
there? You can always offer a free plan
later, like MailChimp did.
A good free plan ideally should be
similarly to a free trial. The difference is
that while a free trial is time-based,
freemium is usage-based.
Unless you’re deriving monetary value
from free users, the freemium model is
less of a business model and more of a
marketing tactic to fill your pipeline with
potential prospects.
Pricing is one of the riskiest and most
critical part of the business model and
should be tested early on. Freemium
delays this learning.
Even though the operational cost of
carrying free users may seem low, they
aren’t zero. Unless free users are adding
participatory value (such as network
affects) they are an expense.
FREE TRIAL
Time Based
FREEMIUM
Usage Based
Omar Mohout 25
Display and Transactional Pricing
DISPLAY PRICING
Visitors to your website or landing page
can be divided into:
• Prospects who can't afford you.
• Prospects who can afford you but were
planning to spend less.
• Prospects who were expecting to pay
exactly what you charge.
• Prospects who were expecting to pay
more.
The main question is: how big is
each group?
TRANSACTIONAL PRICING
Companies work with forecasts and
budgets, therefore predictability is valued
highly. Transactional pricing is perceived
as a risk such as the inability to plan
spending.
Exception are industries that have a
transactional based business model: i.e.
per seat (airlines), per subscription (media),
per transaction (banks) etc.
If you have to choose between who signs
up quicker and who pays the most, pick
the former as they are early adopters and
have a better influence on your product.
In this case the cost of sales is lower and
even if they pay less money, it will be
easier to hit your target growth rate
early on.
You should also try to adapt your
message to the different groups:
"We're more expensive but we're better.
Here's why...“
FINAL WORDS
Nothing Lasts Forever
Omar Mohout 27
Remember to Revisit Pricing
Pricing is not a one-time, set-it-and-forget-
it deal. Entering new markets, target
different segments, inflation-index,
new features etc. can be a reason to
revisit pricing.
A pricing strategy is a process that utilizes
multiple tactics. Unfortunately there is no
“one-size-fits-all” answer when it comes to
developing a pricing strategy. Pricing can
be validated but not made by anyone else
than yourself. Every paying customer is an
achievement so go find out why they pay.
Make sure you don’t over-engineer your
pricing strategy and make it difficult to
understand. Pricing is also a function of
marketing. Cash Flow is as important as
pricing, seeing that it’s the only reason
why business die.
Pricing is all about setting the
right perception: water is more
useful than diamonds, yet it is a
lot cheaper.
LINK : PAY NOW MODEL
LINK : PAY LATER MODEL
LINK : PAY NEVER MODEL
REVISIT
PRICING
CONCLUSIONS
Things to consider when setting the right price
Omar Mohout 29
The Dos and Don’ts Of Pricing
Research the optimal price per customer to maximize
revenue
Price is a continues process
Understand why customer will pay you (value)
Use industry gross margin as starting point
Use tactics such as anchoring and decoy
Take into (margin) account the possibility to work with
partners
Start with the premium part of freemium
Offer transactional pricing to transactional businesses
only
Pricing is a function of marketing
Take Cash Flow into account
Set-it and forget-it
Cut prices to sell more
Overestimate Customer Lifetime Value
Ask clients for ballpark pricing
Underestimate cost structure
Over engineer or use more than 3 axis for pricing
Give discounts that aren't limited in time
Do pilots for free
Use freemium as a vanity metric
Subsidize the wrong side or both side in a two-sided
market model
DOs DON’Ts
These are rules, not laws
LEAN PRICING
THE BOOK
More business cases
More pricing examples
More guidance
Leading practices
Pricing methods explained in detail
ORDER NOW
Omar Mohout
Author of
Lea(r)n Pricing
and Lea(r)n Marketing
Let’s Get in TouchLinkedin
OmarMohout
Twitter
@omohout
Slideshare
omohout

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Lean pricing startups

  • 1. PRICING STRATEGIES FOR STARTUPS OMAR MOHOUT GROWTH ENGINEER
  • 2. Omar Mohout 2 ONE TWO THREE FOUR Contents FIVE SIX SEVEN PRICING PRICING METHODS MULTI-AXIS PRICING PRICING STRATEGIES FREE OR PAID FINAL WORDS CONCLUSIONS Slides 3-9 Slides 10-13 Slides 14-17 Slides 18-21 Slides 22-25 Slides 26-27 Slides 28-29
  • 3. PRICING You can always pay cheaper, but is this what you want?
  • 4. Pricing Determines Your Market Position Commitment of money is a very powerful validation of your business model. The price your customers are willing to pay validates to which degree you have nailed the solution. Pricing is one of the most sensitive topics in business. It will determine your market position, whether or not your customers can buy from you, the sales and distribution channels and whether or not you can provide the level of service expected by your customers. Most of us determine prices using competitive research and / or cost estimates. A high price may result in less customers whereas a lower price can be seen as leaving money on the table. Often, the price stays where it is, never knowing how many more customers you could have had or how much money you're leaving on the table. Price is the dominant factor for your profitability. Omar Mohout 4 A price increase of 1% results in 11% increase in profit. 1% 11%
  • 5. Omar Mohout 5 The Relationship between Price and Customers A higher price means less customers. At a $10 price point: 500 customers will buy. At a $20 price point: 300 customers will buy. At a $50 price point: 50 customers will buy. At a $100 price point: 5 customers will buy. $10 $20 $50 $100 500 300 50 5
  • 6. The Optimal Price-Customers Tandem Omar Mohout 6 $100 $50 $20 $10 500300505 Correlating price points with potential clients is called in economics, the demand curve. $6.000 $5.000 $2.500 $0 50030050 Multiply the number of potential clients with the respective price points to find the optimal price-customers tandem to maximize revenue $20 is the optimal price The optimal price provides the maximumrevenue not the highest margin or the largest number of customers.
  • 7. Setting the Right Price Price is not what you think you can charge, but what your customers are willing to pay based on the perceived value. Traditionally, the price is the sum between cost and profit, which means that in order to determine your profit, you need to subtract the cost from the price, which is known as lean thinking. A better way to determine your profit is : Sales – Fixed cost – Variable cost. The better way for Start-ups to improve margins is to increase volume with the same fixed costs and less variable costs. It should go without saying that the price must always be higher than costs. Omar Mohout 7 Before setting the price, you need to ask yourself the right questions: • Why would people pay for my services or products? • What value will customers get from my offering? Once you identify the reason why potential customers are willing to pay, you can create a business model to capture that value. In doing so, you need to have a clear understanding of your product’s or service’s value before you set the right price.
  • 8. Omar Mohout 8 Delivering Value What type of value are you delivering? Make sure your product or service offers more than what the customers pay for. The value hierarchy is the order of values that influence business decision making. Those values are: Features A product’s features represent the basic level of value delivered. Advantage The advantage that a product offers. This is a characteristic that competitive products don’t have. Benefit The benefit is the impact of your product on the customers’ business often measured as Return on Investment (ROI). Benefit of the Benefit At the end of the day, the decision maker is a person that will take a risk with adopting your product in the organization. Often it’s important to understand what’s in it for them to make the decision. This value is called the benefit of the benefit The Pain of the Pain The pain of the pain is having a solution for a problem that is a pain in itself. INCREASE REVENUE DECREASE COSTS REDUCE RISK
  • 9. Omar Mohout 9 Factors Influencing Pricing For a trader, selling is buying. The purchase cost drives 80% of the sales price. For a manufacturer, selling is production- efficiency. The production cost drives 80% of the sales price. For products based on Intellectual Property, such as software, SaaS and web services, cost is driven by two major factors: the cost of sales and the level of support you want to provide. VALUE Need (B2C) vs. Pain (B2B) Return on Investment (ROI) Must Have vs. Nice to Have CLIENT ALTERNATIVES Doing nothing is #1 alternative Alternative is often the use of Excel COST Variable Cost Fixed Cost Internal Cost Structure MARKET Type and Length of Contracts Competition Regulation $$$
  • 10. PRICING METHODS There are 11 different pricing methods you can use
  • 11. Omar Mohout 11 Pricing Methods 1. SILICON VALLEY RULE OF THUMB We charge this much because our customers get at least 10 times that much value. In other words the ROI is at least 10:1. You need to really understand your customers and the value you are delivering. 2. CUSTOMER INTERVIEWS Don’t ask the customers for ballpark pricing. It is better to explain your pricing model. Usually the right price is the one your customers accept, but with a little resistance. Keep in mind that Price Objection is in fact Value Objection. It’s not the price that they are not happy with. It’s the value they don’t like. You need to know the customers’ willingness to pay (value perception) and their ability to pay (how, when, why, where, how). 5. GOOGLE-ADS Lookup the cost per click for relevant search words, using Katalict. The price of a “word” is a starting point to calculate the cost of sales. Fill in an estimate of your sales funnel costs, conversion rates and the lead value. The ratio between the cost estimate and revenue estimate is the ROI for the sales funnel. The simulation will result in the cost of sales, often the largest cost driver for Start-ups. 3. INDUSTRY BENCHMARK The license model typically charges about 3 to 5 times as much as the SaaS model for a lifetime license. Calculate back, based on industry gross margins: Software = 70 - 95%, SaaS =60 - 80%. This is a very effective method but it requires that you know your cost structure very well. 4. BREAK-EVEN POINT You need to determine the potential revenue, costs and margins. What is the right price which ensures you have a viable business? Simulate with halved assumptions as Start-ups tend to overestimate revenue and underestimate costs. LINK : KATALICT
  • 12. 7. DECOY EFFECT Consider 2 USB keys. The majority will buy USB key B since it provides much more value for money comparing it to Key A. When adding a cheaper USB key than the initial two, the purchase will shift to Key A thanks to the introduction of the Key C decoy. Omar Mohout 12 Pricing Methods 8. “BUY VS. BUILD” PSYCHOLOGY Using this method, you can price your product—on an annual basis—at 10% of the equivalent "build" price if the customers want to build it themselves. For example, if the customer has to pay $100,000 for building a similar product, you can price your product at $10,000 per year. In other words, you will provide your customers 10 years of outsourced value without a huge upfront cost. As additional benefit, the customers get a product that will continually improve, compared to a static product they build themselves. 6. ANCHORING BENCHMARK People can only understand relative value, not the absolute one. Anchoring is probably the most powerful force in today’s economics as you can compare your product or service to something much expensive. Take Steve Jobs for example. He compared the $499 iPad versus a $999 laptop, making the iPad seem inexpensive. Retailers are mastering this art of using “suggested retail price” as anchor, making your “special” price look like a good deal. A B 32GB $29 $39 64GB A B C 32GB $29 $39 64GB 8GB $25
  • 13. Omar Mohout 13 Pricing Methods 9. PRICING – DISTRIBUTION FIT You need to ensure you have the margins to accommodate resellers, distributors, agents or affiliates. If you have a 40% gross profit margin and a distributor needs a 70% discount off the price, you’re forever limited to direct-to-consumer. You can still increase your pricing and margins after-the-fact, or launch new "premium" products to fix this problem. 10. COMPETITION You stack all of your competitors on a pricing spectrum and decide where you want to position yourself. The benefit of this method is the use of external data indicators that guide the pricing process. Part of it is still guessing, because most products are not completely the same. You should never underestimate the pricing power of established brands when setting your price. At least you have a fairly accurate view of the market. 11. INDUSTRY AVERAGE The monthly average price point on a per user basis, is between $26 and $75, with the initial sale ranging from 6 to 50 users. Typical discounts are 7-15% to those customers that opt for longer agreements. You should remember that churn is the number 1 SaaS killer*. *Source: Softletter Research
  • 14. MULTI-AXIS PRICING A must for a freemium business model
  • 15. Omar Mohout 15 Features, Users and Usage The aim of multi-axis pricing is to increase revenue. It allows you to capture more revenue without putting off smaller (budget) customers. In addition, it enables to grow revenue from existing customers. Multi-axis pricing is aligning value creation with pricing as there are different types of users extracting different levels of value from your product or service. If done well, it will lower the threshold for purchasing while maintaining a path to grow the customers as the usage increases. Multi-axis pricing is often around the following axis: Product Features, Users and Usage. Don't use more than 3 axis as the human brain cannot process more than 3 dimensions. 1. PRODUCT FEATURES This is the most common way. More functionality means higher price. 2. USERS The more users using the product, the higher the value creation and therefore they pay a higher price (note that the price per user is going down in this scenario). 3. USAGE More disk-space (Dropbox), more email addresses (MailChimp), etc. are indications of a higher value creation and therefore justifies a higher price. The most common axis of pricing
  • 16. Omar Mohout 16 Features, Users and Usage These 3 axis are the most common ones. But it is perfectly possible to have pricing based on a service level agreement axis as well: Free: users need to find answers to their questions in a FAQ. Price X: users can email questions and receive an answer within a number of working days. Price Y: users can call a hotline during office hours in the specific time zone of the company (not according to the customer location) Price Z: users can call a hotline 24x7x365 FEATURES USERS Basic Edition Professional Edition Enterprise Edition DEPTH OF USAGE Mailing List Size Database Size Amount of Storage Used Note that the Users and the Usage axis, also impact your cost structure, so it makes perfect sense to put some limits or, even better, capture additional revenue.
  • 17. Omar Mohout 17 Salesforce.com is the biggest SaaS company in the world and active since 1999. It’s an excellent case as a benchmark for best practices. The pricing of Salesforce.com is based on 2 axis : Features and User Limitation. Salesforce.com is using 1 and 2 year contracts and their monthly pricing is purely a marketing feature. It’s not because of the fact that the Salesforce.com pricing is displayed on the website that it’s fixed. You can contact the call centre to negotiate a volume discount. For Salesforce.com, providing support and training to their customers is not a cost but an additional source of revenue. Case Study The Pricing Model of Salesforce.Com “Basic Support” is included in the price but in reality this is just FAQ. “Premier Support” is +15% (except for Unlimited Editions) “Premier Training” is available. Contact Manager Group Professional Enterprise Unlimited Editions FEATURES 5 Maximum for Group and Contact Manager editions USER LIMITATION
  • 18. PRICING STRATEGIES Additional elements to consider for your pricing strategy
  • 19. Omar Mohout 19 Set a Reasonable Price PRICE ELASTICITY Visit the graveyard to see companies that cut prices by 15% to 20% to “cross the chasm”. Without doubt you need a “reasonable” price. Reducing it further might not cause sales growth but it will surely damage margins. Instead of cutting prices, consider reducing adoption risk by offering a performance guarantee or an attractive low-risk financing package. NEGOTIATING B2B “BIGGER DEALS” PRICING In order to negotiate bigger B2B pricing deals you need to make sure you understand the market, your options and the other side’s. You should also identify your absolute walk-away outcome and decide on your ideal outcome. It’s the side that has the most information who controls the deal. Just ask questions and don't make statements. Everything is negotiable, so negotiate everything. If the price is “too high”, ask the following key questions: • What is the number the customer is thinking of ? • How did they come up with that number ? “Instead of cutting prices, consider reducing adoption risk.” “It’s the side that has the most information who controls the deal.”
  • 20. Omar Mohout 20 Discounts and “Special” Prices DISCOUNTS Discounts work well for companies that compete based on price and not on differentiation. Start-ups should give temporary discounts only to prove product value (it is not lowering the price, it is lowering the order for the specific time period). Discounts are linked to upfront payments (i.e. pay for 12 months and get 2 months free). The formula is simple: if the discount is lower than the cost of capital, go ahead and bootstrap the customer to finance your growth. PILOT CUSTOMERS When dealing with pricing for pilot customers, you should never do it for free. Instead negotiate a cost and a margin deal to pilot the service. Keep in mind that an important condition for a pilot is to build a relationship based on mutual trust. It’s is ok for you to make money on the deal, businesses that don't make money don't stick around to work with them in the future. “Discounts work well for companies that compete based on price” “Negotiate a cost and a margin deal to pilot the service”
  • 21. Omar Mohout 21 In a two-sided marketplaces, the side with the highest price sensitivity receives a subsidy in order to stimulate demand from the other side. AIRBNB The host received a fee to cover the cost of processing customer payments (subsidy). Why? There are free listing services in the market which create a barrier for hosts to pay Airbnb high listing rates. Buyers are price sensitive too, but Airbnb often is well below higher priced market alternatives (e.g., hotels / BnBs). PAYPAL The existing customers receive a subsidy ($10) for each new user they invite. At the same time, those new users get $10 too. The merchant gets a better deal compared to the transaction cost of credit cards. Two-Sided Marketplaces : Airbnb & Paypal AIRBNB PAYPAL Case Study
  • 22. FREE OR PAID Should your customers pay for using your product?
  • 23. Omar Mohout 23 The Freemium Approach Make sure you establish the purpose of your free package. Is it aiding viral growth or is it hooking customers onto your product and upsell them other products later on? You should also determine your ideal ratio of free vs paid customers, in order for you to run a sustainable and scalable business. Your goal should be eating up your competitor's market share and NOT cannibalizing your own offer. Often freemium is a way to go from B2C (free) to B2B (premium). The freemium approach is Tease, Please and Seize. There isn't a standard template solution. B2B is twice of B2C (i.e. Evernote = 6%; Yammer = 15% conversion) A typical Freemium service is 0.5% to 5% conversion range TEASE PLEASE SEIZE
  • 24. Omar Mohout 24 The Freemium Approach “A good free plan ideally should be similarly to a free trial.” Start with the premium part of freemium first. Since your eventual goal is to charge for your product anyway, why not start there? You can always offer a free plan later, like MailChimp did. A good free plan ideally should be similarly to a free trial. The difference is that while a free trial is time-based, freemium is usage-based. Unless you’re deriving monetary value from free users, the freemium model is less of a business model and more of a marketing tactic to fill your pipeline with potential prospects. Pricing is one of the riskiest and most critical part of the business model and should be tested early on. Freemium delays this learning. Even though the operational cost of carrying free users may seem low, they aren’t zero. Unless free users are adding participatory value (such as network affects) they are an expense. FREE TRIAL Time Based FREEMIUM Usage Based
  • 25. Omar Mohout 25 Display and Transactional Pricing DISPLAY PRICING Visitors to your website or landing page can be divided into: • Prospects who can't afford you. • Prospects who can afford you but were planning to spend less. • Prospects who were expecting to pay exactly what you charge. • Prospects who were expecting to pay more. The main question is: how big is each group? TRANSACTIONAL PRICING Companies work with forecasts and budgets, therefore predictability is valued highly. Transactional pricing is perceived as a risk such as the inability to plan spending. Exception are industries that have a transactional based business model: i.e. per seat (airlines), per subscription (media), per transaction (banks) etc. If you have to choose between who signs up quicker and who pays the most, pick the former as they are early adopters and have a better influence on your product. In this case the cost of sales is lower and even if they pay less money, it will be easier to hit your target growth rate early on. You should also try to adapt your message to the different groups: "We're more expensive but we're better. Here's why...“
  • 27. Omar Mohout 27 Remember to Revisit Pricing Pricing is not a one-time, set-it-and-forget- it deal. Entering new markets, target different segments, inflation-index, new features etc. can be a reason to revisit pricing. A pricing strategy is a process that utilizes multiple tactics. Unfortunately there is no “one-size-fits-all” answer when it comes to developing a pricing strategy. Pricing can be validated but not made by anyone else than yourself. Every paying customer is an achievement so go find out why they pay. Make sure you don’t over-engineer your pricing strategy and make it difficult to understand. Pricing is also a function of marketing. Cash Flow is as important as pricing, seeing that it’s the only reason why business die. Pricing is all about setting the right perception: water is more useful than diamonds, yet it is a lot cheaper. LINK : PAY NOW MODEL LINK : PAY LATER MODEL LINK : PAY NEVER MODEL REVISIT PRICING
  • 28. CONCLUSIONS Things to consider when setting the right price
  • 29. Omar Mohout 29 The Dos and Don’ts Of Pricing Research the optimal price per customer to maximize revenue Price is a continues process Understand why customer will pay you (value) Use industry gross margin as starting point Use tactics such as anchoring and decoy Take into (margin) account the possibility to work with partners Start with the premium part of freemium Offer transactional pricing to transactional businesses only Pricing is a function of marketing Take Cash Flow into account Set-it and forget-it Cut prices to sell more Overestimate Customer Lifetime Value Ask clients for ballpark pricing Underestimate cost structure Over engineer or use more than 3 axis for pricing Give discounts that aren't limited in time Do pilots for free Use freemium as a vanity metric Subsidize the wrong side or both side in a two-sided market model DOs DON’Ts These are rules, not laws
  • 30. LEAN PRICING THE BOOK More business cases More pricing examples More guidance Leading practices Pricing methods explained in detail ORDER NOW
  • 31. Omar Mohout Author of Lea(r)n Pricing and Lea(r)n Marketing Let’s Get in TouchLinkedin OmarMohout Twitter @omohout Slideshare omohout