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This post is NOT about pricing.
Pricing is how you assess the value of something you offer to the buyer and then quantify it in terms of commercial value (in some form of currency). There are several great books on it, and if you are a regular Harvard Business Review Reader, You have plenty of articles to glean from.
PS : If you are serious about entrepreneurship, Invest in a HBR Membership. The two publications that I’ve learnt a lot from are HBR and secondly Fastcompany - though the latter isn’t what it used to be.
Let's talk about Pricing Plans
I want to talk about pricing plans - as in how do you ask your customers for money.
The Basic : Offer your service to a customer and ask them to pay. If you are a really expensive service, perhaps you’ll even align with a financial service provider and help your customer to get a loan - but as far as you are concerned, when inventory leaves your warehouse, money comes in.
SaaS : offer your software to a customer and ask them to pay in a monthly recurring manner (Instead of CAPEX, You are now OPEX).
Rental : The same as SaaS, except that there is perhaps a hardware or asset involved - which also means there is servicing costs attached to maintaining the asset. Eg. Rent a Runaway or Furlenco - or something as basic as your apartment or office space.
Retainer : If you are a service provider, you can charge a monthly retainer - which has an inbuilt number of hours for the service you provide. Lawyers and consultants work in models like these.
Honestly, these are the four traditional ways of buying a product or service for a long time.
I’ve been noticing a fair bit of variable pricing models that folks are experimenting with and you might want to keep an eye on.
Group Buying - Groupon perhaps made this famous, but this was also the sale model. Typically if you have stagnant inventory and you know what quantity you want to get rid of, you’d slash prices and till stocks last, buyers get a chance to get a real deal!
Reverse Group Buying - There are sites like Massdrop (now called Drop) - where they have a new product launching and everyone knows that the greater the volume, the better the chance of the manufacturer to be able to negotiate a better deal with their supply chain partners. These are premium products and they want to get word of mouth to get influencers get their friends also to buy the product - and the more number of people sign up, the lower the price of the product becomes. I think this is a really interesting model - especially if you are launching a new product of service, and to activate word of mouth.
Pay what you want - there are a lot of folks who have experimented with this that this is even a feature in Instamojo. Events like Unpluggd have tried this, where they do the event and attendees at the end can decide what they want to pay. I’ve been part of a few webinars where instructors have followed the same model - I’ve found it a tad bit confusing without a sense of anchor pricing though.
There was this time I remember when a group of us who were running Incubators had gone to visit Stanford and we asked them how they charge their incubatees. I found their answer fascinating. They said, if we charge them an amount, they’d pay it and then it would be a transaction. But we don’t ask for any fixed % or amount and because of that when these companies become big and succeed, they usually donate millions by themselves and they continue to give out of gratitude.
Pay what you want but anchored - This solves the problem that customers have with the previous model. Sites like Humblebundle use this tactic. What they do is, they give you an average of what the previous users have paid - so now you have a price anchored and then they incentivize you to pay a bit more by giving something extra if you pay more than the past average. I remember picking up a bundle of games (including Cities Skylines) and if I paid a $1 more, I could also get the extra DLC content. It was a no-brainer. And I paid more than a $1 for it.
Bundling : A lot of resourceful sales folks use this strategy to maximise their chances of a deal to happen. Sites like Appsumo have thrived around this. Take a product, bundle it with 3 more - either your own or others, and suddenly there is disproportionate value being perceived.
So next time you are looking at pricing for a product or service, think how you could do it differently.
Imagine if schools didn’t charge a fee but said you can pay what you want. What would that look like? Or schools said, we won’t take a fee now, but would love to have you contribute a % of your future earnings to a trust, which will then contribute towards educating more students of the future? Would schools then get far more vested in the success of their students, rather than just teaching classes and sending them off to the next table?
How you price will have an impact on many things - your business model, and most of your cashflow. But it can also be a differentiator and it does something to you - it makes you vulnerable to the customer and makes the customer act generous (especially if you do these variable models) - and that in turn creates a soft spot, and even a builds a brand.
Are there other interesting pricing models that you’ve come across or even better - experimented with? I’d love to hear more!
Coming up on Blackbook Ideas : The Hypermedia Opportunity
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