Choosing The Right Value Metric Is About What Fits!
Before landing on what pricing strategy you should adopt, keeping the customer at the center of it, is worth it all. When you think of consumer behavior, the assumption is that they are ‘value-conscious’ – that they will prefer paying the lowest possible price when they purchase a product or a service.
But that may not be the case!
A recent BCG study conducted across 18 regions (including USA, Canada, UK, Australia, South Africa, India, China, Brazil, Germany) and with a sample size of over 40,000 respondents reveals that the percentage who tend to choose the lowest-price option ranges from only 2% to 18%, depending on the category and market.
But it’s not just the ‘how much’ that customers are concerned about, but also the ‘how’ of it. So, what is the differentiating value metric that you need to consider when you want to price well? Jan Pasternak, a recognized Pricing and Packaging Leader, who has driven pricing for Microsoft, LinkedIn, Citrix and Coupang, shares some valuable insights. This passage is part of author Ajit Ghuman’s book, Price To Scale.
Two important elements to consider before addressing the difficulty in selecting an actual pricing model (like charging by number of seats, per interaction, data-volume driven, etc.) are:
- What is the customer accustomed to: The most important thing is to recognize and acknowledge what customers are used to. I tried using a pricing model like cost per action, instead of a flat rate, with the view that it would be more beneficial to the customer — and they didn’t like it because that’s not what they were used to. Being overly creative sometimes backfires.
- Demonstrate return on investment: This is the most difficult and alluring part in enterprise sales. The closer the pricing is related to the movement of customer money, the easier it is to sell. These are flexible pricing models that take a cut from the revenue.
Pricing is not necessarily always about what objectively generates the highest revenue.
It's about what fits.
Think American Express — they don’t own terminals, but just the standard, and make huge amounts of money for something like payment rails. But because they collect the money, when the customer makes money, there is no pushback, and their fees are paid — because there is no risk.
On the other hand, look at inexpensive Office solutions, for $9.99 or $19 a month. People question whether they will make enough interaction in that value, to justify the commitment of purchasing for a year.
That becomes a big conversation on how the customer wants to be charged. The more flexible, the better. The company, whichever round of financing it is in, should demonstrate to shareholders or investors that it has a stable source of revenue. Illustrating this is easier if you can demonstrate subscriptions and committed customers.