I have seen a lot of startups over the years. I often get asked to look over their pricing strategy, and nine out of ten times it is rarely a strategy. Usually it is a single price or something similar to the market leader in the industry.
And that’s ok! Having an idea of how others in the market price is a good start.
The problem is, it’s not a strategy.
Startups often focus on getting to the “magic number” rather than on the key questions they should be asking or the context the pricing strategy should operate in for the startup.
In the startup world, the goal is focus. Startups that have grown successfully, did so because they quickly removed ambiguity of where they are going early and often. They had a strategy or at least the makings of one.
If you can put in the effort to understand the problem at hand, then why are you “failing fast” by trying to do 200 things with your startup? It’s ok not to know what will work. Learning is part of the process. That starts by creating a plan that generate hypotheses you can test and iterate on. This is the food feeding your strategy blueprint.
Take Slack as an example. Founded in 2009, Slack took a focused 7 year journey to achieving product-market-fit. While the platform had use cases that went far beyond technology-based companies including large enterprises and SMBs, the leadership focused squarely on tech startups. The early Slack team was incredible focused. They focused squarely on their core customer rings that included tech startups in key startup ecosystems where team sizes were small. They wanted to grow with their customers who were not only willing to adopt the new platform but were also willing-to-pay because they connected with the value offered and delivered.
One exercise we do early-on with our clients is an evaluation of the existing strategy.
Look at your own current strategy, and ask yourself:
Does it help us transform our startup?
Can we do it well?
Will it enhance our acquisition strategy (and the unit economics)?
Does it scale?
Is it defendable with the resources and talent we have?
This should give you a starting point of your strategy’s strengths, weaknesses and gaps. This should also create a long-list of questions that require further research and fact/information-finding. As we often say to our clients, the discovery process never ends, just the simplicity of the approach.
This also gives you a chance to build creative ideas – or strategic choices – and build around this to quickly test and eliminate options. It is important to not only get outcomes, but understand why it didn’t work. If learning is not part of the process, you will blame the pricing. It’s not the pricing, it’s your approach.
If you’d like help thinking through your pricing strategy, contact us. If you have a pricing strategy that works – fantastic! Keep it going and look for ways to enhance it and evolve it as your startup continues to grow.
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Customer segmentation is a powerful tool for businesses and entrepreneurs.
Much like creating a business canvas, very few startups today skip doing a customer segmentation. When we surveyed more than 200 startups we found that more than 90% stated they had done customer segmentation.
That’s good, right?
Sort of. Most customer segmentations do distinguish potential customer groups by identifying common characteristics or attributes within those groups. What is often missing is that these segmentations are rarely actionable.
Some important action-oriented questions that is missed include:
Does willingness-to-pay differ between groups? If so, how much?
How can our packaging or offer create different responses from our segments?
What is the basis for different perceived quality between segments?
Unfortunately, for many startups the framework and research supporting their segmentation is too broad and unfocused.
Let’s take a look at how customer segmentation is traditionally done.
A Breakdown Of Traditional Customer Segmentation
In traditional customer segmentation, companies create groups or clusters of their customers based on a selection of traits and descriptives to identify those groups of customers.
Generally these segments are based on socio-demographics such as gender, geography and income. For more B2B companies, segments are created using high-level attributes such as company size, number of employees and number of locations. Helpful, but just scratching the surface. Some segmentations go further and identify psychographics such as behavior, needs, values, and preferences.
The ultimate goal for customer segmentation is to help the company to engage and sell their products more effectively and efficiently. When done right, effective segmentation is measurable by metrics such as:
Sales velocity and conversion rates
Discount rates
Customer inquiry and engagement rates
Willingness-to-pay and price increases
While this basic framework for segmentation is a helpful starting point to get a general understanding of your customers, this is not enough.
What’s Wrong With The Old Way?
Too many times, companies in the early stages of their business do a broad assessment of their customer and then move on. When segmentations are not created with the intent of using them (for pricing, marketing, sales, etc.) they become useless.
These segments are usually too broad and descriptive. Segmentations should be designed to be actionable and prescriptive for a company’s go-to-market strategy. At the early stages of a company, specificity and focus is critical. Unfortunately, many customer segmentations exercises often fall short to help make these critical decisions.
Being too broad can also be expensive. Why? Defining your customer segments with non-actionable generalities exhaust your time and resources while also giving you too many inconsistencies and inaccuracies. It is too common to hear companies that have created a customer segmentation, but when they go-to-market struggling to focus on a specific customer.
Being too broad with your customer segmentation allows for too much leeway and causes a larger deviation from your actual customer. This unintended deviation costs your marketing and sales money as they throw good money trying to reach customers that are not within your actual segment or the segment your business should be targeting right now.
Another missed opportunity in traditional customer segmentation is the focus on change and adjustment. Over time, companies inevitably change and develop. What sometimes is forgotten is that their customers change as well.
Many times companies progress and not re-analyze their customer segments. As this occurs, companies begin to market their products towards new groups who don’t really care or even want what they offer. Only going through one round of customer segmentation can be detrimental which is why it is important to adapt and update segmentation over time.
Introduction to Customer Rings
While the initial segmentation steps are useful, pitfalls make it difficult to develop a go-to-market strategy that actually works. An alternative approach is to assess your segments as customer rings.
Customer rings are micro-segments that look at customer segments in terms of layers. Customer rings start with traditional customer descriptives, but go further by identifying customer preferences, perceptions, value drivers, and for more advanced companies, willingness-to-pay.
The customer rings approach consists of three main principles.
Your customer segments are layers
Customer rings are layers. Like a tree trunk, the core is the foundation your business is built on. The core circle are your loyalists. These are the initial customers who go beyond function and features, and believe in mission and inspiration.
As you move further away from the core, these segments are likely to have different requirements, urgencies, product alternatives, and potentially more price sensitivity.
The further you move towards the outermost ring, the closer you are to the weakest and most vulnerable and sensitive rings. You can ‘protect’ these outer-rings by marketing your product to meet their needs.
Each ring layer are hyper-specific
Each company is made up of not only 3 or 4 customer types, but a series of 10 or more customer groups. Customers today are expecting more customization and tailored experiences, making generalized groups less effective.
Think of your customer rings in sub-segments and get hyper-specific. We advise our clients to take every segment that was originally researched and split each segment a further down into four additional separate rings. So if your company has 3 customer segments to start, then the goal is to break this down further so you have up to 12 customer rings. Ensure sufficient time is spent on customer research and behavior attributes.
This can be great practice for your company to go deeper, and define your customers even more specifically. While the starting point may be an initial set of hypotheses, the end result of any set of customer rings must be research-driven.
Each ring is actionable
Each progressive customer ring is a step. They are customers that not only must be targeted, but where products, packages, and pricing are designed to their needs and value.
Each customer ring has their own value drivers, so you are building offers for each targeted ring. The prices you use do not only go from high to low, but different pricing models (e.g. subscriptions) can be used to align with that customer ring.
Some founders may question whether the rings are “big enough” or may be missing potential opportunities. It is important to recognize that winning the earlier rings are hard enough. Studies find that a startup does not start to move into the growth stage until they have won 2% to 5% of their prospective target market.
In our own experience with thousands of startups, we see that chasing opportunities creates lost focus, and less wins and validation for initial customer segment hypotheses. Hyper-focus, clear action items and accelerated wins is the winning combination.
Benefits of Using A Customer Rings Approach
One of the key benefits of using the customer rings approach is that it is actionable.
For example, companies that are actively going-to-market and acquiring customers, willingness-to-pay and price drivers must be a core dimension of any customer segment.
That raises an vital question of how well we know the customers we want to attract and what offer makes the most sense to win them as customers. A key insight for any customer segmentation.
By using our customer rings approach helps you understand not only to identify the customer, but begin to identify what drives value for that segment.
There are four primary goals for your customer rings that will create stronger customer segmentation. Customer rings are:
Measurable and quantifiable;
Describe detailed shared attributes of your unique customer;
Make it easier to target ring-specific customers; and
Drive higher impact business outcomes (e.g. conversion, retention, and profitability).
Final Thoughts
Your goal is to reach customers who find the most value in what you offer as effectively and efficiently as possible. While traditional segmentation is a helpful first step, customer rings enhance the power of segmentation.
Rings are designed to be tight and focused. If more granular rings are quickly acquired, then you can move to the next layer and craft the go-to-market accordingly. If you run into challenges making meaningful headway into a specific ring, then it should give you room to make necessary adjustments without the noise of different ring layers.
Customer rings help you to embrace diversity and the uniqueness customers identify with. This focus and targeted actions to drive positive results your company requires.
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When startups are out to create value to customers, they are often focus on a single path of value delivery – from company to customers. For many startups this is why they exist; to build solutions for problems in the market. The focus is on building products and services, and the allocation of resources to fuel the sales and marketing engine to get those solutions into the hands of customers.
This is the easy part: the playbook for building product and acquiring customers have evolved massively over the last decade.
What is more complicated and transparent is how startups receive value in return for their innovation specifically through price. How do startup leadership teams actively manage pricing or find ways to capture more value through pricing? Often called a dark art, pricing is a perpetual challenge for startups not only to create strategy and learn new techniques, but also the active management of customer perception and value proposition creation.
As a result, startups fall into a state of value debt where they are continuously receiving less value in exchange for the value they deliver. The short-term impact is the maintaining a system that requires greater results and applies pressure to already limited resources. The long-term impact is on the sustainability of the system and company without outsized injection of resources (e.g. investment). The unfortunate reality for many startup is value debt takes them down a path of potential failure.
We have identified four signs that a startup is in value debt. These signs are identifiable and measurable ways a startup can determine how far into value debt they are in, but also identify ways to work there way out of value debt. Each sign focuses on three areas: value through pricing, customer value drivers, and acquisition.
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You may be at the point in your company that it’s time to change prices.
Understandably, this can be intimidating.
You’ve done the work to create thoughtful pricing and packaging changes. You focused on creating pricing that aligns with your customer’s willingness to pay. Now it’s time to execute. So what can you do to ensure a successful pricing transition?
It is a question we have helped a number of our clients successfully navigate. Luckily there are useful strategies to go about price changes effectively. The focus is not only the commercial benefits of pricing changes, but to also ensure relationships with existing and prospective customers are strengthened.
In order to simplify the process and help ease the stress of pricing changes, let’s start with making sure your customers understand the changes being implemented.
Transparent Communication
Transparent communication is a crucial step in any pricing change.
Customers value companies that they perceive as honest and open about their business practices.This includes any changes to price.
Effective price change communication should be focused on information. This information should focus on helping customers answer three core questions:
Why is the change happening?
What is the nature of the price change?
When will the price change taking place?
If the customer has additional questions, where can they go?
Never wait to let customers know about changes after the fact.
While you want to be mindful of the potential financial impact any price change will have on your customers, this also does not mean you have to treat price changes as an unfortunate mistake. Your price change reflects changes in value – ideally more – that is given to the customer. The price change is a reflection that you understand that value and are willing to defend it through your pricing.
Customers should see a benefit from the changes. This can be seen through investment for enhanced content, maintaining important services such as customer support, new features, better employee wages, etc. For one of our clients, part of the reason for the change is to further invest resources into serving under-represented communities.
That is the goal here — we want customers to feel in the loop about where their money is going in order to keep their business.
In this process, it is important to remember that not all customers will be accepting of this change — and this can actually be a blessing in disguise.
Accept some customers don’t like change
The thought of upset customers seems scary.
Price changes will inevitably lead to some unhappy customers. There may even be some customers who are unwilling to pay the new prices and will leave. The balance you are trying to achieve is maintaining a customer base who are more profitable and remain aligned to the value exchange – the prices they pay to the value you deliver.
For some companies, a price change is a tool to assess how aligned customers are to their value proposition. This is a way to recalibrate the customer base.
It is a simple question of — do you want to support customers who are so price sensitive that changing prices will automatically lose their business? The answer is probably not. Why? Because these types of customers are often expensive to maintain. This can include higher utilization of customer success or support teams to higher complaints on social media or other channels.
While you may not be able to only choose your best customers, you can definitely find ways to strengthen your customer base that’s more aligned with your value proposition.
Gradual changes
There is a tendency for some companies to want to do one large price change. One driver is so they don’t have to do it again.
In practice, price changes do not need to be drastic. Price changes should be thoughtful and methodical, and in some cases gradual. Gradual changes can space out price change over time, or the change itself can be announced and applied over time with different customers and products.
Gradually introducing changes can help ease customers into changes and follow your journey to create more value for them.
One example is Google change to calculating storage consumption on their Drive product. Previously, Google family of productivity products (e.g. Docs, Slides, Sheet) did not apply towards storage limits. In late 2020, Google announced these products will count towards storage limits, thereby accelerating storage consumption and moving customers closer to paid plans. To give customers – personal and business – sufficient time, they were going to roll out changes over a 14 month period.
Companies can also gradually change prices by introducing these changes on a smaller scale — to a select group of customers. These more gradual changes are used as price tests and assess how different customer segments may react to the changes on a larger scale.
Be selective
Just as you should be methodical, price changes can also be applied selectively.
Not every product and every customer warrant a price change. If you created a customer segmentation linked to pricing, then this should be used as the basis for selective price changes.
Starbucks is constantly changing their menu prices and they usually do so only on select products: food, drip coffees, espresso drinks, frappuccinos, or even specifically targeting sizes. For example, Starbucks may change pricing by a few cents for only their small sized, brewed coffee drinks. There is a specific customer segment where this price change may be potentially meaningful, and will how this segment reacts and how this impacts sales at select retail locations.
Netflix also does this by choosing to increase prices on certain plans they offer. This year they decided to make pricing increases to their standard ($12.99 to $13.99) and premium plan ($15 to $17.99) while keeping the basic plan ($8.99) the same price.
Selectivity can help ease adoption for pricing changes, while being thoughtful about what areas would respond the best to these increases.
Final thoughts
We just went over a few ways to effectively change prices while minimizing potential negative reactions from customers. .
Within each of the strategies, the focus is on the customer and how best to engage that customer for the changes your company needs to make.
There are many examples where price changes go horribly wrong. Common reasons include late communication of a price change and forcing customers to adopt not only new pricing but pushing customers out of existing plans and products. Another design issue is that while price changes for a product is correct, companies do not close off potential loopholes or other ways of circumventing paying “full price”.
Ultimately price changes should center on benefits, and does not have to mean losing customers as a result.
Through deep research, pricing-centric customer segmentations, and a comprehensive communication plan, the price change should be mutually beneficial, ultimately leading to greater growth for the company.
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Have you ever stared at your computer screen wondering if you should really spend $70 on a pair of Gymshark leggings or even $100 for a pair of Lululemon Align pants?
This scenario is far too common for people looking to purchase workout clothes, most commonly referred to as “athleisure.”
Athletics Meets Fashion
Athleisure is apparel that is meant for athletic activities but can also be worn casually. The idea is that this type of clothing fits inside and outside of the gym, and a person won’t look out of place wearing it on the treadmill or at social events. Some common athleisure items are yoga pants, leggings, tank tops, sports bras, jackets, and more.
The rise in popularity pushed companies to begin researching and experimenting with the materials to make athleisure what it is: versatile. This meant a rise in production costs and thus, a higher relative price.
Is it “worth” spending a lot of money on clothes you are meant to sweat through?
How do athleisure brands enhance willingness-to-pay, perceived value, and loyalty?
Trust The Process: Innovation and Category Creation
Consumers have to think about the process athleisure goes through to live up to its purpose.
How are they made? What kind of technology is used?
Part of the reason why Lululemon has been able to differentiate is because of their innovative process in experimenting with different materials (nylon, Lycra, spandex, elastane) in order to make something that is both functional and versatile. Interestingly, Lululemon has a “whitespace lab” in Canada which consists of exercise machines, humidity controlled chambers, and even dunk pools to test the durability of Lululemon apparel.
If you think about it, this is a good thing. You want your athleisure to hide your sweat, smell, and keep your internal body temperature balanced. The athletic brand, Vimmia, promotes something called “thermoregulation” which regulates your temperature depending on your surroundings. This technology and innovation makes athleisure versatile for any situation. This means you can comfortably walk into the grocery store right after your workout without looking (and feeling) out-of-place. The innovation, style and fit has created a new category of clothing with its own perceived value.
Building Pricing Power
Part of the reason why athleisure is able to maintain its pricing power is because consumers find relative value that goes beyond just product features.
Once you purchase high quality athleisure products you acquire a sense of status due to the brand recognition that goes along with it.
Athleisure companies have built brands to connect with consumers through product and emotion. Instead of performance like traditional athletic wear brands, athleisure connects consumers with a lifestyle that is aspirational and self-aware. These brands have tapped into the emotional connect one finds in boutique fitness (think SoulCycle), sneakers (think Yeezy), and exclusivity (think Supreme).
This brand identification has created pricing power for athleisure companies, commanding premium prices relative to traditional athletic clothing, but also tapping into new segments of the market.
Extend The Value Proposition
Brands have begun to take the feeling of community to another level.
For example, Gymshark specifically turned to social media fitness influencers. They converted many into something they called a “Gymshark athlete” which is similar to being a brand ambassador for the company. The athletes are responsible for posting on their social media to raise brand awareness by trying on some of the free products they’ve received, answering customer questions, and posting their workouts in their athleisure. This helps boost sales influenced by the personal connection between the consumer and brand.
Gymshark went further by creating expos, or Gymshark meet-ups, where consumers could meet their favorite athlete. When the company expanded, they created an “expo world tour” where people could now buy tickets to see select influencers. This kept the idea of a community but added exclusivity in the mix by making it available to a limited amount of consumers. Not only that but Gymshark is great about posting free workouts to their social media as well as reposting consumers’ posts when they tag Gymshark. With this in mind, consumers feel valued making them more likely to continue to purchase from them.
Find Market Gaps
The rise of athleisure has created subsegments in the market that includes those that have different willingness-to-pay. These gaps in the market create opportunities for competitors to come in and address the needs of those consumers especially because of relatively low barriers to entry.
This competition give customers an alternative to more expensive brands. For example, the brand “Colorfulkoala” on Amazon has thousands of 4-5 star ratings. Interestingly this brand is classified as a “Lululemon dupe” because of the high quality but without the logo and price point.
Another competitor, Fabletics, uses star power (the brand was founded by movie star Kate Hudson) and a different business model to differentiate from other brands. Fabletics is a subscription-based brand offering inexpensive athleisure with leggings selling for as low $40. Fabletics often runs sales where consumers can receive 2 pairs of leggings for only $24.
The reason Fabletics is able to position its products at lower price points is due to its “no-waste” model. Since the brand is based on a subscription, the no-waste model means that only what is demanded is produced. Using the subscription to their advantage, members are guaranteed to visit their site monthly to purchase. Fabletics Vice President Felix de Toro claims that demand can be predicted with 95% accuracy. Fixed costs are reduced because of this, and Fabletics can consistently offer their members high quality products at affordable prices whereas their competitors markup their products to make up for waste they’ve produced.
Final thoughts
Building a new market requires several key components, one of which includes understanding the drivers of price and willingness-to-pay.
Athleisure brands have done an incredible job in creating a market valued at more than $155 billion globally.
The expansion of the athleisure market has created growth opportunities for new brands to enter using differentiated pricing, business models, and value propositions (linked to pricing).
While technology and innovation in the use of material has contributed to the value driver, athleisure companies have gone beyond to expand the value proposition – and the price opportunity – to connect and retain loyal customers.
What has been central to the success of so many athleisure companies – and important lessons companies from other industries can learn from – is the keen understanding of their customers, what they value, and how to package product and pricing that resonate with them.
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We are excited to share a new feature by Oxford University about HelloAdvisr and our CEO Ed Lee.
In the article we had a chance to share our journey, and our vision for how startups can build thriving sustainable ventures. We are grateful for all the support we have received for our work to see innovative builders close the value gap to grow thriving sustainable ventures that contribute to their communities and the ecosystems they operate.
One important takeaway shared in the article is the introduction of our “value debt” concept. With our experience with hundreds of startups and companies around the world, one of the most common threads we see if the misalignment between value delivered and value received.
This value misalignment has significant impact for a fast-moving growth venture specifically in terms of their trajectory and resources required to achieve that path.
The most obvious is the impact on revenue traction and pathways to profitability. When a company under-values their product this leaves potential revenue and profit on the table. This should not be confused with revenue or price optimization. This is foundational and several steps before optimization. The challenge is in articulating value through a proposition and price. For too many startups, this is a step that is needed, but rarely taken.
Value debt also impacts a company’s competitive positioning and utilization of resources. Lack of clarity around what is the value for the solution created, but equally what drives that value for customers puts pressure on a company’s ability to position competitively. We see this manifest in a feature race with competitors, without a more mindful appreciation of what creates benefits for customers and differences between them.
Related, but separate is the associated costs for supporting value debt. One of the biggest areas is in acquisition costs. Less insight into customer segmentation driven by willingness-to-pay, pricing, and value drivers creates a gap in how acquisition costs are targeted and utilized. This also influences the acquisition strategy a startup can and should pursue.
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The right strategy can fuel long-term growth. Whether it’s cost-plus, competition based, or value based pricing, each pricing approach can hold great impact for your business. Learn how to choose the best approach for your startup—and turn pricing into a powerful competitive advantage.
Have you ever subscribed to a service because they offered “the first month free”? Have you ever downloaded an app because it is free but then spent more money for the “premium version”? Or have you been surprised when being promised a free iPhone for switching to a new mobile operator?
There is a good chance you have experienced one or all of these situations since “free” can be such a powerful strategy.
It is why we see free – and commonly, the freemium model – used as a popular and effective pricing strategy used by brands and company around the world.
For businesses purposes, “free” does not always mean “free”. As the old saying goes, “there ain’t no such thing as a free lunch.” By offering free or freemium strategies, companies are looking to generate benefits such as attracting potential customers and decreasing the overall cost of acquisition.
Therefore, “free” is actually a pricing strategy designed to influence behavior and share perceptions. This can come by reducing friction to try a product or service. Free can also reduce resistance to monetization due to perceptions of affordability.
Let’s explore some of the advantages of offering free, and smart ways to start applying this strategy.
Advantages of Offering Free
“Free” itself is a great attraction.
It makes customers feel that they can gain something at virtually no cost. Therefore, pricing “free” leads to a broad range of people knowing your product or service and increasing your potential customer base.
Renowned behavioral economics Professor Dan Ariely ran an experiment to test the power of free. Professor Ariely did a test offering two products: a Lindt Truffle and a Hershey’s Kiss. The Lindt Truffle was offered for $0.26 and the Hershey’s Kiss at $0.01. With this offer, 40% chose to buy the Lindt Truffle, and another 40% went with the Hershey’s Kiss.
Now the experimenters decided to drop the price $0.01, where the new prices were $0.25 for the Link Truffle, and $0.00 or free for the Hershey’s Kiss. While the relative difference in price remains similar, 90% ended up choosing Hershey’s Kiss. This is one example of the power of free and how this can influence customer behavior.
Benefit of free: Potential Cost Savings
One benefit of free is the potential cost savings of acquiring or winning a customer.
For many companies, there is an inherent cost to market to- and win- and customer. This can be substantially higher if it requires more customer engagement (marketing isn’t free after all). If the product is offered for free – either as a trial or reduced product – the willingness to try is potentially higher. So instead of spending more to win an unwilling customer at the start of the buying journey, companies can spend more effectively after a customer experience the product and hopefully get value.
To assess whether this strategy is right for your company, consider how well you can stand up to these three tests:
The Willingness-to-Pay Test: Price is a sufficient barrier for the right customers to use the product. The user will find sufficient value in the product to want to pay after starting to use the product;
The Efficiency Test: You can make the monetization conversion process cost-efficient enough to achieve profitability; and
The Payback Test: You can retain customers long enough that marketing investment will be paid-back in sufficient time.
If one or more of these tests do not hold up, then the effectiveness of the strategy may be at risk.
Benefit of Free: Increased Distribution
Another advantage is that “free” itself can be a distribution strategy.
For the free product or service, once it has high quality and offers a great user experience, the existing users will be more willing to invite others to join or have a try.
When done right, organic word-of-mouth spread about the product is some of the best advertising and cost-efficient conversion strategies a company can have.
How Free Is Applied
Freemium pricing is one of the most common pricing models that utilize people’s preference for “free”.
“Freemium”, the combination of free and premium, means offering all customers an essential service as free but charges some customers for an enhanced version or more content. Freemium pricing aims to attract many customers using the free version on offer, where a proportion of these users will be converted to the premium.
Evernote, a popular note-taking app that owns more than 225 million users, is free for anyone to download. Still, you can only access the basic version to simply take notes. However, if you want to enjoy the core features such as forward emails, annotate PDFs, you will need to upgrade to the premium for $7.99 a month.
Companies can also offer the customers free versions for a certain period or limited usage as a “free trial”.
Spotify is one of the world’s best-known music streaming platforms. It offers the customers a month free trial for the premium. After one month of free, the customers can cancel at any time.
Using this strategy, Spotify is reducing friction to signup, and create a separate pathway to get more consumers to upgrade for premium. According to Spotify Usage and Revenue Statistics(2020), among 286 million monthly active users of Spotify, there were 130 million Spotify Premium subscribers – nearly 45% of their active user base.
Among these subscribers, some may gradually get used to the premium version. Some may even forget to cancel subscriptions and, therefore, be kept charged, which happens more often. According to one report in Yahoo Finance, 48% of people forget to cancel a free trial before they’re charged with auto-renewal.
Using Free Effectively
Applying “free” as a pricing strategy can highly increase potential customers’ pool by lowering the barrier between customers and the product.
However, it is also essential to know when and where to offer “free,” or it can end up being a free gift.
One goal of providing free is to attract a broader audience. Therefore, a free product or version must be compelling. Verizon, the U.S. telecommunication company, offers a free phone for anyone to switch to them or add a new line. Even if there will be other costs later on, “free phone” itself is a great attraction for customers (and future revenue).
Suppose you have sufficient top-of-the-funnel traffic, but few of them choose to pay for premium. In that case, your free offer may be too generous, decreasing the willingness-to-pay for a paid or more premium version. In this situation, you may want to consider a redesign of your offer and what is offered for free.
In 2011, the New York Times (NYT) announced a digital subscription plan that gave readers the ability to read 20 articles for free per month. If people wanted more, readers need to buy digital news packages. After launching the digital plan, NYT found 20 articles per month was sufficient for readers – decreasing the number of potential paying readers. By 2012, the number of free articles was reduced to 10; eventually reducing the free articles to 5 today. By assessing willingness-to-pay through reading behavior and pricing research, the NYT found a balance between offering attractive “free” versions and encouraging people to subscribe.
Final Thoughts
Free is great for customers, and companies using a free pricing strategy must also get an equal exchange. Designing and using “free” effectively can not only bring in new prospective customers, but improve the costs associated with winning those customers.
At its core, the product and service must have value drivers that increase willingness-to-pay. It is vital to make a free pricing strategy work. Absent this, companies may be giving customers a gift that does not give back – and that is a strategy worth reassessing.
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When thinking about the creation and development of a product or service, we often focus on the pricing component that seems the most important to success — the “what”. On the surface it seems like this is the most important thing that one should think about with pricing, so it is easy to fall into the trap of fixating on “what is the price point for our product?”
This is certainly important; but when it comes to pricing, there are multiple components that need to be researched and developed in order to design pricing successfully. Companies need to consider their pricing multi-dimensionally or what we call the 5 W’s of Pricing.
The 5 W’s of Pricing provides a framework for companies to assess their price design strategically and tactically. This framework can also offer companies an early step to building a decision-making process. This is even more powerful when you consider less than 30% of new ventures have a pricing process.
As you go from the “why” to the “what”, the decisions made become increasingly more visible to your user or customer. The “why” is what your company thinks about and sees and the “what” is what your customer ultimately sees.
Let’s start with the “Why”.
The “Why”
To start thinking about a pricing strategy, you need to figure out the reason behind your composition and structure. Why do we need to make these pricing decisions?
It is critical to start here, because this will influence not only how you price, but to what customers and at what price. The “Why” is also important because it really pushes you and your team to think about the decisions you’re making in the context of your vision and overall business strategy. Less thoughtful approaches can lead to lots of filler with little content that’s actually valuable to pricing decisions you need to make.
Question for you and your team to consider — what is your goal and what do you want your pricing to help you to accomplish? When thinking about how you want to structure your pricing decisions, will lead to successfully moving forward into other areas of your business.
The “Who”
Knowing who your target audience is and trying to sell to is extremely important.
Picture this. You put in years developing something that you are finally ready to offer to the world. Although you probably spent a considerable amount of time researching how to market and distribute, there is a good chance that you didn’t connect who these people are and how your product resonates with them from a value and pricing standpoint.
We find too often that one of the reasons why companies discover there is no market need for their product, is yes partly due to the product, but also because the product failed the “worth it” test: is the product right for this customer at this price and offer?
Knowing who exactly your target audience is and ensuring they are aligned to your value (which includes price) creates loyal customers. More companies need to focus on researching and surveying their customer base — we found that only 47% of companies stated that they ran a price test or pilot with customers.
Now we need to consider what our channels are for pricing, engagement, and distribution.
In other words, where will your product be sold? Do you want to sell across multiple channels, directly or indirectly, internationally, and overall what would be the optimal way to sell your product? Where will your pricing be displayed (if at all) and on what platforms do you plan on connecting with your customer base?
Mapping out the “why” and the “who” leads to an easier transition to finding out the “where”.
If we already know the meaning behind our actions and our customer base, then there is already a strong foundation to pave the way for where our prices live and how.
The message being sent has to be accessible and practical to the audience you’re trying to reach.
The “When”
The “when” is focused on the timing of monetization and the influence of pricing. This is the stage where you need to figure out the timing of your pricing decisions.
For example, you can offer a service that can be paid for monthly or annually depending on the needs of the customer and what they are willing to pay for. In order to try to bring in new customers, you can also offer a free 14 day trial.
These are not only structural mechanics, but also the types of “when” decisions to be considered for your customers.
The “What”
At last we have reached the “what”. At this point you will have found that there is no one way to decode pricing. The “what” can be influenced materially when accounting for the other W’s.
One consideration to think about with the “what” is to think if you want to offer just one price point or multiple prices. This can be housed in tiers, but also can be designed for timing and for different customer types.
Other consideration when thinking about multiple prices, is also the pricing distance between the prices. Are your prices really “simple” because they are exactly $10 apart, or do your customers find this irrelevant to their decision-making because prices are divided into payments?
Every price difference needs to be considered when planning out the “what”. Each level of pricing and all additional components need to be assessed and determined at this stage.
Final Thoughts
Pricing is a complex journey, but once you understand the 5 W’s of Pricing, it brings it down to a level that is more manageable. Using a structured framework like the 5 W’s of Pricing can improve your pricing decisions, and make a material difference in the early traction and success for your business.
We all need to get into the mindset of working smarter not harder. Pricing is challenging but once you’ve mapped out each step and your objectives, most of the hard work has already been completed.
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Customers associate the value of your product with your pricing. It is the value-math all customers do.
How you price should help illustrate the individual uniqueness of your product.
Essentially, pricing should help customers answer the question, “Is [add your product here] worth it?”
Focus on value
A product or service’s unique benefits are what makes it stand out from competing products. Discover what that value is––now!
You can benefit from this uniqueness by designing your prices on what customers really think your product should be worth. By implementing value-based pricing into your strategy, you will reach closer to what your customers are willing to pay and can help you understand what your customers want from your product. This strategy may raise your prices above your competitors; signaling to the market that this value is linked to your product’s uniqueness.
Now don’t just raise your prices to make your products unique without having a strong grasp of your value drivers. When Kanye released a $120 plain white t-shirt, he was able to sell-out because his brand and exclusivity are core value drivers for the product.
Your customers must believe – or hold the perception – that your product is worth the price. When value-based pricing is done correctly, there is greater alignment between your customer, your value, and your price.
One great example of value-based pricing came from a web-based service called If This Then That (IFTTT). IFTTT, a tool enabling users to trigger and connect multiple web services such as Gmail and Instagram, offered customers the ability to set their own prices for their paid Pro-version web-based service.
The customers who choose higher prices signal value for the service – whether it be through the benefits of the services or through a more altruistic desire to keep the service going. This is also a reflection – and test – for IFTTT on what their customers are truly willing to pay when given the choice.
Create uniqueness for the customers who value it
Remember, you’re in charge (or at least can influence perception). You have the ability to design your prices. Changing your price strategy is a great way to find a different market segment that is more interested in your product. Do this by lowering or raising prices or even by offering a payment plan to make a luxury product more accessible.
One way to find and address your target market is by using Customer Rings.
Customer Rings are micro-segments that pinpoint customer preferences, perceptions, value drivers, and more. Think of Customer Rings as concentric circles. Your core circle are your loyalists. As you move further away from the core, these segments are likely to be more price sensitive. This price sensitivity can be persuaded towards your product or service if you develop a unique pricing strategy that catches their attention. Assessing what part of the market needs or wants the benefits of what you offer them will help you determine the value of your product or service.
If you find that your product is needed by a segment with a lower income, you may decide to lower your prices to reach those customers. A lower price could be what makes your product unique. That’s a strategic decision.
Take for example the iPhone SE. Apple realized that in order to reach customers in the outer circles of their Customer Rings, they recognized a more affordable phone was a value driver, and influenced the willingness-to-pay. In order to offer lower prices, the SE model was made of plastic. This also maintained differentiation from their premium priced phones. However, Apple generously marketed this product as being “lightweight”, making the product unique enough to be sought out by consumers in their outer rings.
Differentiate price design to enhance product uniqueness
Create a unique way to sell your product. This can be digital-only sales channels or buy now, but pay later.
Revolutionize your pricing. Help your product stand out from competitors and against industry “norms”. Recently, many SaaS companies have decided to offer their products for free and use pop-ups and other advertising tools as their main source of revenue.
Change the model. Another strategy companies have been using is changing the model. One example of this strategy is the rise of subscription services. More and more companies are adopting new models that include tiered levels of pricing. Netflix has long been a pioneer and leader of this model.
Netflix has three different subscription packages: $8.99 for Basic, $13.99 for Standard, and $17.99 for Premium. In order to differentiate offers and prices (latest price increase on October 29, 2020), Netflix created different price packages that made specific benefits accessible on different tiers.
Taking a page our of the Netflix playbook, you can also decide what features and fences to use that could be made even more valuable.
One of Netflix’s top competitors, Disney Plus also tried creating product uniqueness by using pricing. They offered their own premium plan with the benefit of watching the live action movie Mulan months before general release. This way, Disney Plus gave subscribers the option of whether or not the premium package had enough benefit to purchase. Making your pricing unique will draw attention to your product allowing your customers to reassess the value and benefits of what you’re offering them.
Final Thoughts
Building an differentiated product or services is challenging. Having customers identify or perceive the difference can be difficult especially for those operating in crowded markets.
When designed thoughtfully and strategically, pricing can be used to enhance your product’s uniqueness, but reframing how customers understand the product.
This take insights, design and strategic execution.
Leverage all the tools available to you – including pricing – to make your product standout and win the customers – and revenue growth – you need to help your company grow.
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