Imagine you are responsible for almost 20 million people.
You make difficult decisions impacting their financial security, health and safety. As a leader of so many, the decisions you make have consequences on social well-being, commercial productivity, and the climate. With all that you are responsible for and make decisions on, how difficult can a pricing decision be?
Now imagine you are the Governor of New York and you have to make a critical pricing decision. Given the complexity of decisions you make each day, how hard is a pricing decision?
As it turns out, a very difficult decision.
New York City has the worst congestion of all major metros in the world.
This impacts not only financial productivity, but also has important consequences on health and wellness, and on climate change. In fact, congestion in NYC is so bad that it can be faster to ride a bike than drive in Manhattan.
One way leaders of major cities have attempted to address this is by implementing congestion pricing. Cities such as Singapore and London have implemented such pricing to tackle congestion by influencing driver behavior, generating income to reinvest in public transport and other infrastructure initiatives.
After several years of research and discovery, New York and its leaders felt the business case was sufficient to pursue congestion pricing. New York invested more than $700 million a decade to follow the lead of cities such as London to implement tolling cameras (many already installed), billing systems, and pricing plans and communication.
Less than a month before the new congestion pricing was to go live, New York’s Governor Hochul decided to pull the plug and stop congestion pricing implementation.
What congestion pricing would have helped to accomplish
Financial: It is estimated that congestion pricing would bring in more than $1 billion per year. Using London as an example, congestion pricing generates more than $180 million per year in net income or several billion in additional income since the pricing was launched in 2003. In Singapore, the congestion pricing or electronic road pricing (ERP), generates $110 million to $150 million annually.
Infrastructure: The new income would have enabled NYC to make much needed improvements to the largest mass transit network in the U.S. In fact, New York allocated $15 billion for modernizing outdated infrastructure including the subway system.
Climate pollution: Reduction of fossil fuel powered vehicles, and with lower congestion, the vehicles that are traveling within a congestion zone metro are traveling more efficiently producing less pollution. If London is used as an example, in the early years after implementing congestion pricing CO2 emissions were reduced approximately 16% and traffic volume was reduced 15% to 20%. Singapore had similar outcomes where CO2 emissions declined 10% to 15%, and traffic volume decreased approximately15% during peak hours
Detractors and critics
Pricing, whether new pricing or changes to existing pricing, is rarely without detractors or critics. In the case of New York and the New York Governor, congestion pricing also had its fair share of detractors.
Commuters were against an added expense to commute and travel into the city. For some it felt like a “tax” to travel and work.
Businesses – small and big alike – did not want the additional cost the congestion pricing would bring to its employees, suppliers and customers. In a survey by Partnership for New York City found that 58% of small business owners were concerned that the new congestion pricing would reduce customer visits.
Politicians that serve the interests of the commuters and businesses, were detractors of congestion pricing. Some politicians also took issue with the cost and time needed to implement congestion pricing. There was also a concern by those in the outer boroughs without easy access to public transport that the congestion pricing unfairly targeted them.
Important lessons from New York’s experience with congestion pricing
While the future of congestion pricing in New York is uncertain, there are several lessons that you can apply to your own business:
When stakes are high, decisions are complex: Pricing is multifunctional and one of the most visible things a company can do – so there are many stakeholders with opinions on what pricing decisions are needed. Embrace this. We have seen instances where companies spend more than 9 months just trying to find some direction, let alone decision, because of the number of stakeholders and their perspective on prioritization and strategy. Navigating this is crucial to not only make critical pricing decisions, but creates opportunities to gain the benefits.
A clear pricing vision builds support, otherwise creates confusion: One of the reasons why pricing doesn’t “work” is not the quantitative analysis or testing, but because the market, customers, internal team members don’t understand the vision your pricing is intended to achieve. This is usually a sign that a strategy doesn’t exist. Helping stakeholders understand why pricing exists, why certain decisions are made is part of the communication process.
Pricing will evolve (as will the opportunity): Pricing opportunities shift as macro conditions change, new competitors emerge, technology evolves, and your team’s speed and capabilities (what we call the pricing management system). Creating something new is scary and hard. People struggle with change. Customers have stronger feelings about losses than benefits. We see this often in our research and work with innovative companies. Some companies adapt and create new opportunities. Others get stuck. Navigating change, adapting and moving is where you enhance your pricing competitive advantage. This is where you create opportunities to seize the benefits.
Pricing influences perceptions and behavior: The debate about New York’s congestion pricing was less about the precision of the number ($15), but about the perceptions and behaviors the pricing will influence. Questions included not only what are the benefits, but who benefits and how are those benefits shared. This is the foundation of the value proposition and business case. When it comes to your pricing strategy, you should be thinking broader. Your pricing should create differentiation, create (positive) perceptions, and willingness to change behavior because of benefits.
Final Thoughts
While the future of congestion pricing in New York remains uncertain, the attempt provides invaluable insights into the complexities of pricing decisions and stakeholder management. Leaders must recognize the multifaceted nature of such decisions and the importance of a clear, strategic vision to navigate the challenges. By understanding the diverse perspectives of stakeholders and the inherent difficulties of implementing innovative solutions, businesses can better prepare for and manage similar scenarios. Ultimately, the experience of New York underscores the need for thoughtful, well-communicated pricing strategies to achieve sustainable and beneficial outcomes for all involved.
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Spotify, the digital streaming behemoth, has reshaped the music industry with its extensive library of songs and creator-driven content. Launched on April 23, 2006, by Daniel Ek and Martin Lorentzon, Spotify hit the ground running in October 2008 and hasn’t looked back since.
With over 615 million monthly active users, including 239 million paying subscribers as of March 2024, Spotify reigns supreme in the music streaming universe. Its presence spans over 180 countries, making it a global powerhouse. Whether you’re unearthing new artists or binge-listening to your favorite podcasts, Spotify is the definitive gateway to a world of audio entertainment.
And, as of June 9, 2024, Spotify boasts over 615 million users, including 239 million paying subscribers (of approximately 39% of users), spanning more than 180 markets worldwide. This remarkable growth is reflected in its financial performance: for the quarter ending March 31, 2024, Spotify Technology reported revenue of $3.94 billion, a 20.9% increase year-over-year. For the twelve months ending March 31, 2024, the company’s revenue was $15.02 billion, marking an 18.8% increase year-over-year. Dominating the music streaming space with a 31.7% market share, Spotify stands as the choice for 226 million out of the 713.4 million people worldwide who have a music streaming subscription (as of Q3 2023).
Spotify revolutionized music consumption, offering on-demand access to a vast music library. Personalized playlists like “Discover Weekly” and “Daily Mix” set industry standards for music discovery and engagement. Spotify’s investments in podcasts, including acquisitions like Gimlet Media, Anchor, and Parcast, and exclusive deals with big names like Joe Rogan and Michelle Obama, have diversified its content offerings. Features like Spotify Wrapped provide personalized insights, enhancing the user experience and driving social media buzz. Spotify has even worked to provide artists themselves with data and insights into how their music is performing and helping them understand their audience and even engage with fans more effectively.
The Dynamic World of Music and Audio Streaming
Spotify operates within the vibrant and ever-evolving music and audio streaming industry. This industry is defined by the distribution of music, podcasts, and other audio content through digital platforms, enabling users to access vast libraries of audio media on-demand. The shift from traditional ownership of music to instant access has revolutionized how people consume audio content, driven by rapid technological advancements and a focus on data-driven personalization.
The music and audio streaming industry is highly competitive, with major players such as Apple Music, Amazon Music, YouTube Music, Pandora, and Tidal vying for market share. In addition to these dominant competitors, the industry also includes significant international platforms like Deezer in France and QQ Music and NetEase Cloud Music in China.
This competition within the streaming industry is motivated by a variety of factors. A key factor is the content itself and content exclusivity with platforms working to secure exclusive music releases, podcasts, and other audio content. These exclusive deals and original content are critical in attracting and retaining users.
The different services also offer varying user experiences, hoping to differentiate themselves through distinct user interface designs, ease of use, and personalized recommendations. With different services offered in different areas, it is imperative that each service expands into new markets and regions, meeting local demand.
Finally, the actual competitive pricing and flexible subscription models play a significant role in attracting new users. Some may offer family plans, student discounts, and ad-supported free tiers to reach different customer segments.
The Pricing Strategy: Attracting Millions with Flexibility and Value
Target consumer audience:
Spotify’s pricing strategy is a masterclass in flexibility and value, targeting diverse user segments seeking convenient content consumption.The overall target audience for Spotify consists of a wide range of customer segments who ultimately seek a convenient platform and service to consume content based on their various tastes and preferences.
Age: Spotify targets younger generations who are more likely to adopt new technology and prefer on-demand, personalized content. This typically includes individuals comfortable with using technology and who prefer digital streaming services over traditional media formats.
Geography: The Spotify target audience is located worldwide, with more users in Europe than any other region. Because of its availability in a large number of regions, it caters to a globalized audience by offering localized content in different languages and including music from various parts of the world.
Podcast Listeners: With its expanding podcast library, Spotify targets users who enjoy listening to podcasts for entertainment, education, news, and more. Spotify has made a significant push into the podcasting space over the years by acquiring major podcasting companies and signing exclusive deals with popular podcasters.
Social Media Users: Spotify actively caters to people who enjoy sharing and discovering music and podcasts through social media and has worked to integrate social features on the platform.
Current Pricing Plan:
Spotify’s pricing strategy focuses on offering a range of options to cater to different user needs, from the free tier with ads to premium plans with added features like offline listening and access to exclusive content. The inclusion of student discounts, family plans, and additional perks like access to Hulu demonstrates Spotify’s efforts to attract and retain a diverse user base.
How Their Pricing Has Evolved
Spotify’s pricing strategy has evolved significantly since its initial launch in 2008. At first, the platform offered a free, ad-supported tier alongside a premium subscription priced around €9.99/month in Europe. Over time, Spotify introduced various changes and additions to its pricing plans to attract and retain customers. In 2014, they offered a free 30-day trial for Premium and introduced a discounted plan for students, typically priced at $4.99/month. They also introduced the Family Plan, allowing up to six family members to share a subscription at a discounted rate, priced around $14.99/month in the U.S.
In July 2020, Spotify introduced the Premium Duo plan, designed for two people living at the same address, offering each person their own Premium account for a discounted price of $12.99 per month, positioned between the individual and family plans. However, the most significant changes came in July 2023 and June 2024 when Spotify increased the prices of its Premium subscription and other plans. The individual plan went from $9.99 to $11.99 per month, with similar increases for Duo and Family plans. These adjustments were part of a broader strategy to continue investing in and enhancing Spotify’s product offerings.
Pricing Strategy Breakdown: Key Takeaways
Why is their pricing strategy effective?
Diverse Pricing Tiers: Spotify offers a range of subscription options (Free, Premium, Family, Duo, Student, and even an upcoming HiFi tier) that cater to different user needs and budgets. This segmentation allows them to attract and retain a wide audience, from casual listeners to audiophiles.
Freemium Model: The free, ad-supported tier serves as a gateway for new users to experience the platform without commitment. This helps in building a large user base, some of whom eventually convert to paid subscriptions for an ad-free experience and additional features.
Targeted Discounts and Promotions: Student discounts, family plans, and promotional offers (e.g., three months for $0.99) attract price-sensitive segments and encourage trials. Bundling services (like Hulu and Showtime with the Student plan in the U.S.) adds more value and appeal.
Localized Pricing: Adjusting prices based on regional market conditions makes the service accessible to a global audience. This helps in capturing market share in diverse economic environments.
Personalization and Value Addition: Personalized playlists, exclusive content, and high-quality streaming options add significant value to the Premium subscription, making users more willing to pay for the enhanced experience.
Retention through Family and Duo Plans: These plans are cost-effective for households and pairs, encouraging group subscriptions and reducing churn, as users are less likely to cancel when multiple people benefit from the plan.
What makes their pricing strategy different from others?
Freemium Model with Extensive Features: Spotify’s free, ad-supported tier offers access to its entire music library, though with ads and some limitations. So, this is an effective entry point for new users, which many competitors do not offer to the same extent. Furthermore, their free tier includes personalized ads, which help Spotify monetize non-paying users effectively.
Bundled Services: Spotify’s student plan often includes additional services, such as Hulu and Showtime in the U.S., at no extra cost. This exclusive kind of bundling provides extra value compared to competitors’ student discounts.
Flexible Pricing Tiers: The Family Plan, which allows up to six accounts, is competitively priced and includes additional features like “Family Mix,” a shared playlist based on the family’s listening habits. And, the Duo Plan is tailored for two people living at the same address and includes “Duo Mix,” a playlist that combines the listening habits of both users. This particular plan is especially unique among music streaming services.
Regional Adjustments: Spotify adjusts its pricing based on regional market conditions, which helps Spotify capture a larger global market share compared to some competitors with more rigid pricing structures.
Aggressive Promotions and Discounts: Spotify frequently offers promotions, such as three months of Premium for $0.99 for new users, which help convert free users to paid subscribers. These aggressive promotional strategies are more frequent and impactful compared to many of their competitors.
How did they do it?
Freemium Model Deployment: Spotify launched from the start with a robust free tier that provided access to its full music library with ads. This helped attract a large user base and familiarize them with the platform’s offerings. And by integrating personalized ads into the free tier, Spotify monetized its non-paying users effectively, ensuring revenue generation while maintaining a vast user base.
Market Segmentation and Diverse Plans: Other than its premium plan, Spotify later introduced the Family Plan to cater to households and the Duo Plan for couples or roommates. These plans offered cost savings for groups, making it more attractive for multiple users to subscribe together. Furthermore, they also offered discounted rates for students with bundling to add value to budget-conscious younger audiences.
Global Expansion Strategy: Spotify tailored its pricing to fit different regional economic conditions, making it accessible in various markets and increasing its global footprint.
Continuous Promotions and Retention Strategies: Spotify’s promotions are strategically timed to attract new users and encourage upgrades. Spotify also focuses on retaining users through continuous updates, user-friendly features, and consistent content additions, ensuring subscribers see ongoing value in maintaining their premium status.
Innovative Additions and Future Plans: Planning the introduction of a HiFi tier for lossless audio quality targets audiophiles and adds a premium offering to their lineup. And, Spotify continuously works to announce exclusive podcast deals and partnerships with influential creators to draw users seeking unique content available only on their platform.
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Launched in 2014, Uber Eats is a leading online food delivery service that connects you with a diverse range of local restaurants, making ordering food as easy as calling a ride. As a result, the service acts as an intermediary between users and restaurants where customers can browse, pay, and place orders all through the one app. Today, Uber Eats operates in over 6,000 cities in 45 countries, bringing convenient food delivery to doorsteps worldwide. Generating $12.1 billion in revenue in 2023, Uber Eats serves more than 80 million users and over 800,000 restaurants.
Since its emergence, on-demand delivery services have expanded, making it possible for consumers to place orders not only with local restaurants but other types of stores as well for the ultimate convenience. In fact, Uber Eats itself has expanded its platform beyond food delivery into grocery and retail delivery to offer users a wider range of products available for a quick delivery. For instance, Uber Eats partnered with Albertsons Companies to deliver groceries from various brands under its umbrella, such as Vons and Safeway, so that customers can order groceries online and have them delivered to their doorstep. Other stores that are part of the Uber Eats platform range from 7-Eleven to Drizly to Petco, offering users access not only to food items but more.
The Anatomy of the Food Delivery Industry: Key Players and Dynamics
The food delivery industry in general is part of the larger on-demand services market that has grown rapidly over the past few years. Just between 2017 and 2022, the industry’s revenue surged from $230 billion to $760 billion, reflecting a growth rate of approximately 230%. This includes meal delivery from restaurants, grocery delivery from markets, and more. The primary business models involved are platform-to-consumer (like Uber Eats and DoorDash) and restaurant-to-consumer (like Domino’s and other chains who work through their own delivery service platforms). Due to its rapid rise as well as the surge in the number of players involved, this industry has become highly competitive. The major competitors in the U.S. for Uber Eats include DoorDash, GrubHub, and previously Postmates before it was acquired by Uber. Uber Eats also has international competitors such as Deliveroo in the UK, Meituan Waimai in China, and Just Eat Takeaway throughout Europe.
One key part of this industry is the participation of both restaurants and the drivers themselves. These are all people that both Uber Eats and their competitors have to pay, contributing to what Uber Eats eventually charges its users and impacting their unit economics. So, their participation also influences the general pricing strategy of these services.
With so many players involved, there are some key factors for competition within the industry to keep in mind. Pricing and promotions lie at the heart of this competition with constant active pricing action, competitive discounts, free delivery promotions and campaigns, as well as various loyalty programs set up to attract and retain customers. Each service offers their own subscription services as well to offer additional benefits to regular users.
These big players are also looking at technological advancements to gain a competitive edge. This entails investments in tech such as AI for route optimization, personalized recommendations, and efficient order management systems. They are also constantly exploring innovations such as autonomous delivery vehicles and drone delivery to make their processes more efficient.
These services also strive to secure exclusive partnerships with popular restaurant chains, promoting exclusive discounts only available to their own services. Furthermore, they compete with each other for collaborations with grocery stores and retailers to expand beyond food delivery and reach other customer segments.
The Pricing Strategy: Transitioning from Flat to Dynamic Pricing
Target Consumer Audience:
The overall target audience for Uber Eats includes a diverse range of customer segments who ultimately seek convenience, variety, and quick access to food.
Geography: Urban dwellers, which include young professionals, students, and families, and families living in cities, typically use these services the most for quick meal options due to limited time for cooking. Uber Eats in particular is the leading service in large urban markets, such as Los Angeles and New York City.
Profession: Uber Eats specifically targets busy professionals who have demanding work schedules and need time-saving meal solutions with fast and reliable delivery.
Age: Another targeted customer segment includes younger millennials and Gen Z individuals because they are tech-savvy and value easy access through mobile apps, diverse food choices, and social sharing features, allowing them to order meals for social gatherings, study sessions, and casual dining.
Health & Wellness: Uber Eats even caters to health-conscious consumers by promoting access to healthy and organic food options and providing nutritional information along with special dietary accommodations (e.g. gluten-free, vegan).
As a result, the target consumer audience for Uber Eats is vast, which is why it has been able to expand not only nationally but globally and reach new audiences.
Current Pricing Plan:
Uber Eats currently employs a multi-faceted dynamic pricing plan that includes various components in order to cater to different customer needs and preferences. All of their pricing includes variable delivery fees that dynamically change due to factors such as distance, demand, and the restaurant itself, ultimately ranging from $0.99 to $7.99. And, during peak times and/or in high-demand areas, Uber Eats will implement surge pricing and delivery fees will increase. Additionally, Uber Eats charges a service fee as a percentage of the order subtotal to help cover operational costs and platform maintenance. And, in some cases, Uber Eats may also charge a small order fee for orders that fall below a specific minimum amount.
In general, Uber Eats currently implements dynamic pricing to respond to shifting market demands. These real-time adjustments are based on algorithms that consider several variables, including demand, supply, and market conditions. Collecting vast amounts of data from various sources and using advanced analytics tools to process this data, Uber Eats can gain insights into demand patterns and price elasticity constantly that can help shape their own pricing on a daily basis. As a result, they use real-time data feeds and optimization techniques to maximize revenue, balancing supply and demand efficiently.
And, in November of 2021, Uber Eats introduced a subscription service called Uber One that is a monthly service priced at $9.99 per month with benefits including $0 delivery fee, member pricing, frequent discounts, and cancellation flexibility. So, access to the subscription service can eliminate many of the fees that are typically charged with your order.
For the restaurant-specific pricing, the restaurants themselves are fully in charge of setting their own prices on the Uber Eats platform, so this can differ from in-restaurant prices to account for the cost of delivery and their own service fees.
How Their Pricing Has Evolved
Uber Eats’ pricing strategy has materially changed over time. When it first launched, the platform often used a flat delivery fee model, charging a consistent fee regardless of distance or order size along with no additional service fee since the delivery fee covered the cost of the service. However, eventually they moved from flat pricing to variable delivery fees and service fees as the service expanded, accounting for factors such as the distance between the restaurant and customer, the time of day, and local demand. Thus, their pricing strategy became more flexible to account for a diverse variety of factors when an order is placed.
Then, Uber Eats began implementing surge pricing during peak times and in high-demand areas, increasing delivery fees further. They also worked to encourage larger orders by adding the “small order fees” for orders below a certain threshold. This indicated another shift from a variable pricing plan to dynamic pricing in order to account for demand differences and to capture revenue surges in demand. So, this involved using a lot of data and technology to adapt pricing in real time based on price driver factors.
They then added a subscription layer to their pricing by launching their subscription service Uber One, which could help build customer loyalty and provide savings opportunities for frequent users. Thus, this helped with more recurring revenue and retention.
Due to the highly competitive nature of the industry, Uber Eats constantly tweaks its pricing in response to competitor pricing, responding to the shifts in unit economics. They also constantly spend resources on discounting and promotions while expanding value-add services (e.g. groceries) to retain and attract customers who may be swayed and tempted to utilize other food delivery services instead.
Pricing Strategy Breakdown: Key Takeaways
Why is their pricing strategy effective?
Dynamic Pricing: Uber Eats incorporates variable delivery fees and surge pricing so that they can adapt constantly to changing demand and supply conditions. These increased fees help them manage demand and incentivize drivers to be available. It also ensures that they can maintain profitability during periods of high demand by covering additional operational costs, so their dynamic pricing allows them greater adaptability than their initial flat delivery fee model.
Transparency: Uber Eats provides customers with a clear breakdown of all of the fees included in the final cost before they place them in order to build trust and reduce the likelihood of negative surprises. As a result, this improves the overall customer experience as clear communication helps them understand what they are paying for, enhancing the perceived value.
Introduction of a Subscription Model: Their Uber One subscription service offers tangible benefits like $0 delivery fees and reduced service fees for a monthly fee. This encourages frequent users to subscribe, increasing customer loyalty and recurring revenue. Additionally, subscribers feel they are getting a good deal, especially if they order frequently, making them less likely to switch to competitors. Furthermore, because this subscription service is a membership for both Uber and Uber Eats, it provides benefits beyond food delivery and accesses a larger customer base.
Regional Adaptation: Adjusting pricing based on regional market conditions, local competition, and cost variations ensures that Uber Eats remains competitive and attractive in different areas. And, by tailoring pricing to local economic conditions and consumer behaviors, Uber Eats can effectively penetrate new markets and expand its customer base.
Operational Efficiency: Service fees and small order fees help cover the operational costs of running the platform, ensuring sustainable operations. These small order fees also encourage customers to increase their order size, which can improve efficiency and profitability by reducing the number of small, less profitable orders.
What makes their pricing strategy different from others?
More Pricing Flexibility: Uber Eats leverages surge pricing more prominently than some competitors. This approach adjusts delivery fees based on real-time demand, which helps manage peak times and incentivize more drivers to be available. And, their use of data allows them to implement dynamic pricing, which typically requires a lot of data computation and modeling. So, their flexibility from their dynamic delivery fees allows Uber Eats to optimize revenue and service availability.
Comprehensive Subscription Service: Because their subscription membership is an all-in-one membership for both Uber and Uber Eats, users can become a member for savings and exclusive perks for both services. This increases the perceived value of the subscription compared to the subscription services of competitors and offers unique benefits connected to their ride-sharing platform.
Willingness to Make Changes: Uber Eats has constantly worked to adjust their pricing and pricing strategy as needed, adding new fees as value is created and consumed by users. So, their approach in embracing changes has allowed them to focus on capturing their value in their prices and maximize profit.
Extensive Promotions and Discounts: UberEats frequently offers targeted promotions, discounts on first orders, seasonal deals, and referral incentives. This proactive approach to promotions helps attract new users and retain existing ones. Also, this willingness to test pricing through promos and discounts showcases their willingness to adjust their pricing strategy and respond to developments in the industry as they arise.
Seamless App Experience: The UberEats app is known for its user-friendly interface, live order tracking, and easy payment options. These features enhance the overall user experience and justify the pricing model. Also, due to the similar design and layout to the Uber app, there is continuity in their branding that creates a sense of familiarity for new users.
Expanded Delivery Services: Beyond restaurant meals, UberEats has expanded into grocery delivery, alcohol delivery, and retail delivery. This diversification of services creates additional revenue streams and attracts a wider customer base.
How did they do it?
Targeted Promotions and Discounts:
First-Time User Discounts: UberEats attracted new users with significant discounts on their first orders, making it easy for potential customers to try the service at a lower cost.
Seasonal and Special Promotions: The platform regularly offered seasonal promotions, holiday deals, and limited-time discounts to encourage more frequent ordering and boost customer retention.
Referral Programs: UberEats incentivized existing users to refer friends by offering discounts or credits to both the referrer and the new user, effectively expanding its customer base through word-of-mouth.
Fee Breakdown Explanation: Detailed explanations of the various fees were provided in the app and on the website, helping customers understand the value they were receiving for the price paid. This transparency helped build trust and reduce potential friction points that typically come with price increases.
Subscription Service Marketing: To entice users to try Uber One, the company offered free trials or discounted introductory rates, allowing customers to experience the benefits before committing to a monthly fee.
Strategic Partnerships and Exclusive Deals: UberEats partnered with popular restaurants and chains to offer exclusive deals and promotions, which were heavily marketed through various channels. These partnerships not only provided value to customers but also differentiated UberEats from competitors by working with prominent chains such as McDonald’s, Starbucks, Chipotle, Sweetgreen, and more. And, by expanding into grocery and retail delivery, UberEats marketed itself as a comprehensive delivery service, offering more than just restaurant meals. This was communicated through targeted ads and promotional campaigns.
Leveraging Technology and Data: Using data analytics, UberEats personalized its marketing efforts by recommending promotions and deals based on user behavior and preferences. This increased the relevance and effectiveness of their marketing campaigns. They also used the platform’s in-app notification system to inform users about ongoing promotions, subscription benefits, and new features, ensuring that customers were always aware of opportunities to save money.
Cross-Promotion with Uber: UberEats leveraged its connection with Uber’s ride-sharing service to cross-promote deals and subscriptions, offering bundled discounts and promotions to users of both services. This strategy helped to tap into Uber’s existing user base.
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OpenAI is a non-profit artificial intelligence research company founded with the mission to develop and direct AI for the betterment of humanity. Unlike profit-driven entities, OpenAI’s research is free from financial obligations, allowing a singular focus on positive human impact.
Pioneering AI for Humanity’s Benefit
Since its inception in 2015, OpenAI has raised over $11 billion in funding and has been at the forefront of AI innovation, with products like ChatGPT and DALL-E making waves. ChatGPT, an AI chatbot, simulates human conversation and offers a subscription-based service, ChatGPT Plus, with access to advanced features like DALL-E 3 for image generation and real-time web browsing via Bing integration. Codex simplifies coding by leveraging AI to understand and generate code in various programming languages.
OpenAI has also significantly contributed to the advancement of large-scale language models (LLMs), particularly the GPT series, enhancing natural language processing capabilities. The company has also been a vocal advocate for ethical AI, emphasizing responsible development and deployment. Furthermore, OpenAI is actively engaged in AI safety and alignment research, ensuring AI systems align with human values and goals. Their involvement in AI governance discussions underscores a commitment to safe and beneficial AI use.
Industry Overview: AI in the Spotlight
The Artificial Intelligence (AI) industry has grown considerably both in terms of the number of AI-related companies but also recognition and use by mainstream users. The industry includes tech giants like Google, Microsoft, Amazon, and Facebook, along with a swarm of ambitious startups and research institutions.
Despite being a relatively newer industry, AI has accelerated in growth over the last several years, especially as the technology has become more mature and companies in other industries such as tech and finance have adopted and embraced it to gain a competitive advantage. And, now, there are currently more than 70,000 AI companies worldwide, and worldwide spending on AI systems was estimated to be approximately $154 billion across all industries in 2023.
Both companies big and small are actively working to bring AI to the market. In 2023 alone, AI startups raised $42.5 billion across 2,500 equity rounds, exhibiting the amount of resources invested into AI products and the rapid expansion of AI into the market. Larger companies with ample resources are developing AI technologies in-house with teams of data scientists and engineers brought together to work on projects for specific needs. Larger companies are also acquiring AI startups and smaller companies with AI expertise to gain access to AI technology and talent.
In general, the power of processing for AI has advanced over time, playing a crucial role in enabling LLMs to work effectively. With the development of more powerful hardware as well as improvements in algorithms and software optimizations, AI models have become more efficient and successful with the ability to process vast amounts of text data with unprecedented accuracy and speed.
The rapid integration of AI into products and services has allowed more users to grow comfortable with it. Now, AI is not only readily available but is simple enough that people can access and use it without fear. The low barrier to entry has helped increase the accessibility and adoption of AI by mainstream users over time.
As a result of its explosive growth and popularity, the competition in the AI industry is fierce with different applications and adoption by customers. Other than OpenAI, Google DeepMind and their Gemini Models, focus on building general-purpose learning algorithms. With Amazon as their major investor, Anthropic is another heavyweight, specializing in AI safety and research. They have raised more than $7 billion from investors, valuing Anthropic at up to $18.4 billion. They’re hot on OpenAI’s heels, boasting a funding level second only to Google. Cohere is a rising star, focusing on building language models for companies. Stability A.I. is also in the ring, known for being the world’s leading open-source generative AI company.
Then there are the tech titans. Microsoft is no slouch either, investing heavily in AI with initiatives like Azure AI and Cortana, and developing a range of AI products and services. Facebook wields AI in its products and services, from facial recognition to content moderation, through its product Meta AI. Amazon, with its AWS and robotics ventures, is a significant force in AI. IBM, famous for Watson, is a key player in healthcare and business analytics AI. Because of the ability to develop faster and the large amount of investment put into the industry from companies across the globe, the AI industry is constantly changing and growing.
The Pricing Strategy: Pricing Plans That Speak Your Language
Target Consumer Audience:
OpenAI has three different core customer segments that they focus on. The first is the mainstream, who learn and use OpenAI products without much barrier to entry. It was immediately evident when OpenAI first launched just how quickly they were able to get mainstream adoption. For instance, just five days after it was launched and made public in November 2022, ChatGPT reached 1 million users. By comparison, Instagram took 2.5 months to reach 1 million users. And, it grew rapidly, reaching 100 million monthly active users in January 2023, making it one of the fastest growing applications in history.
Businesses make up another core segment for OpenAI. With the ways that companies can leverage AI to increase productivity and reduce costs, OpenAI has worked with businesses seeking to revolutionize their industries. Some businesses partner with OpenAI to experiment while others hope to operationalize their processes. Either way, many businesses with a vision for the future turn towards OpenAI to innovate and find new solutions.
Finally, developers are the third core customer segment that OpenAI targets. Developers are constantly working with OpenAI to harness the technology and platform in order to build out a broader ecosystem and bring their ideas to life.
Current Pricing Plan:
When it comes to pricing, OpenAI believes in keeping things transparent, so you know exactly what you’re getting. Whether you’re diving into the depths of language models or painting with pixels in image models, OpenAI is pretty flexible and tries to offer a plan that fits your needs.
For instance, as an evolving technology, they offer different versions with some more powerful than others (e.g. ChatGPT-3.5 vs. 4). So, access to the newest versions and features will offer users more potential value and faster iteration
The Pricing Metric:
For these language models, the pricing metric they are using here is tokens and number of users. A token here refers to a unit of text that the model processes at a time, where each token typically represents a word or a subword with the model processing a sequence of tokens to understand and generate text. So, looking at the pricing for their original GPT-4 model which can understand more complex instructions, it is currently $5.00/1M tokens for inputs and $15.00/1M tokens for outputs. By comparison, the GPT-3.5 Turbo model is the fast and inexpensive offering for simpler tasks, where it is currently priced at $0.50/1M tokens for inputs and $1.50/1M tokens for outputs.
For the artists and visual thinkers, DALL·E 3 has its own pricing model based on image quantity, quality, and resolution. So, at a 1024×1024 resolution, DALL·E 3 offers two options: Standard quality at $0.040 per image and HD quality at $0.080 per image. For resolutions of 1024×1792 and 1792×1024, the pricing rises as Standard quality is priced at $0.080 per image and HD quality is priced at $0.120 / image.
Pricing for Different Customer Types:
Finally, ChatGPT offers a range of options for different types of customers. The Free plan is perfect for beginners, while the Plus plan, at $20 per user billed monthly, is for those looking to boost their productivity. Teams can opt for the Team plan, starting at $25 per user billed annually or $30 per user billed monthly, for supercharged collaboration. And for the big players, there’s the Enterprise plan, tailor-made for innovative companies looking to scale securely.
How Their Pricing Has Evolved:
OpenAI’s pricing journey has been a tale of adaptation and innovation, driven by a commitment to meet the evolving needs of its users. From early access programs to tiered pricing structures, OpenAI has continuously refined its approach to pricing to provide greater flexibility and value to its customers.
In its early days, OpenAI offered select partners and researchers early access to its language models, such as GPT-2 and GPT-3. This allowed the company to gather valuable feedback and insights, enabling them to improve the models before their wider release. Then, with the launch of the GPT-3 API, OpenAI introduced a usage-based pricing model, where customers pay based on the number of tokens processed by the model. This model offered flexibility and scalability, allowing users to pay only for what they use. Recognizing the diverse needs of its users, OpenAI later introduced tiered pricing for its API. This approach offered different pricing plans based on the level of access and usage requirements, allowing users to choose a plan that best suited their needs and budget.
Initially, OpenAI restricted the use of its models for commercial purposes. However, in response to user feedback and demand, the company later introduced a commercial use plan, allowing businesses to use the models for a wide range of applications. Pricing for these custom models is based on the complexity and scope of the project, ensuring that users receive a tailored solution that meets their unique requirements.
Furthermore, the rapid rise of competitors, especially those backed by big tech companies such as Google and Amazon, has led to increased competitive pressure on OpenAI. For instance, many of OpenAI’s competitors also price based on usage metrics, and some (such as Google Cloud AI and AWS) even offer volume discounts for high-volume usage. However, in spite of the rise of alternative offerings, OpenAI has not adapted much, if at all, as its pricing has not changed much over the same period of time in which these competitors have emerged. This is likely due to its widespread popularity and public recognition as a premium provider of AI services, giving it an advantageous position within the market.
When taking a closer look at OpenAI’s pricing changes over time, we can observe the key differences in their pricing models over a one year time span, between February of 2023 to March of 2024. For instance, back in February of 2023, their language model offerings were completely different from those offered currently, as they only offered their base models Ada, Babbage, Curie, and Davinci.
And, while the pricing was still centered around tokens, OpenAI offered price points for every 1K tokens. Furthermore, they introduced and enticed new users to the service through a “Start for Free” offering that they no longer include now, which entailed giving new users $18 in free credit to be used in the first 3 months to experiment with. Also, as the technology was pretty new, OpenAI made sure to enforce usage quotas with their rollouts, where new users would have an initial spend limit that could increase over time based on a user’s track record.
By March of 2024 the next year, OpenAI offered multiple language models with varied capabilities, also allowing users to view pricing in units of either per 1M or 1K tokens. Shifting to “input” versus “output” pricing (as opposed to “prompt” and “completion”), the new pricing model also includes a “Vision pricing calculator” that allows users to view how pricing varies for different resolutions. Finally, with a more established consumer base by March of 2024, OpenAI outright eliminated the initial offering of “starting for free”, which had evolved from offering $18 in free credit to $5 to none. Ultimately, many of the pricing changes evolved as the technology evolved and as the consumer base grew in size, catering to the growing complexity of the models themselves as well as the popularity of the services.
Pricing Strategy Breakdown: Key Takeaways
Why is their pricing strategy effective?
Accessibility: OpenAI offers a range of pricing tiers, from free to enterprise-level plans, making its technology accessible to a wide audience, from individual developers to large organizations.
Scalability: The pricing model scales with usage, allowing users to start small and increase their usage as their needs grow, without needing to renegotiate terms or switch providers.
Flexibility: OpenAI’s pricing allows users to choose the level of access and support that best suits their needs, from self-serve options to more hands-on support for enterprise customers.
Transparency: OpenAI’s pricing is transparent and easy to understand, with clear pricing tiers and usage limits, which helps users budget effectively and avoid unexpected costs.
Value-based: The pricing is aligned with the value that users derive from the technology, which is particularly important for users who are looking to use AI to drive business outcomes.
What makes their pricing strategy different from others?
Focus on Usage: OpenAI’s pricing is often based on usage metrics, such as the number of API requests or compute resources consumed, rather than a flat fee. This allows users to pay for what they use, which can be more cost-effective and flexible, especially for users with varying or unpredictable usage patterns.
Tiered Pricing: OpenAI offers tiered pricing with different levels of access and support, allowing users to choose the tier that best fits their needs and budget. This tiered approach is more flexible than a one-size-fits-all pricing model and can accommodate a wider range of users.
API-first Approach: OpenAI’s pricing is designed with an API-first approach, catering to developers and businesses looking to integrate AI capabilities into their applications. This approach is more developer-friendly and aligns with modern software development practices.
Value-based Pricing: OpenAI’s pricing is based on the value that users derive from the technology, rather than just the cost of providing the service. This value-based approach allows OpenAI to capture more of the value it creates for users, which can lead to more sustainable pricing over the long term.
How did they do it? Constant engagement and creating relationships with consumers
Clear Message: OpenAI was transparent about its pricing, clearly outlining the different pricing tiers and usage limits on its website. This transparency helped build trust with potential customers and set clear expectations about the cost of using OpenAI’s services.
Developer Outreach: OpenAI actively engaged with the developer community through events, conferences, and online forums to promote its pricing strategy and solicit feedback. This outreach helped OpenAI understand the needs of its target audience and tailor its pricing strategy accordingly.
Case Studies and Testimonials: OpenAI showcased case studies and testimonials from satisfied customers to demonstrate the value of its services and the effectiveness of its pricing strategy. This social proof helped build credibility and attract new customers.
Partnerships and Integrations: OpenAI partnered with other companies and integrated its services into popular platforms and tools to expand its reach and make its pricing strategy more accessible to a wider audience.
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Skims is a popular American shapewear and clothing brand co-founded by Kim Kardashian, Emma Grede and Jens Grede in 2019. With a focus on body positivity and inclusivity across the brand, Skims has rapidly become popular due to its diverse range of nude tones and sizes, as well as its innovative designs that cater to various body types.
Changing fashion perceptions through the Kardashian brand
Skims is not only popular but also influential in the fashion industry. Its emphasis on inclusivity with how their range of products cater to a variety of body types and skin tones has garnered it a lot of praise and attention. Furthermore, it has been at the forefront of the shapewear revolution in terms of shifting the paradigm towards comfortable and functional shapewear for everyday use, providing a diverse array of designs and stretchy fabrics. And, especially during and after the COVID-19 pandemic, Skims has offered popular loungewear products for people who spend more and more time at home to enjoy.
The shapewear and loungewear market in general has seen significant growth in recent years due to various fashion trends, an increasing focus on body positivity, and a growing demandfor functional and stylish clothing. This has made the industry highly competitive with the competition between both established and emerging brands. For Skims specifically, its main competitors are Spanx, Commando, Yummie, Honeylove, and Savage x Fenty, who all either offer similar product offerings and/or incorporate similar messaging and branding.
The Pricing Strategy: Inclusive Luxury Positioning in a Highly Competitive Market
Target Consumer Audience:
Due to the nature of their products, Skims has a generally broad consumer audience but primarily focuses on women seeking comfortable and inclusive shapewear, loungewear, and undergarments. Their emphasis on inclusivity means that their products aim to cater to women of all shapes, sizes, and skin tones. And, with Kim Kardashian as the figurehead of the company, much of its marketing often features many other celebrities and influencers.
Current Pricing Plan:
Across its wide variety of products, Skims’ pricing is considered mid-range to premium, reflecting its focus on quality materials and innovative designs. For example, a basic shapewear piece might range from $30 to $80, while more elaborate or specialized items could cost $100 or more. As a result, Skims’ pricing is generally in line with other premium shapewear and loungewear brands such as Spanx and Yummie. But, it is also slightly more expensive than some lower-priced brands. So, Skims emphasizes the quality and value of their products so that customers can instead perceive Skims’ products as worth the investment.
How Pricing Has Evolved
Since its launch, Skims’ pricing strategy has remained relatively consistent, focusing on this mid-range to premium pricing for its shapewear, loungewear, and undergarments. In fact, such consistency in pricing is a part of their branding in general, as they maintain a consistent pricing approach across all of its size and shade offerings to deliberately avoid price discrimination based on size or color. However, the brand has occasionally introduced limited-edition or special collaboration collections that may have different pricing structures. Thus, this has pushed the image of the brand being one that is both premium yet accessible.
Also, compared to other brands, Skims offers very limited discounting in terms of frequency. They have also done discounting in various ways, such as distributing promo codes through email newsletters, social media, or partnerships with influencers or media outlets. They have also offered discounted prices for members as membership benefits as well as occasionally holding short sales periods for select products as advertised on their website and social channels.
Deeper into Skims: Key Takeaways from their Pricing Strategy
Why is their pricing strategy effective?
Focus on the brand and brand ambassadors: Premium yet accessible branding helps differentiate Skims from lower-priced competitors through its emphasis on high quality
Broaden the brand’s value drivers: Skims’ commitment to Inclusivity starts with its founders down to the product – same pricing across all sizes and nude shades helps reinforce its brand image
Establish pricing expectations: Their consistent pricing since their launch has helped build trust and loyalty among its customer base
Establish value expectations: Limited discounting helps Skims maintain the perceived value of its products and encourages customers to make purchases at full price instead of waiting for sales, leading to higher profit margins for the brand
How did they do it? Maximize branding and marketing assets
Create and support assessable premium pricing: Good brand positioning helps them focus on being a premium brand with high quality
Influence, influence, influence: Founder Kim Kardashian and other celebrities helped to create buzz and reinforce their premium image
Create FOMO: Limited Edition drops help create buzz and excitement by being different from regular offerings which creates a sense of exclusivity
Leverage social selling: Savvy social media marketing helps them focus on their messaging around value and inclusivity
Watch Out! If you use this pricing strategy playbook…
Understand your target customer segmentation and their willingness to pay because this is crucial to figuring out your eventual pricing strategy.
Skims is a premium brand, so it is important to remember that the quality of your product justifies your pricing.
Value perception is key as it affects the way customers view your pricing and determine whether your product is truly worth the investment.
Utilize promotions and discounts in a reasonable manner with a focus on customer behavior. Don’t break the bank and use the element of surprise so that your customers aren’t just “waiting it out” until the next promotional period.
A compelling brand image can essentially support higher pricing, so take time to work on it and make it consistent with your product offerings.
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In our previous blog regarding pricing strategies for beauty brands, we covered the unique aspects of the beauty industry that can cause various challenges to arise and how some brands may utilize pricing as a tool to not only counteract such challenges but to grow and succeed. Here, we will delve deeper into some of the real challenges that come with pricing for beauty and cosmetic brands and then introduce a relevant case study to detail how exactly pricing can truly make a difference.
Delving into the challenges beauty brands face
Beyond what we have discussed previously, there are many unpredictable challenges that beauty brands may encounter as they formulate their pricing strategies.
With numerous brands offering similar products, there is constant pressure to keep prices competitive. This can lead to pricing wars and margin erosion. At the same time, brands need to differentiate their products to justify higher prices. And, because consumers often associate higher prices with better quality in the beauty industry, brands need to carefully manage this perception while staying competitive. Finally, in spite of all of these other challenges, beauty brands will also have to deal with rapidly changing beauty trends, learning how to adapt quickly and making sure their pricing strategies align with these trends to remain relevant and competitive.
Furthermore, introducing product differentiation within such a crowded market can be very difficult. For instance, when a brand introduces a new and unique product, competitors may respond with their own innovations or price adjustments. So, brands must be prepared to adapt their pricing strategies accordingly. Furthermore, introducing a new, differentiated product often requires educating consumers about its benefits. This can be a costly and time-consuming process that impacts pricing decisions. And, differentiated products may require a different distribution strategy, such as being sold exclusively through certain channels. This can impact pricing decisions and channel relationships.
And, as we mentioned previously, the margins are thin for beauty and cosmetic brands due to the numerous costs they accumulate. This can include costs from investing in social media, establishing influencer partnerships, and more that can all eat into your profit margins. Actual product development costs are expensive, especially if you are investing into the research and development of new ingredients and formulas. And, because of the importance of brand image, brands typically incur packaging and presentation costs to appeal to customers who may be more willing to pay if the aesthetics of a product are attractive. Many brands will likely accumulate distribution costs trying to get their products into the hands of consumers, especially if they rely on third-party distributors or retailers due to their own limited distribution networks. So, these are some of the many different kinds of costs that brands will likely amass in trying to make their products stand out and appeal to their target consumers.
Case Study: Helping beauty brands achieve their goals
HelloAdvisr has worked with multiple brands within the beauty and cosmetics industry, accumulating experience and expertise with regards to how pricing can play such a crucial role in building for sustained growth.
For example, here we have a case study of our work with a fast-growing FemTech brand. Needing to assess their own approach and strategy to pricing, this brand realized that they were struggling with their product pricing because it was becoming increasingly complex as they expanded their purchasing methods (e.g. a la carte, bundles, and subscriptions). Furthermore, they were dealing with added complexity due to expansion plans into newer channels like retail.
As a result, we helped leadership team transform their pricing approach in several ways:
Designed a custom pricing strategy workshop with the brand’s senior leadership team.
Assessed existing pricing portfolio – the prices and price combinations (including promotions and discounts) created and presented to customers.
Conducted data analysis of brand sales and select customer and product cohorts.
Reviewed the brand’s customer segmentation and value proposition.
Through our work, this brand was able to build a pricing strategy framework they could use for new and existing products. They also implemented pricing portfolio recommendations including discounts and bundles, which subsequently increased conversion rates. So, with these improvements, they continued to expand revenue growth and were well-prepared for the next round of fundraising.
Final thoughts
Pricing in the beauty world is a multifaceted challenge that requires a deep understanding of market dynamics, consumer behavior, and brand positioning. By carefully navigating these challenges and staying agile in response to market shifts, beauty brands can find success in setting prices that resonate with their target audience while ensuring sustainable growth. It’s a delicate balance, but one that can ultimately lead to long-term success in this vibrant and ever-evolving industry.
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In the world of beauty and cosmetics, where trends evolve and change at a rapid pace, pricing can be a make-or-break factor for brand Choosing the right pricing strategy is not just about covering costs and making a profit; it is about standing out amongst your competitors, where differentiation is the key to sustained success. Here, we will delve into the many pricing challenges that beauty and cosmetic brands regularly face and introduce some strategies that can be used to overcome them.
What makes beauty products unique?
Beauty products are unique in various ways. First, they are very personal. They can help you represent yourself, connect with your values (e.g. using clean ingredients), and identify with a specific community. They are something you frequently put on your face and body for a purpose, permeating into your everyday life.
As a result, these products hold a unique position in the market due to this intimate relationship with consumers. Because of the emotional connection between the consumer and the beauty product, purchasing decisions can become highly subjective.
Furthermore, beauty products and brands are no longer simply owned by big conglomerates. They are more accessible to creators and brand-builders, making the industry even more competitive. Furthermore, this beauty marketplace is known for its trend-driven nature with constant innovations. This means that new ingredients, formulas, and technologies are constantly introduced, creating a continuous stream of new products and brands entering the market.
Finally, more often than not, beauty products are not just products but experiences. They can be moments of self-care, indulgence, and transformation. This aspect adds value to these products beyond their obvious functional benefits, which allow brands to offer them as unique and memorable experiences worth paying for.
Challenges beauty brands face
Due to the unique nature of beauty products, there are many challenges that come with pricing them.
First, there is increasingly more competition as both big brands and new entrants (some funded by institutional investors) fight over many of the same customer segments. So, it is even more difficult to stand out and differentiate your product from the rest of the competition. Brands often face immense pressure to price their products competitively to attract customers while ensuring that they can cover their costs and make a profit simultaneously.
Second, it is more expensive to create awareness and willingness-to-pay. With the challenges that come with product differentiation in such a crowded market, many brands find it difficult to communicate their own unique value proposition to potential consumers. As a result, some brands may find it difficult to justify premium pricing and experience price wars with their competitors.
Third, the margins are thin within the beauty and cosmetic industry, not only due to this high level of competition but also many other costs accrued in order to stand out in such a crowded market. These can range from promotional costs to R&D costs to distribution costs, among many others. All of these costs can make your margins extremely thin and increase pricing complexity.
Fourth, while many beauty brands like to implement promotional pricing campaigns to attract new customers and drive sales, it is a balancing act because excessive discounting can devalue a brand. Furthermore, it can erode margins and make it difficult for some brands to achieve profitability despite gaining new customers.
Finally, consumers in this particular market have a wide range of price sensitivity. Pricing plays a role in defining the brand, and can be a factor in switching. Like any product category, a low or discounted price can not compensate for poor products. Beauty customers have high expectations across price points and channels, so understanding this value exchange – product for a price – is critical for successful beauty brands.
How successful brands use pricing
Facing a wide variety of challenges, we have seen successful beauty and cosmetic brands turn to pricing as a powerful tool to help them achieve their growth objectives. Pricing can play this crucial role by:
1. Building brand image
Pricing can communicate the brand’s positioning in the market. For instance, premium pricing can help create a perception of quality and exclusivity. On the other hand, value pricing can attract budget-conscious consumers. Retains your company’s overall number of accounts or subscriptions.
2. Supporting differentiation
Within such a crowded market, pricing can help brands differentiate their own products from those of their competitors. Unique pricing models, such as personalized offerings, can help brands really stand out. And, with competitive pricing and the right promotions, brands can first acquire new customers and then focus on retaining them through their product quality and customer service
3. Creating pathways to sustainable growth and profitability
Nailing a dynamic and effective pricing strategy can really help brands improve their profit margins, so it is important to spend time and resources on developing one that can lead to sustained growth. Doing so can even allow many brands to then reinvest in other areas such as product development and expansion.
4. Building the right customer base
With the right customer segment in mind, pricing can help your brand attract the right customers who are willing to pay for your products. As you attract more and more of them, you can build up a solid customer base aligned to all facets of your business. Furthermore, using pricing strategies such as loyalty programs or discounts for repeat customers can encourage customers to make repeat purchases, ultimately building brand loyalty.
5. Expanding into new markets
When entering new markets and expanding, brands can adjust their pricing based on local market conditions, competition, and consumer preferences to maximize their chances for success. So, establishing dynamic pricing strategies can help maximize your brand revenue.
Final thoughts
The world of beauty and cosmetics today is a tough one to navigate as challenges emerge daily that can disrupt your growth as a company. With such a competitive market that deals with such unique products, many startups find it difficult to figure out where to start with pricing, sometimes dismissing it altogether as something that requires their time and effort. But, dedicating resources to developing your pricing strategy is priceless as it can be extremely rewarding in the long run. The challenges within the beauty industry that we listed above are only several among many others that exhibit the true complexity of growth within this industry. So, it is important to have a detailed understanding of what challenges you may encounter and how you can counteract them as you grow your brand within this space.
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In the world of entrepreneurship, startups often find themselves at a crossroads when it comes to product development. While building something a customer explicitly asks for is an essential step, staying in this phase for too long can hinder a company’s growth. In fact, many early-stage companies (e.g. pre-seed and seed stage startups) sit and get stuck in this phase, eventually wasting time and resources that can be better spent elsewhere.
Building something that a customer “asks for” should just be an initial layer of need and an important directional step in building a product and your company. As a result, there is a crucial difference between building something a customer asks for versus something they want to buy that all companies should be aware of. So, let’s take a look at the challenges early-stage companies face and the significance of transitioning from necessity to desire.
The Initial Layer of Need
When a customer asks for a specific product or feature, it marks the initial layer of need. This interaction is a crucial step for startups, essentially guiding them in the right direction as they seek to address real problems faced by their target audience. Many pre-seed and seed stage startups find themselves in this phase, diligently working to fulfill customer requests. So, a common example that illustrates the concept of this difference between want versus need can be something as commonplace as working out and going to the gym. While the initial “need” for someone who works out is likely to get healthy, the true “want” may be that they would like to look like their favorite athlete or celebrity, setting that as a concrete end goal to work towards.
Stuck in the Loop:
However, a significant challenge arises when companies get stuck in this phase. While addressing immediate needs is important, dwelling exclusively on building what customers ask for can create a loop, preventing companies from reaching their full potential. This loop can become a trap for early-stage companies, hindering their ability to evolve and adapt to the changing market demands.
Furthermore, do customers actually even know what they want? This question is even more meaningful for products and services in new emerging technologies and innovations. And, if you give customers what they want, will they still necessarily want it in a month or a year? Looking into the past, there are many case studies of products that companies developed taking into account what customers have “wanted”, only for the actual demand to be less than expected or last for a short period of time before these same customers moved onto something else.
A relevant example of a product that did not meet expectations despite high initial customer interest is Google Glass. Introduced as a revolutionary wearable technology, Google Glass was a highly anticipated product that specifically offered augmented reality features in a wearable format. However, despite the significant hype and interest generated from the announcement, it failed to gain widespread consumer adoption, largely due to concerns regarding privacy, usability, and social acceptance. While the initial explosion of interest seemed to align with the idea that customers “wanted” a product like Google Glass, the actual demand for the product lasted a very short period of time until Google eventually stopped selling the product to consumers altogether.
Why Can’t We Get Out? Why Is This a Problem?
The primary reason startups struggle to move beyond building what customers ask for is a fear of deviating from the familiar. Founders may be reluctant to step out of their comfort zones, fearing that addressing a broader, more latent need might alienate their existing customer base. This reluctance to explore uncharted territories can lead to stagnation, inhibiting a company’s ability to innovate and grow.
Moreover, many startups take on the common belief that “the customer is king”. If you don’t give them what they want, then they will switch to someone or something else who can. As a result, this can intimidate many startups into simply trying to cater to the customer’s desires when they should really be determining what their customers need above all else.
From Need to Want: The Importance of Willingness to Pay
The transition from building what customers ask for to creating something they want to buy hinges on the concept of “willingness to pay.” Wanting to buy implies a deeper connection and a higher level of need—a product or service that customers not only find useful but are also willing to invest in financially. This transition is crucial for the survival, growth, and success of a company. Founders can get stuck in the phase working towards that initial layer of need based on what the customers “ask for” when they should really be building towards a higher level of need based instead on “willingness to pay”. Focusing instead on this higher level of need allows founders to set their companies up for more sustained success, necessary for their startups to survive, grow, and ultimately win.
For example, the Segway Personal Transporter was hyped as a revolutionary way to travel short distances. However, despite the enormous fanfare that it met when introduced, the Segway ultimately failed with production eventually halting in 2020 because the makers did not think about “willingness to pay”. More specifically, though it was an exciting piece of technology, it offered very little real-world utility and eventually failed due to its relatively high price, safety concerns, and limited practicality. Because consumers were unwilling to pay for a product that offered very little in terms of utility, it resulted in very little sustained success for the product beyond the initial excitement.
Why Is Wanting to Buy Important?
Willingness to pay is a clear indicator of value. When customers are not just asking for a solution but expressing a genuine desire to invest in it, it demonstrates a product-market fit that goes beyond mere necessity. Companies that focus on building what customers want to buy are more likely to establish a sustainable business model, ensuring not only survival but also long-term success in the competitive market.
Final thoughts
While building something a customer asks for is an essential step in product development, it’s crucial for startups to recognize the limitations of this approach. Transitioning from fulfilling immediate needs to creating products customers want to buy is a strategic move that sets the stage for sustained growth and success. By understanding the concept of willingness to pay, founders can break free from the loop of building to need and unlock the full potential of their products and companies.
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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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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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