Revenue models depend on pricing. And pricing is one big unknown for most startups. How much do I charge? If I charge low, I will have lost an opportunity – if I charge high I may lose a customer. So what do I do?
Actually price is not one number. It depends on the customer’s willingness to pay. This varies widely. A smart company must take full advantage of this. Customers are different – so prices have to be different. But, how does one charge different prices, for the same product, without being seen as a crooked company. There are strategies that companies follow for exactly this:
Take the case of the airline industry. Their service is essentially to fly people from A to B. But for this same service they charge three rates : Economy, Business and First class with the price being 1 X, 3 X and 4 X of the base price. The real difference between business and economy is minor – about 20% more leg room and some fancier (not necessarily tastier!) food offerings. What they do by this categorization is to take from each category of customer what he is willing to pay- for essentially the same product.
This is even starker in lifestyle products – say shoes. The cost of the shoe may be $5/- per pair made in some sweat shop in China. The same product is available for $ 7/- in China, $ 10/- in a discount store in India, $ 50/- in a classy mall and $ 150/- when branded as Nike. Very little change in the essential product , but with a little embellishment and packing the product price goes up 10 to 30 times.
Norton has four offerings of its antivirus product – ranging from $10/- to $ 25/- year – each version meets the essential need! The differences between the lowest and the highest priced product are very small and cost Norton nothing – they could very well have offered the same price /product to all. But, if they had kept price at the higher end they may have lost some customers at the low end. If they had kept price low they would have lost profit that could be made from those willing to pay more.
So the lessons for startups from this are :
- Prices are not cost related – the only rule is that price must be more than cost
- Price is what the customer is willing to pay; there are different kinds of customers so there is a price band available. One of the key tasks during the startup phase is to discover this price band
- Some customers are bargain hunters, others look for value and there is a category that couldn’t care less (price insensitive). Ensure you have a product (suitably packaged) for each category.
Pricing strategy should recognise differences in customer types and price products to cater to each of these. Product offerings must be created to cater to different categories. These changes need not be substantive nor cost very different. Value , a bit like beauty is often in the mind of the beholder; price reflects this value.
Create differences in perceived value ; name products differently say standard, classic and premium. Don’t be shy to price products boldly. Playing the market cleverly to take advantage of customer differences is not only perfectly legal and moral – it is also practised all over the world.