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The Pricing Model Revolution

By Danilo Zatta

“If you’ve got the power to raise prices without losing business to a competitor, that’s a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” – Warren Buffett

Pricing is the most effective way to change things. 1% improvement in pricing can occur instantly and at zero cost.

Pricing Framework

  • Price strategy
  • Price setting
  • Price implementation
  • Price steering

Pricing accelerators:

  • technological innovation
  • data science progress
  • new ecosystems
  • marketing of the future

Key pricing pillars to consider:

  • pay per use
    • Aligning price with use value is key
    • Capture latent demand by reducing initial cost associated with physical assets for customers with a low rate of use
    • This triggers expansion for new segments of customers
    • The short lifespan creates a demand for flexible and scalable options at low risk
    • Pay models
      • Pay for space served
      • Pay according to individual use
      • Reorients product as a service
      • Pay for time used
      • Feedback from day passes helps you develop other services and products that satisfy demands as people express them
  • subscription
    • Establish a long relationship with no post-sales contact
    • Can sustain turnover; customer base is the new engine of growth
    • Shift from owning to sharing
    • It’s acquisition of experience, not product
  • outcome-based pricing
    • If you don’t X, you don’t pay
    • Must be:
      • Important and substantial to customer
      • Measurable
      • Independent – nobody able to tweak outcome
  • psychological pricing
    • “We do not see things as they are, we see things as we are ourselves.” – Talmud
    • Nine rules:
      • Contextualize value with a “price anchor” – price something high and the mid grade one is an easy sell
      • Remove resistance to buying by using the printer/cartridge model (cheap investment/expensive maintenance)
      • take advantage of maximum readiness to pay by means of “threshold pricing” the $50 threshold is at $49.99 to win people not willing to pay $51.
      • Facilitate customer choice by means of compromise effect: high price point, mid price, low price to get them to buy mid.
      • Using pricing as an indication of quality: super wild expensive is good
      • Creating scarcity to encourage sales
      • Use a sense of winning to break down pricing barriers : cash back/discount/value add
      • Optimizing the relative discount vs absolute discount: it might be cheaper, but you have to drive to get the cheaper one
      • Impact price perception by means of visual design: size of letter, color, etc
  • dynamic pricing:
    • Surge pricing is not loved, but discounted is
    • Temporal dynamic – take it or leave it based on time
    • Customer based – five star clients vs one-star
  • pricing based on AI
    • Algorithms based on data: historical sales and transaction data, seasonal changes, weather conditions, material prices, geographical data, events, inventory levels, product features, prices and promotions offered by competitors, customer relationship data, marketing campaigns, reviews and articles
    • To do this, you need to do geo pricing, contract margin prediction, churn minimization, discount prediction, customer segmentation, cross- and up-selling data and incentives
  • freemium
    • Unlock value by doing something small for free (like get a PDF in exchange for an email)
    • Free = subsidized directly by what is paid for (pay for two, get one free)
    • Freemium = best for experiential commodities, like base levels of software, best for online offers
    • Triangulation = Turn customer into the product by offering free service but sell the customer data
    • Rules for success
      • Market must be segmentable
      • Must have low variable cost
      • Consumers should act as ambassadors
      • Gradual addition of restrictions to free version introduced
  • sympathetic pricing
    • Flexible and imaginative discounts that help relieve peaks of pain in lifestyle and lend a hand in difficult moments or uphold a shared value
  • participative pricing
    • Choose your price: may increase volume, price fixe offerings, trading volunteer work for food, pay it forward
    • Name your own price: sellers list products with a threshold price beyond which the offer will be accepted, but the threshold isn’t visible to the buyer. (It’s like Priceline)
  • neuropricing
    • “Your brain takes decisions up to ten seconds before you’re aware of it.” – John Dylan Haynes
    • The same wine, priced more, tastes better
    • Wide range of selection/offer inhibits buying
    • context influences price perception
    • gut decisions are in the head