The hidden world of pricing: uber, trulia, etsy, superhuman, and more

https://www.nfx.com/post/the-hidden-world-of-pricing

Madhavan Ramanujam is a legendary Jedi Master of pricing among tech unicorns including Trulia. He is the author of Monetizing Innovation and a partner at Simon-Kucher.

3. Acceptable, Expensive, or Prohibitively Expensive?

• One of the interesting ways to do this is by asking: the acceptable, expensive, and prohibitively expensive questions. This is a way to quickly identify psychological thresholds.
• What we have seen over and over again from many thousands of projects that we’ve done, acceptable price tends to be the price where people not only love your product, but they also love your price.
• If you’re at a growth stage, you need a low friction price — maybe an acceptable price is okay because it becomes a no-brainer.
• Expensive price tends to be the price that is more value-priced, as in prices align with the value that you deliver and people don’t necessarily love you or hate you. They’re kind of neutral and that’s that.
• Prohibitively expensive tends to be the price where people laugh you out of the room.
• If you do this at scale, even through quantitative surveys, you start plotting graphs that actually show you cliffs in the demand curve where there are some psychological thresholds across the population. Knowing these thresholds is important.

We use one of the easiest methods, which is the Van Westendorp Price Sensitivity Meter. So in late 2015, we asked hundreds of our earliest users the following questions:

1. Number one, at what price would you consider Superhuman to be so expensive that you would not consider buying it?
2. Number two, at what price would you consider Superhuman to be priced so low that you would feel the quality could not be very good?
3. Number three, at what price would you consider Superhuman to be starting to get expensive so that is not out of the question, but you would have to give some thought to buying it?
4. And number four, what price would you consider Superhuman to be a bargain, a great buy for the money?

If you have a premium position, the question to focus on is the third question, which is when does it feel expensive, but you’d still buy it anyway? One can imagine that Tesla did that with the Model S. And for us, the median answer to that third question actually turned out to be $29 per month, and then a few conversations with some pricing experts later and we rounded up to $30 per month because when you end a price in the number nine, that doesn’t signal quality, that actually signals value, and we’re all about signaling quality. So, that’s how we picked our price.

6. How You Charge > How Much You Charge

How you charge is way more important because you can align price with how your customers perceive value. And if you do it in the right way, then you have a winning model. Choosing a price point becomes that much easier.

If you tap into this and you identify pricing models that just make sense for your customers, then you’re often unlocking a lot of magic because then you’re aligning your pricing with perceived value automatically.

7. Five Monetization Models That Work, Time And Time Again

1. Subscription

• One caveat though: don’t rush to a subscription on a per user per month, because that’s the most familiar model for you. Test and learn if that is the right model.

2. Dynamic pricing

• Dynamic pricing is having the ability to flex your price based on supply and demand. Even in many consumer situations where it was thought not to be possible, it’s actually becoming more and more possible because you can hyper personalize an offer to a customer through a combination of pricing and promotions.

3. Market-based pricing

4. Pay as you go

• People are asking if there is a usage-based metric or a usage-based model that they can come up with because often when you just have a subscription price, you’re capping out on your monetization potential.

5. Freemium

• The last one is freemium pricing. To us, it’s more of a model than a strategy because if you really have freemium pricing, the key is to have a proper expansion motion from the land of free to expand to paid offerings.
• Many companies that put out freemiums don’t think about this very strategically and often have given the product away. There’s no room to expand.
• What we find time and again is Pareto’s rule likely applies to customer value and willingness to pay as well. 20% of what you build dictates 80% of the value. Most entrepreneurs and startups build 20% of things pretty quickly, and they call it an MVP and throw it out in the market, but they’ve given away 80% of the value. They then focus over 80% of their energy on trying to build stuff that’s only worth 20% more and they don’t have any room for expansion.
• Before rushing into freemium, think hard about it. And if you do, do it in such a way that there’s a proper land and expand motion or restrict the freemium usage beyond a certain point so that there’s a natural expansion that happens in your customers.

9. The 4 Ways Your Monetization Fails9. The 4 Ways Your Monetization Fails

1. Feature shock

• The first one is what I call feature shock. These are products where there’s simply too much going on. It’s over-engineered, often over featured. And because it’s over featured, it’s overpriced and it just does not sell.
• The way to avoid feature shock is to build versions of the product so that you’re not trying to build what I call a one size fits none. You are rationing the product based on different types of customers you might have.

2. Minivation

• This is a failure type where you probably have the exact right product-market fit, lightning in the bottle, but you just didn’t have the courage to charge the right price. You undervalued your own innovation. You basically charge much less than what you could have charged.
• They were thinking about how to come up with a price. They said, “Okay, the last generation we priced at 60 cents, maybe this is really groundbreaking. We can’t be pricing it less than the previous generation. Let’s do this at 85 cents.” When they did a post-mortem for their own pricing, they found out that these consumer electronics companies charge up to a $50 premium because this part was inside those electronics.

3. Hidden gems

• The third type of monetizing innovation failure we see is what we call hidden gems. These are products that simply go against your DNA if you’re a company and you probably don’t bring it out because you’re worried about cannibalizing your existing business.
• I think knowing when to pivot, what to actually do, is the hidden gem. I think startups definitely have an advantage over more established companies because it’s part of their DNA.

4. Undead

• The fourth monetizing innovation failure, and probably my favorite, is what I call undead. These are products that you should have never launched because they come back to haunt you.
• They come in two flavors. Either they’re the wrong answer to the right question or they’re an answer to a question no one cares about. Either way, you shouldn’t have productized it, but you threw it in the market and hoped for the best without understanding the product-market-pricing fit.
• A classic example of this was Google Glass, which was thrown in the market for $1,500. It probably lived on with the paparazzi for a few weeks before it was gone. That just creates massive internal disruption and distraction and then obviously brand damage as well.

12. P.S. Pricing Principles Applied to Life

• We are all products. If we are all products and we are pricing ourselves as in pricing our own services, let’s say you’re a contractor or a consultant, if you’re pricing your own services, avoiding a cost-plus mentality is critical.

• You want to align your price with the value that you actually bring to the table rather than a dollar per hour default which is easier to do but often the absolutely wrong thing to do.
• Thinking about more value-based pricing or pricing based on outcomes is also something that you want to think about if you’re pricing yourself or your services.