Transcription
Step 16PricingFrameworkMIT Global Startup LabsPeru 2018
Step 16: Pricing Framework
Why Now?1.Value Creation Value Capturea. Business Model Pricing2.Set initial estimate of pricinga. Used in LTV calculationb. Important to set now, but don’t spend too much time now3.Test with clients4.Change as needed, iteratea. Seasonal/Daily change (gas prices)b. Dynamic pricing - real time (airline tickets based on availability)5.The 1% Windfall, Dr. Rafi Mohammed, McKinsey Studya. 1% increase in price 11% increase in profit
Why Now?1.Value Creation Value Capturea. Business Model Pricing2.Set initial estimate of pricinga. Used in LTV calculationb. Important to set now, but don’t spend too much time now3.Getting price right is anTest with clientsiterative and ongoing process4.Change as needed, iteratea. Seasonal/Daily change (gas prices)b. Dynamic pricing - real time (airline tickets based on availability)5.The 1% Windfall, Dr. Rafi Mohammed, McKinsey Studya. 1% increase in price 11% increase in profit
Value Based PricingSetting your price for your products and services based on the perceived value to thecustomer.
Basic Pricing Concepts NOT based on costs Should NOT even share cost info with sales team (Freakonomics - Steven Levitt)20% of Quantified Value Prop, but depends on: Risks you’re willing to take on - subscription vs. upfront“My business is very simple. My customers give me 2, and they get back 10” Steve Walske, CEO of Parametric Technologies Always easier to drop prices than raise prices Price high, offer discountsHigher prices for earlier customers
Price Sensitivity Price elastic vs. inelastic how sensitive your customers are to price changes Tech Enthusiasts 1st people to buy, consumers vs. research, buy only 1, highestWTP, price inelastic Early Adopters Price inelastic, high WTP, require extra attention, potentially highcost Early Majority (pragmatists) THIS IS THE PRICE POINT we should think about forpricing strategy. This is where you make a scalable company Late Majority (conservatives) comes later, pricing strategy will be very clear bythen Laggards/skeptics don’t even worry about them now
Dynamic Pricing Price Discrimination charging different prices to different consumersdepending on their WTP Perfect Charge each consumer max WTPMarket Segmentation Charge higher prices to different (observable) segmentsConsumer Self Selection Offer a menu of related products and let consumersdecide (early bird discount)Using big data Understanding of user characteristics to understand WTPAmazon - Cookies Off - First time users get it cheaperTarget - Credit Card Activity - Target Web Ads & Change Pricing
Other Pricing Concepts Tiered: 2 or more product package options Freemium: a product or service is provided free of charge, but money(premium) is charged for additional features Unit Pricing: You pay for exactly how many units you consume Volume Pricing: The greater quantity, the cheaper the price
A/B Price TestingBefore I explain what this means,let’s do the experiment!
A/B Price TestingYou have the following options to subscribe The Economistmagazine. Which plan would you choose?Scenario #1 Online subscription @ 59/yr Print & Online subscription @ 125/yr Print subscription ONLY @ 125/yr
A/B Price TestingYou have the following options to subscribe The Economistmagazine. Which plan would you choose?Scenario #2 Online subscription @ 59/yr Print & Online subscription @ 125/yr
A/B Price Testing est-pricingDan Ariely, author of Predictably Irrational, did a study on The Economist magazine adsActual results from 100 MIT students:Scenario #1A.B.C.Scenario #2Online subscription @ 59/yrPrint & Online subscription @ 125/yrPrint subscription ONLY @ 125/yrHow many chose option A?Option A: 16%Option B: 0%Option C: 84%Revenue: 11,444A.Online subscription @ 59/yrC.Print subscription ONLY @ 125/yrHow many chose option A?Option A: 68%Option C: 32%Revenue: 8,012Source: TED 2008 “Are we in control of our own decisions?”https://www.ted.com/talks/dan ariely asks are we in control of our own decisions?language en#t-809050
A/B Price Testing est-pricingDan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads
Wrap Up - Key Consideration in Pricing1.2.3.4.5.6.Value CreationCustomer Acquisition AnalysisNature of the CustomerStrength of Your CoreCompetitionMaturity of Your Product
Homework:Report on two (1 Peruvian & 1 international) companies that arecompeting in your field Prepare slides and add them to your Wednesday presentation ppt Guidelines:o Company (founders, date founded, size)o Business (products, target customer, value prop, biz model, and core)o Your Response (how you plan to coexist with them)
Dan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads Scenario #1 A. Online subscription @ 59/yr B. Print & Online subscription @ 125/yr C. Print subscription ONLY @ 125/yr How many chose option A? Option A: 16% Option B: 0% Option C: 84% Revenue: 11,444 Scenario #2 A. Online subscription @ 59/yr
