The more experience I gain running businesses, the more fascinated and puzzled I become with the mystery called PRICE.
What is Price? How is it determined?
Solve the mystery if you can, with the following clues:
P = Perception
When the ‘Zodiac Grill’ – a very sophisticated restaurant launched at the Taj Mahal Hotel in Mumbai, the menu did not have prices. Guests were free to order what they wanted, and then leave behind a price for the meal as they deemed fit. There were no eyebrows raised if guests left behind $1 as long as they thought that was the value of the meal they had enjoyed.
As it turned out, The Zodiac Grill received more revenue for meals served than they had estimated. Guests had enjoyed the ambience, the food and the service and had rewarded the restaurant with a price based on their ‘perception’ rather than what would have been printed on the menu.
The Zodiac Grill today has a fully priced menu and the launch experiment helped the hotel management tremendously to ‘price’ the service appropriately.
I see an interesting pricing model being followed by the digital enthusiasts who make free ‘plug-ins’ for large publishing platforms like Wordpress.org. Subscribers of the wordpress.org platform are free to download all these fantastic plug-ins and then are prompted to ‘donate’ a few dollars to the developers if they feel like it. I am sure that the sum of donations received, generates more money for the developers than they would have earned if they were to price each plug in.
If you are a new start up or a business entrepreneur, try and gauge the prices of your product and services based on what your customers perceive it to be worth. It may be the best way to discover your true value.
R – Revenue Build
Many businesses I know have certain revenue targets in their business plans. They aspire to be say a $10 million Topline Company by the 3rd year of starting up. Pricing then begins to work backwards and they price their products and services accordingly.
Is this the way to build and price your services? I have a contrarian point of view. This approach may damage the value creation.
For the sake of giving an example, let’s assume that you have a Magical Goose that will start laying eggs very soon.
Revenues are important but should not become the death noose of your business as it begins to rev up.
I – Insights
What do people pay for? If you can really examine the finer detail of what consumers really want to reward you for, then pricing can really be made to work for you in a far more profitable way than you could imagine.
Examples are aplenty. It’s well known that kids buy McDonalds 'happy' meals for the toys, and more often then not, their parents then eat the ‘happy’ meals. In India, brands splurge on MTV just for the association with an iconic youth channel more than the actual media reach it delivers. Chinese customers are happy to pay much more for a Gucci bag made in Italy than an identical Gucci bag made in Korea. So, in the case of McDonalds, MTV & Gucci, beyond their core offering, it’s intangible value drivers based on their consumer insights that is also being aggressively priced.
When we sell ‘Advergames’ (branded games), we calculate the time spent by consumers playing the game and hence interacting with the brand. So assume that 200,000 unique players play a brand game for 3 minutes, we have delivered 600,000 minutes of engagement to the brand. Next, we compare how expensive buying 600,000 advertising minutes would be on television and then price our offering very competitively. In this case we have an insight about how our customers (brand owners) VALUE media – not by impressions but by engagement.
When I made socks in my father’s Company, I began walking around in European Clothing stores to discover what kind of socks I should be selling to them. During this process, I stumbled upon an amazing insight – the price of Baby Socks for new borns (as young as 3 months) were the same as the price of Men’s socks as large as shoe size 12! When I dived deeper, I realized that it was mothers who buy socks and they were equally attached emotionally to their newborn child as they were to their husbands and hence didn’t differentiate the price of baby socks vs. men’s socks. Now, baby socks weigh 10% of Men’s socks and hence are 90% more profitable to make. We started our export business making Baby Socks!
Try and go beyond the obvious reasons why consumers are buying your products and services. The real price you can charge them may be hidden in that insight.
C – Costs
You cannot escape measuring costs and then making sure that it’s more than covered for when you start pricing your goods and services. But wouldn’t that make a business just another usual small time business?
If Zynga – the Company behind Cityville and Farmville would have added its costs of servers and salaries and then divided it by the number of players it served, it would have logically priced the game service as a monthly subscription. Instead, they offered all their games as free to play and sold only in-game virtual items. In the a few months, millions of gamers bought virtual gifts for their friends (beer on Poker tables) and pink tractors for their farms! They compensated Zynga multiple times over to what they could have otherwise paid for as a monthly service.
To drive home this point - when you buy seeds in Farmville, you pay for a virtual item that is nothing but an image on your screen. You pay for the electricity to fire up that image on your screen and even for your Internet broadband connection to play Farmville. For Zynga, the money of the Pink Tractor has almost no cost and is an almost hundred percent profit!
So understand costs, but don’t adopt ‘only’ the costs plus formulae to make money. You may well be missing the Pink Tractor hidden in the mud.
E – Endearment
I think this is the most amazing dimension of Pricing. Apple for instance has mastered ‘endearment’ pricing. Consumers like me just have to buy Apple products the moment they become available because I simply LOVE Apple. When my Macbook costs 100% more than a similar laptop, I don’t even think twice before buying it. If an iPad costs $499, it costs $499. I don’t go out and look for comparisons and then decide to buy it or not. The same applies to Fashion brands and the likes. For example, why do you pay $1499 for a black Armani Jacket when you could buy a very similar looking Jacket from Gap at $199?
I don’t think consumers compare prices of brands they are attached to and just pay what they are asked to. As we all know, when you are in love, ‘price’ comes second.
If you can make your consumers fall head over heels and blindly in love with you then you can charge them anything. That’s the ultimate nirvana of Pricing.
Hmm..... I like the idea of asking people to pay what they think the software is worth.
Wonder if I can do something like that with in-App purchases on iTunes ? It should certainly be an interesting exercise - and would probably test the limits of what Apple allows :)
Of course, the problem with software is that most people are rather leery to actually pay for it.
I mean, if I eat a meal at a restaurant, my stomach ends up full and I *feel* that I've got something great.
But with software ? Even though I am a programmer myself, I still resist the idea of paying for *anything*. And this is despite my appreciating just how much time, money and effort would have gone into developing the said software.
On the other hand, I don't mind splurging money on hardware !
@Jyothi - No problems :)
Searching for my name on Google also brings up photos of Nayanatara for some reason :X
This is the best article i have ever read on pricing.
I have read articles on pricing and it was so boring that i felt like sleeping.
As a start-up entrepreneur pricing a product is very big decision.
But alok can we apply this principles in pricing software i.e selling the created software or creating custom software for customer.
i think in India customers don’t see the value and work involved in creating the software and they think that the software has to be cheap.
please alok can you give me some advice in pricing a software product.
Alok - this is really fantastic!! Phillip Kotler is a passe after this..
Always kept wonder how a pair of Levis and something from gini & jonny or lilliput cost the same but found the answer.. Emotional appeal I guess!!
In matured markets price is market determined but in markets like India, if you were to give a choice of allowing what the clients wish to pay we may have to shut shop!!
Have a poser here wrt financial products.. If you have 2 options: a)Platform1 where you have a broker who doesn't charge you a price but on the contrary he shares a part of his revenue and reasonable service or b) Platform 2 where the broker would charge you a price for the transaction but is able to offer a superior service. Assumption here is that the product is widely available in the market.. Which side would you go and why??
First things first -- very good article :)
@Jyoti - While it is good to give examples of iPhones/Barbie Dolls/... in retrospect w.r.t. pricing, one would not know, apriori, how/what to price the product! In such a case, the following approach may be used:
- For the first one/two/few customers - give it free or at a very nominal pricing - that would reduce perceived risks (primarily financial risk with using an untried product) & help you gain an entry. One could also use feedback to fine-tune this product/offering. (Note that if the product doesn't work then you would have lost the opportunity to recover your costs incurred in developing that product - a sunk cost anyway.)
- Once you have a certain amount of customers & a relatively stable product, then you can charge a higher price (more than the introductory pricing) for subsequent customers.
Jyoti Shukla said:
@Jayesh: agree with the punch line being the best quote of this post. One example of this point can be seen in movie business where a Rajnikanth movie breaks box office records because consumers (cine-goers) are so much in love with the product (cine-star) that they will pay any price to watch his movies again and again.
Same with any other franchise, be it Barbie dolls or iPhones. Make the consumer fall in love with the products and sit back listening to the ringing cash registers.
Jayesh Gopalan said:@Jyoti and Nayana Thanks for the replies.
I agree with you Jyoti.
I too believe this is the best formula that we can apply in software business too.
And this is the best quote from the entire post
"If you can make your consumers fall head over heels and blindly in love with you then you can charge them anything. That’s the ultimate nirvana of Pricing."
WE have restaurant in Ahmedabad Seva Cafe which does not charge any price from the customers, it does not have any employees except the cooking staff and does not have a manager or cashier to collect money but still people volunteer services, donate enough to meet the expenses of the cafe and maintain it in the most hygienic ways possible. Food quality served is also good.
Good insights Alok on pricing the product or a service. This article is truly a ultimate nirvana of Pricing as you have said :)