Pricing

Pricing is a crucial aspect of entrepreneurship that requires thoughtful consideration before developing your business idea. You need to recognize that pricing is not just about assigning a cost to your product; it's about understanding customer perception and the value they place on your offering. Interestingly, sometimes setting a price, even a high one, is necessary because free items are often perceived as low-value. An extreme of this phenomena are Veblen (opens in a new tab) goods, where the demand for a product increases with its price due to its perceived status symbol, such as luxury items like Birkin bags or even iPhones.

Pricing Strategies

The price of your product should mirror the perceived value you aim to deliver. By the time customers encounter the price, they should have encountered several touchpoints that build up this perceived value, because price is relative to the perceived value you are delivering.

There are several pricing methods. 2 of which:

1. Customer-Driven Pricing:

   • Willingness To Pay (WTP): This method involves directly asking customers how much they would pay for a new product.
   • Van Westendorp Price Sensitivity Meter (PSM): This technique helps establish a price range through four key questions about customer perceptions of product value.

2. Business-Driven Pricing:

   • Gabor Granger Technique: This approach involves presenting customers with different price points and gauging their willingness to pay at each level.
   • Monadic Price Testing: Customers are shown only one price point from a range, ensuring more genuine responses. This method, though more costly and time-consuming, provides a more accurate estimation of price sensitivity.

Willingness To Pay (WTP)

This method is beneficial for completely new products, where there's no established market price. You talk to customers, explain the concept, show how it works and ask how much they are willing to pay for it. Asking open question this way engages customers in the value the product brings.

The most simple quantitative methodology: Present/demonstrate the product and ask "How much would you be willing to pay for this?". This simple question is mainly used in two situations only:

1. For a radically new product, with no idea of what the customer will accept
2. For bargaining products (i.e. where bargaining is allowed, e.g. second hand products)

Van Westendorp (PSM)

This is also called the Price Sensitivity Meter (PSM). This method helps identify the optimal price range for your product by understanding customer perceptions of value, ranging from "good value" to "too expensive." In this method, you ask four questions. You present the product, then ask the price point at which it:

1. It would be good value
2. It becomes expensive
3. It is too expensive
4. It is it too low

These four questions help understand the price range within which the product should be sold.

Gabor Granger

In this method, you present 4 price points to the customers and ask if they'd be willing to pay at each one. For each price, they are asked their willingness to buy at different price point (yes, no or 5-point scale).

Extension: if no, ask why it is "Too expensive" or "Too cheap". Each time you use the previous price point to go higher or lower with the next one, so you can get the most value for your product.

Monadic Design

In this method, you want to test four to five price points, but you only show one to the customer. You split the group of customers that you want to talk to into groups depending on how many price points you want to test. You only have one price point for each customer so it's not very obvious that's it's a price question you are asking and you get a much truer answer.

Ideal method gives more accurate estimation of price sensitivity (than WTP, PSM, GG). However, needs more respondents, take more time, and is more costly than the other methods.

Revenue Models

• Unit Sales
  • Fee paid for every individual item sold
  • iPhone, cars
• Advertising
  • Fee paid by brands and companies to get in front of potential customers
  • E.g. Google Adwords or Facebook Advertising works this way.
• Data
  • Fee for information (e.g. online or economic behaviour)
  • Twitter, Bloomberg etc.
• Intermediation
  • Fee for bringing together two or more parties involved in a transaction
  • Ebay, AirBnB, Alibaba
• Licensing
  • Fee for use of some IP
  • Windows or Adobe
• Franchising
  • Fee for right of using brand and business model
  • Mcdonalds, Costa
• Subscription
  • Fee for continuous access to a service
  • Spotify, Netflix
• Utility and Usage
  • Fee is proportional to the usage of service
  • Virgin Media, Box
• Freemium
  • No fee for access to basic service (intent is to convert to premium customers)
  • Soundcloud, Dropbox etc.

In conclusion, pricing and revenue models are fundamental to the success of entrepreneurial ventures. Understanding customer perceptions and market dynamics is key to determining effective pricing strategies, while choosing the right revenue model can significantly impact the sustainability and growth of your business.