Pricing it right!

Every startup venture has to wade through innumerable hardships and hurdles – securing funds, managing time, legalities, finding the right people, ensuring consumer adoption and much more. All these efforts are ultimately targeted towards generating revenues and profits that spark life into the venture and incentivises it to move forward. No factor influences revenues and profits more than the pricing strategy. It is somewhat surprising therefore, that nine out of ten startups don’t have a formal pricing strategy in place. In such a scenario, Pricing becomes a big snag. A well deliberated upon pricing strategy is crucial to optimizing both sales volume and profit. Hence, it becomes essential that startup prices its product reasonably in terms of the pricing model it deploys.

At this stage comes the crucial question of whether to adopt a simple or a complex pricing model.

The very essence of a simple pricing model is that the variables upon which the pricing is based make sense in the eyes of its end customers. Pricing an OTT service such as Hotstar according to the duration of video streaming by the customer wouldn’t make sense, even if it better matches the willingness to pay mathematically. Almost everyone knows that the price of an iPhone rises in simple increments based on storage capacity. This is a simple yet effective way of pricing the products and is one of the main reasons for Apple’s success. If it is made clear to the consumers exactly what value they’re receiving at a certain price, they’re more likely to make the purchase.

Also, while pricing, one cannot ignore the strong and inherent psychological component. After all, for any potential customer, nothing is simpler than walking away from something they don’t understand. And with the increasing competition in the market, it’s more important than ever to adopt a straightforward and transparent pricing model based on the value of your offering so that you don’t frustrate your customers. In the minds of the consumers, there should be no question other than “Is the product being offered worth it?”

Every startup yearns for early customer adoption. Consumer faith and trust in the startup is a prerequisite to such adoption. A simple pricing structure appeals to consumers and more importantly, emphasizes the honesty of your company. There is a tendency of startups moving towards less-honest pricing structures wherein the prices listed on the website seem quite simple but are often far different from what the customer ultimately owes for the product or service offered. The result is that it leaves an undesirable aftertaste in the minds of the customers which may compel them to shift to some other competitor. According to research, the buying decision is influenced to a great extent by the impression of the prospect forms of your product in the initial 10 seconds. If your pricing structure looks more like a complicated table of data than something that makes sense to your prospects, your conversion rate is likely to be a tiny fraction of its potential.

However, like every other real thing, Simple pricing comes with its cons. For starters, you only get one shot at securing customers. Since there are limited options, either the customers would want the package, or they wouldn’t – and there’s little you can do to sway them. In such a scenario, it becomes extremely difficult to extract value from different kinds of users. There is no ‘one size fits all’ option with pricing.

Consumers drastically contrast with each other in terms of how they value the utility being offered by the product and as a result, everyone isn’t willing to pay the same price. It is important to not only be able to offer the product at reasonable prices to price sensitive customers but also extract the additional revenue by charging premium rates from those who have a higher disposable income (by offering additional value). Simplified pricing doesn’t provide such flexibility to the startup in this sense. Price discrimination gets somewhat limited in a simpler pricing model. In recent times, there has been a significant shift in the degree of Price discrimination. The transition from third-degree price discrimination, where retailers offered discounts to certain groups like the elderly, to first-degree price discrimination which was facilitated by Big Data coupled with digital IT lead us to the concept of ‘personalised pricing’ – a tool rampantly exploited by online vendors. Using the same tool, Airline companies alter their fares on the basis of zip-code, time of the day, the day of the week and even on the basis of whether or not you are using a ‘Mac to book the flight’. The potential of Personalised Pricing is so high that according to an estimate if Netflix adopts a pricing model where it runs a personalised discount coupon campaign, it may observe a 12% jump in its net profits. How this system basically works is that the retailers analyse the vast information they have about the consumers, from their credit score to their social media activity to determine the maximum paying capacity for their offerings, thereby maximizing their profits.

However, using multiple or complex variables can complicate pricing to the point where customers struggle to understand how much they would need to pay for the product, harming the business in the process. It basically makes pricing a stumbling block in the transitional road between a potential customer and an actual customer.

Moreover, there are loads of other issues with complex pricing, customers and sales focus more on negotiating details instead of emphasizing the value delivered, value propositions are unclear, sales are lost and value capture is low, discretionary discounting is high, too much sales time is spent on configuring offerings.

Take for example the cab aggregator Ola. The service is divided into different categories- Micro, Mini, Prime Sedan, Prime Play with so many variables at play that sometimes, the calculated price for the superior service is lesser than that of an inferior category. Excessive division not only confuses the customers but also produces contradictory fare estimates. If a new cab aggregator launches its service with more transparent pricing, consumers may start preferring it over the others. In such a scenario, the pricing model will become a differentiation factor.

CONCLUSION

Thus, there’s a trade-off to be made between simplicity and complexity: Complex Pricing can extract value out of different kinds of users and better match the customer’s willingness to pay, but it can also create troubles such as loss of market to competitors with simpler and honest pricing structures. An effective way to balance this is by focusing on value at every step in the process of picking ideal price points and communicating them effectively further down the line. This will ensure that your business not only stays afloat but thrives in an increasingly competitive environment.

One can maximize revenue with a range of services that appeal to multiple customer segments and are priced different accordingly, but the reasons for breaking up your product need to be conveyed clearly in the prices. An emphasis on creating a boatload of undesirable features that don’t justify the prices generally in an attempt to satisfy all kinds of consumers is from where the pricing complexity originates. By persuading a start-up to focus on how the right features will collude with the price to fulfil the needs of the ideal buyers, ‘value-based pricing’ removes this complexity well before it even gets a chance to sprout.