Roderick Huiskamp (@RoderickH) is a Strategic Marketing Analyst with Fedex in Belgium. In this guest post he offers five ways to explore pricing, with three additional suggestions for the special case of professional services.
Five Ways to Explore Pricing
Traction (paying customers) matters more than getting pricing 100% correct in the beginning. Many firms start with a very simple pricing model that is easy for the prospect to understand. Once you have enough paying customers to substantiate that your product or service offers value here are five approaches to consider:
- Let the customers define the price: this probably works best in B2B setting with a relatively small number of customers. In some scenarios this can even be a long-term approach, but for the short-term it will allow customer to name the price (that they still actually pay for the product).
- As a comment for the situational interviews: if you are in the B2B sales, try and figure out where the ‘non-approval’ spending limit is for some companies. Things can go a lot faster and smoother if the customer doesn’t need to gain internal approvals (at least to test the product thoroughly).
- Competitive benchmarking: what is the price range of comparable offerings? Are you in the same range or is there a very large discrepancy (that cannot be explained by anything in the value proposition)?
- Selectively raise prices for current customers: this off course depends on the number of customers that you have. When the contract is up for renewal, increase rates by x% to see if customers stick around. This can potentially be coupled with additional features that don’t cost you much. This can be part of a longer-term strategy (like it is in shipping).
- Price it after the value is shown/delivered: offer a free trial and paid version after. This will allow you to explore pricing a lot more flexibly. This can also be an add-on to A/B testing of your pricing: what is the normal split of the free-trial versus full purchase in the various pricing scenarios?
The Special Case of Professional Services
For the special case where you are delivering professional services, customers can complete the job your service fulfills in three ways:
- Use a full-service agency, which has the highest cost. Here I’m assuming the majority of these costs are also labor costs.
- Complete the job internally, which would take time and capabilities (that companies may or may not have).
- Use your service that is a mix between the first two. For professional serviceS, the highest cost-factor is often labor.
Here are three directions to consider to improve the revenue/cost model of your business:
- If you don’t touch pricing then the fee you pay to subcontractors always needs to be lower than what customers would get themselves. This could either achieved by your scale (or buying power) or your service makes the work of the subcontractor more efficient, effectively lowering labor costs.
- If you can increase the rate for the subscription, it actually becomes the ultimate validation of your product. Introductory low prices give customers a good deal but can generate traction.
- Start with an ‘all-in’ subscription fee and move to tiered subscriptions. This direction would make sense if customers are using more of ‘expensive’ part of your service than you anticipated (which in a way increases your cost more than your revenue). This tiered subscription (or even with one-off purchases) could create more revenue that is associated with the costs you incur.
About Roderick Huiskamp
Roderick Huiskamp’s experience spans roles in a mix of large corporations and high-growth companies. He graduated with a Msc. in Marketing and a Bachelor in Economics, Roderick joined the competitive intelligence team of a marketing services agency that doubled in revenue twice in two years. Since 2012 Roderick is working for FedEx Express Europe. In the first three years his role was in Pricing, but in March 2015 Roderick transitioned to the regional strategic marketing team to support in business cases and contribute to market/competitive intelligence.
Roderick tries to bridge his corporate knowledge with the start-up ecosystem and learnings. In case you want to see what’s on his mind, follow Roderick on Twitter (@RoderickH) or check out his LinkedIn posts:
- Banks: capturing/delivering customer value or driving operational efficiencies?
Banks have innovated, but have largely focused on driving down the cost to serve consumers and in the process foregoing the delivery of value. In that void other companies have stepped up. Are there signs that the future will be different from the past?
- Uber & airbnb: the challenges in two-sided markets:
Life as/in a start-up is already a challenge, but some daring entrepreneurs add even more of a challenge by solving a customer problem/job in a two-sided market. Put simply: in a two-sided market there are two sets of customers for the company. The value proposition needs to be appealing to both for the company to succeed and the value of the product or service also increases as the number of customers grows (network effect).
- Tesla: what if every model sharpens the business model?
With the foundations in place to scale rapidly, the core of Tesla is now built upon a business model that works in the luxury car segment. Moving down-market will remain the key goal for Tesla in the years to come. Driving down component cost is closely linked to this goal.