Step 16 Pricing Framework. MIT Global Startup Labs Peru 2018

Transcription

1 Step 16 Pricing Framework MIT Global Startup Labs Peru 2018

2 Step 16: Pricing Framework

3 Why Now? 1. Value Creation Value Capture a. Business Model + Pricing 2. Set initial estimate of pricing a. Used in LTV calculation b. Important to set now, but don t spend too much time now 3. Test with clients 4. Change as needed, iterate a. Seasonal/Daily change (gas prices) b. Dynamic pricing - real time (airline tickets based on availability) 5. The 1% Windfall, Dr. Rafi Mohammed, McKinsey Study a. 1% increase in price 11% increase in profit

4 Why Now? 1. Value Creation Value Capture a. Business Model + Pricing 2. Set initial estimate of pricing a. Used in LTV calculation b. Important to set now, but don t spend too much time now 3. Test with clients 4. Change as needed, iterate a. Seasonal/Daily change (gas prices) b. Dynamic pricing - real time (airline tickets based on availability) 5. The 1% Windfall, Dr. Rafi Mohammed, McKinsey Study a. 1% increase in price 11% increase in profit

5 Value Based Pricing Setting your price for your products and services based on the perceived value to the customer.

6 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 discounts Higher prices for earlier customers

7 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, highest WTP, price inelastic Early Adopters = Price inelastic, high WTP, require extra attention, potentially high cost Early Majority (pragmatists) = THIS IS THE PRICE POINT we should think about for pricing strategy. This is where you make a scalable company Late Majority (conservatives) = comes later, pricing strategy will be very clear by then Laggards/skeptics = don t even worry about them now

8 Dynamic Pricing Price Discrimination = charging different prices to different consumers depending on their WTP Perfect = Charge each consumer max WTP Market Segmentation = Charge higher prices to different (observable) segments Consumer Self Selection = Offer a menu of related products and let consumers decide (early bird discount) Using big data Understanding of user characteristics to understand WTP Amazon - Cookies Off - First time users get it cheaper Target - Credit Card Activity - Target Web Ads & Change Pricing

9 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

10 A/B Price Testing Before I explain what this means, let s do the experiment!

11 A/B Price Testing You have the following options to subscribe The Economist magazine. Which plan would you choose? Scenario #1 Online $59/yr Print & Online $125/yr Print subscription $125/yr

12 A/B Price Testing You have the following options to subscribe The Economist magazine. Which plan would you choose? Scenario #2 Online $59/yr Print & Online $125/yr

13 A/B Price Testing Dan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads Actual results from 100 MIT students: Scenario #1 A. Online $59/yr B. Print subscription $125/yr C. Print & Online $125/yr How many chose option A? Option A: 16% Option B: 0% Option C: 84% Revenue: $11,444 Scenario #2 A. Online $59/yr C. Print & Online $125/yr How many chose option A? Option A: 68% Option C: 32% Revenue: $8,012 Source: TED 2008 Are we in control of our own decisions?

14 A/B Price Testing Dan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads

15 Wrap Up - Key Consideration in Pricing 1. Value Creation 2. Customer Acquisition Analysis 3. Nature of the Customer 4. Strength of Your Core 5. Competition 6. Maturity of Your Product

16 Homework - Present on Wednesday Report on two (1 Peruvian & 1 international) companies that are competing 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)