Passion. The Secrets Behind the Most Successful Pricing Models. Agenda. About Me. SaaS

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1 1 The Secrets Behind the Most Successful Pricing Models November 2013 Agenda Value based pricing Behavioral economics Pricing principles and SaaS examples + Apple ipad launch Pricing Value Price communication SaaS 2 About Me Passion 3

2 Pricing Is Not All About The Price When research subjects were shown a picture of a bowl of yogurt along with a spoon that was on the side matching their dominant hand (right side for righties), they reported being about 29% more likely to buy the yogurt than when the spoon was on the other side*. If Your Ad Shows a Spoon, put it on the RIGHT side 4 * research by Ryan S. Elder of Brigham Young University and Aradhna Krishna of the University of Michigan Price is what you pay. Value is what you get. Value Warren Buffett 5 The Value Framework Companies Add value Communicate value Price the value Customers Drive value Perceived value Price perception Shared Value Some of the most successful companies have their pricing team and value management team working together 6

3 Identifying The Value For The Customers The value to the customers can be measured Savings Increase income Reduce risks Alternative cost B2B Measure the economic value and the value share Or be soft and much harder to measure perceptions Emotions Preferences Brand B2C Measure by conducting market researches 7 Pricing And Product Development Cost Based Pricing Product Cost Price Value Customers SaaS companies should charge for value Cost+ is rarely relevant Value Based Pricing Customers Value Price Cost Product 8 IKEA The Masters of Value Based Pricing 9

4 IKEA Designing The Price 10 Designing the cost 11 The Pricing Framework Price Settings Pricing model Pricing points Price Execution Retention Quotes Price Communication Price presentation to influence customers Updating prices Channels management Operational support Integrated policies of ATL & BTL offers 12

5 Price Communication Started Here 9 th October 2002 Daniel Kahneman testified that he never took a course in economy. He is notable for his work on decision-making and behavioral economics. With Amos Tversky and others, Kahneman established a cognitive basis for common human errors and developed the prospect theory. 13 He was awarded the 2002 Nobel Memorial Prize in Economics for his work in prospect theory. Prospect Theory Pleasure Diminishing marginal pleasure (and pain) )-(Loss )+(Gain The pain of loss is greater than the pleasure of gain Pain The reference point can change rapidly A person found a $100 but lost it after a minute. Is she/he the same? Loss aversion, postponing losses Attaching a small spend to a larger spend 14 Use Of Loss Aversion To Increase Credit Card Spend Money is credited 15 Bitter Wallet blog - By Paul Smith

6 An Experiment That Assisted To Identify Loss Aversion Imagine you are facing the following decisions Decision A: 1.Earn $1,000 2.Take a 25% chance to earn $10,000 and 75% chance of earning nothing Decision B: 1.Loss of $5,000 2.Take a 75% chance of losing $10,000 and a 25% chance of losing nothing Most people choose options 1 and 4 although options 2 and 3 are statistically better 16 This Version Of The Loss Aversion Experiment Was Really Astonishing This experiment was done by Shane Frederick, professor of Management Science at MIT He asked people (mostly students) to select one of the following: 1.Win $500 2.Take a 15% chance at winning 1 million dollars 17 Why So Many People Are Unwilling To Wait For or Gamble on a Bigger Payoff - David A. Levine CRT - "Cognitive Reflection Test" Shane Frederick developed a test to determine how rational people are. This is one of 3 questions in this test: A bat and a ball cost $1.10. The bat costs $1.00 more than the ball. HOW MUCH DOES THE BALL COST Answer: 5 cents 18

7 The Results Of The Experiment High CRT answered all the questions correctly Low CRT - answered none of the questions correctly Group Win $500 15% chance of winning 1 million dollars High CRT men Low CRT men High CRT women Low CRT Women 20% 60% 62% 75% 80% 40% 38% 25% Less impulsive people (when answering questions) tend to bet more on the bigger prize People that are good with numbers tend to make more profitable decisions 19 Pricing Principles And Real Life Examples 20 Framing Effect Experiment Scenario 1 Option A saves 200 people's lives Option B has a 33% chance of saving all 600 people and a 66% possibility of saving no one Scenario 2 If option C is taken, then 400 people die If option D is taken, then there is a 33% chance that no one will die and a 66% probability that all 600 will die Scenario 1 = Scenario 2 Different phrasing impacted participants' responses to a question about a disease prevention strategy 21

8 The Pricing Message Will Influence Your Sales 22 KISS Too many options prevent action! 23 The Value Of A Simple & Reliable Ads What do you think about this ad? Would you click on it? The following is based on a true experiment of Mobile company in Europe: 20% Discount on calls 200 Clicks 160 Clicks 20% Discount on calls 100 Clicks 24 In Many cases: Additional information = Less effectiveness

9 The Masters Of Simplicity 25 Crazy Egg From Simple 26 Simple, but price points are not well balanced for upselling To Simpler Was presented automatically after one minute at their pricing page 27

10 But When In Need, They Added Another Tier 28 Anchoring Effect People with lower 2 digits People with higher 2 digits are willing to pay more Last 2 digits of SSN Cordless Keyboard Neuhaus chocolates Correlation $16.09 $28.82 $29.27 $34.55 $ $9.55 $10.64 $12.55 $13.27 $ Customers have no Idea how much they are willing to pay for new products An anchor might seem to be totally irrelevant 29 Dan Ariely - Predicting Irrationality Trackur: Left To Right Or Right To Left Taking advantage of the eye catching higher price first 30

11 But Why Did They Do That? Trying to loose customers? Failing to upsell the lowest tier? 31 OnePager: Influencing The Price Perception By presenting cheaper annual prices first 32 Wix: Separating The Free From The Freemium Free is the ultimate anchor it s not here 33

12 Economy Compromise Effect A C B Quality Adding Option A will increase the selection of option C that becomes the compromise point More people prefer the middle option 34 C. Simonson and Tversky (1992) Hubspot: It Took Them A While To Get It 35 Hubspot The Complex Part Made Easy The extra complexity is a second step 36

13 Hubspot The Old Version Many of their sales required longer human assistance 37 ipad Presentation What is the right price for a new product? Can consumers say how much a product is worth to them? How do we influence the price perception? 38 Ipad Presentation The Power Of Pricing The peak of tweets Twice when prices are announced 39

14 ipad Pricing Points Which module would/did you choose? What is the leading selling model? Apple sales figures on launch day in London: 16 GB 32GB 64GB WIFI 6% 17% 3% WIFI + 3G 18% 33% 23% 40 ipad Launch - Behavioral Economic in Use Initial Anchor = $999, everything below that is not expensive Lower pricing point = $499, Effective for price perception. The message is: starting at $499 Compromise effect in action. The sweet point is 32MB Simple message, few options, easy to understand, easy to compare 41 My Blog 42

15 43 Thank You! Sagy Gulianka