Granular pricing - Customer Acceptance
One of the key challenges in implementing optimized pricing at an individual level is retaining customer loyalty with differential pricing.
Some of the strategies that have proven successful in this area are
Customers are unlikely to find out about the prices that other people are paying. The prime example of such successful pricing strategy is online media subscription businesses. Most critical aspect of this strategy is to only promote introductory prices and made available to all customers and start price differentiation with the renewals. As the renewal prices are communicated on an individual basis the chance that someone will find out that they are getting higher prices for the same product is small. The strategy is easy and simple for those businesses who can price without advertising the price charged to all consumers.
The introductory price starts to play an outsized role in such cases.
Online subscriptions are good examples of opaque pricing strategy.
Packaging based pricing
Packaging offers a great opportunity to do price differentiation. So if we have multiple features and components that customers value differently, we can use individualized packaging for each customer and price each customer based on the product feature and component together with the component of loyalty and usage. The more complex the packaging and use components are, the more attractive this strategy becomes.
The value to the business is maximized if we first package understanding what each consumer values, then price according to price elasticity of each consumer ensuring that the price will optimize the business objectives.
Some businesses may want to put some constraints on the final price offered to the customer to ensure basic product, packaging and pricing integrity.
Some examples of industries that practice this strategy are
The airlines are a complex product and the number of variables is enormous. The basic building blocks are flight leg seats. The flight leg’s value is different to different customers based on the origin destination the customer wants to travel. The customers like to have the least travel time and fewest possible stops. The airlines use the freedom of routing the passengers on different legs to utilize the seat inventory and create price differentiation. So comparing prices is almost impossible.
Airlines also use Time of Day and DOW to do price differentiation.
Seats with different class of service, with extra leg room and so on are other factors that are used for price different ion.
Airlines also use secret channels to sell unsalable inventory in first class, business class and to a lesser extent in economy class. They use travel agents that are not allowed to publish prices and allowed to sell tickets either unbranded or on a one to one basis. Some hot such travel agents are Hotwire, Priceline, Sky-lux travel.
The airlines also use Point of Sale to do price differentiation. Point of Sale as a rational for price differentiation is extremely well accepted by the public.
The more features there are, gives businesses more opportunity to do price differentiation and still maintain customer loyalty. In fact if done well customers don’t mind paying extra and even boasting about what they are paying as it shows off to the rest of the customers that they are special. We see this in people travelling in business or for business reason discussing how difficult was it to get the tickets and how much they had to pay.
Some other industries with similar strategies are Hotels, Software vendors, Gaming industry, Telecommunication, etc.
If the value derived by a product is vastly different then price differentiation based on value is a powerful way of doing granular pricing. It is a great way of charging vastly different prices, though the usage or cost of the product or service provided may not vary all that much. The value derived model for pricing is excellent where the value delivered by the product is quantifiable and demonstrable. In fact the key requirement for value derived pricing models is clearly defined metric based on which the price is determined and the metric needs to be agreed upfront.
The typical pricing model for executive recruiting is month of executive compensation on completed hired executive. The pricing model is well received.
Lead generation and Appointment setting
A lot of companies are willing to offer pay for performance models in the lead generation and appointment setting space. The metric for performance is clear and easily defined. Combing the pay for performance model with packaging and sharing of risk allows enormous opportunity for individual level pricing.
LinkedIn is a great example where the subscription price is dependent on value derived. The subscription prices are dependent on if you use the platform for Sales, recruiting or as an executive. The subscription is free for basic users who contribute the professional data on the platform which is then sold to users who derive significant value from the platform. LinkedIn could do significantly better in Revenue and conversion rates, which should be reasonably high, if they priced on an individual basis accounting for Value and Usage.
Some other industries with value derived strategies are Health Care, Fitness etc.
Usage based pricing are perfect for those services where the usage can vary enormously by user, and measurement and communication of usage is reasonably easily done. It is important that the usage is communicated to the user.
Cloud based services
Most cloud based infrastructure and service companies pricing is usage based. The capture of usage is essentially automated and billing is done automatically. Usage models can typically be combined with packaging to make the pricing extremely granular and capture significant portion of the consumer surplus.
Service Providers (ISPs) is also a good example of usage based pricing strategy