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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
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SaaS
Price commu-nication
Pricing
Value
About Me
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360°
Passion 3
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*.
Pricing Is Not All About The Price
If Your Ad Shows a Spoon, put it on the RIGHT side
* research by Ryan S. Elder of Brigham Young University and Aradhna Krishna of the University of Michigan 4
Value
“Price is what you pay. Value is what you get.”
Warren Buffett
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The Value Framework
Some of the most successful companies have their pricing team and value
management team working together
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Add value
Communicate value
Price the value
Companies
Price perception
Perceived value
Drive value
Customers
Value Shared
Identifying The Value For The Customers
The value to the customers can be measured
• Savings
• Increase income
• Reduce risks
• Alternative cost
Or be soft and much harder to measure
• perceptions
• Emotions
• Preferences
• Brand
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B2B
B2C
Measure the economic value and the value share
Measure by conducting
market researches
Pricing And Product Development
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SaaS companies should charge for value
Cost+ is rarely relevant
Customers Value Price Cost Product
Product Cost Price Value Customers
Cost Based Pricing
Value Based Pricing
IKEA – The Masters of Value Based Pricing
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IKEA – Designing The Price
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Designing the cost
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The Pricing Framework
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Price presentation to influence customers
Integrated policies of ATL & BTL offers
Price Communication
Retention
Quotes
Channels management
Operational support
Price Execution
Pricing model
Pricing points
Updating prices
Price Settings
Price Communication Started Here
• …
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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. He was awarded the 2002 Nobel Memorial Prize in Economics for his work in prospect theory.
9th October 2002
Prospect Theory
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A person found a $100 but lost it after a minute. Is she/he the same?
Pleasure
Pain
Gain )+( Loss (-)
The reference point can
change rapidly
The pain of loss is greater than the pleasure of
gain
Diminishing marginal
pleasure (and pain)
Loss aversion, postponing losses
Attaching a small spend to a larger spend
Use Of Loss Aversion To Increase Credit Card Spend
15 Bitter Wallet blog - By Paul Smith
Money is credited
An Experiment That Assisted To Identify Loss Aversion
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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
This Version Of The Loss Aversion Experiment Was Really Astonishing
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1.Win $500
2.Take a 15% chance at winning 1 million dollars
This experiment was done by Shane Frederick, professor of Management Science at MIT He asked people (mostly students) to select one of the
following:
Why So Many People Are Unwilling To Wait For or Gamble on a Bigger Payoff - David A. Levine
CRT - "Cognitive Reflection Test"
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A bat and a ball cost $1.10. The bat costs $1.00 more than the ball.
Shane Frederick developed a test to determine how rational people are.
This is one of 3 questions in this test:
HOW MUCH DOES THE BALL COST
Answer: 5 cents
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
The Results Of The Experiment
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15% chance of winning 1 million dollars Win $500 Group
• High CRT – answered all the questions correctly
• Low CRT - answered none of the questions correctly
80% 20% High CRT men
40% 60% Low CRT men
38% 62% High CRT women
25% 75% Low CRT Women
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Pricing Principles And
Real Life Examples
Framing Effect Experiment
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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
The Pricing Message Will Influence Your Sales
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KISS
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Too many options prevent action!
The Value Of A Simple & Reliable Ads
What do you think about this ad?
Would you click on it?
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20%
Discount
on calls
20%
Discount
on calls
100 Clicks 160 Clicks 200 Clicks
The following is based on a true experiment of Mobile company in Europe:
In Many cases: Additional information = Less effectiveness
The Masters Of Simplicity
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Crazy Egg From Simple…
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Simple, but price points are not well balanced for upselling
…To Simpler
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Was presented automatically after one minute at their pricing page
But When In Need, They Added Another Tier
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Anchoring Effect
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Last 2 digits of
SSN
19 – 00 39 – 20 59 – 40 79 – 60 99 – 80 Correlation
Cordless Keyboard
$16.09 $28.82 $29.27 $34.55 $55.64 0.52
Neuhaus chocolates
$9.55 $10.64 $12.55 $13.27 $20.64 0.42
Dan Ariely - Predicting Irrationality
People with higher 2 digits are willing
to pay more…
People with lower 2 digits
Customers have no Idea how much they are willing to pay for new products
An anchor might seem to be totally irrelevant
Trackur: Left To Right Or Right To Left
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Taking advantage of the eye catching higher price first
But Why Did They Do That?
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Trying to loose customers? Failing to upsell the lowest tier?
OnePager: Influencing The Price Perception
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By presenting cheaper annual prices first
Wix: Separating The Free From The Freemium
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Free is the ultimate anchor – it’s not here
Compromise Effect
Eco
no
my
Quality
A
B
C
C. Simonson and Tversky (1992)
Adding Option A will increase the selection of option C that becomes the compromise point
More people prefer the middle option
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Hubspot: It Took Them A While To Get It
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Hubspot – The Complex Part Made Easy
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The extra complexity is a second step
Hubspot – The Old Version
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Many of their sales required longer human assistance
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?
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Ipad Presentation – The Power Of Pricing
The peak of tweets – Twice when prices are announced
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iPAD Pricing Points
16 GB 32GB 64GB
WIFI 6% 17% 3%
WIFI + 3G 18% 33% 23%
Apple sales figures on launch day in London:
• Which module would/did you choose?
• What is the leading selling model?
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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
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My Blog
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http://www.tmsight.com/blog