Pricing the 'new' premium segment

Since the goal of the premium segment is to get your highest value customers to interact with you more and use your service or product more, the principles behind the pricing should also be

Price according to the value you deliver

In a previous article we’ve discussed how to value the tangible and intangible attributes of a product or service, link that to cost models and economic models and determine the value and optimum price of your service. Please perform this exercise.

The more (or longer) customers use your service the more they pay

You need to now spread the revenue among different customers. Typically your premium customers will be the ones who see value that your service brings them. You need to encourage them to use your service more, which means that you market more to them, which increases the cost of serving them. Naturally they should pay more.

Most companies do exactly the opposite – by giving various forms of volume discounts, or implementing loyalty programs, they ensure that their premium (loyal) subscribers pay less than non-premium (less loyal) subscribers. This way they hope that customers remain loyal since they have greater cost savings. But at what cost? Most loyalty programs are loss leaders, and encourage customers to think in terms of price. The few loyalty programs that do make money depend on partners who use the loyalty program to cross-sell their services.

In the case of products, the customer pays only once when she buys the product, and if she keeps the product beyond the “return by if unsatisfied date”, the company can book revenue on the sale of the product.

But in the case of product support services or pure services, use a staged approach to pricing –
1. Always offer a free trial (if you can afford it) for a limited amount of time.
2. In case the customer has a predictable consumption pattern, charge a reasonable subscription fee to access your service.
3. In case the customer has a non-predictable consumption pattern – for e.g., she uses the service a lot at certain times of the year, and not at all at other times, then charge a per transaction fee that is partly fixed setup fee and partly variable fee depending on the amount of effort put by you to satisfy her.

The more customers interact with your company the more they pay

The goal of this is that you manage your demand according to your resources and get customers to pay a fair amount for the support they receive, and not to drive off customers who like to work with you.

In the post on the product management bit, I suggested that the product should have the bare minimum functionality necessary to help the user complete his or her work and then get out of his or her way. This requires a balancing act between keeping the functionality minimal, and adding high value functionality.

The goal of designing the product should be that most of your customers could use this with little or no training. But if there are a set of customers who need a helping hand or training to get up to speed with your services, set up training sessions, or e-learning systems (flash presentations and dummy product simulations online are a pretty good way of teaching customers) If the training is self paced and does not involve personal interaction by your employees, it should be free. Otherwise, charge a reasonable daily/hourly/milestone based rate for training.

At the other end of the spectrum you’ll find customers who want “customized versions of your product” or “extra features”. I believe that all such requests to “improve the product” should be disregarded, except when the request has come from 3 or 4 separate customers (whose opinions you tend to value). Some other customers may want to embed your product into their process, and need expert help. Do set up a consulting division that helps them in this regard, and charge separately for it. This prevents customers from taking your services for granted, and at the same time increases their responsiveness to you. They also tend to respect the value you provide.

Examples of such premium services: Apples .mac service & the Basecamp project management application by 37 signals

Both these products are premium products. They both have competitors that offer more functionality at a much much lower price. Still, these services thrive. Take a look at their sites. The overriding theme of both is excellent design, insanely easy to use, and the use of buzz marketing to build an army of fans.
Apple's DOTMAC website
The Basecamp website