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

September newsletter: Creating the 'new' premium segment

Pricing is all about perception - money spent on influencing perception properly is money spent well, since it can be often recovered in a "justifiable price increase". The most common way of influencing perception is creating segments.

In the case of products, the most common way of doing this is creating 2 or 3 separate versions of your product or service, with increasing number of features. Say that a company has a low cost or entry version, a middle version, and a premium version of a product. Usually the middle version is a filler for people who need more features than the entry version, but will not pay the price for the premium version.

There are two things that happen with this scenario..

Customers who go for the lowest price entry level product are encouraged to pay a little bit more to get the mid level version.

Customers who go for the mid level version are encouraged to pay a little bit more to get the premium version.

But over time, companies sell the middle version at the same price as the entry level version and keep the premium version separate. The number of features in all three versions keeps increasing, with the newest feature in the premium version, and over time, it is passed on to the basic and intermediate version.

But there's a new trend in town - products with low number of features, easy to use intuitively and yet priced at a premium. Let's take a look at this phenomenon.

Creating the segment - the product management bit

There is a change in mindset involved: moving away from the 'product or service' as the focus to the 'customer interaction' as the focus. Previously, a product or service was a premium, if it "enabled" the customer to do more. Now the product or service is a premium, if it's "used" more and if it requires "greater interaction between the customer and the seller".

Designing the new premium segment requires understanding three things about the customer:

How does the customer use the product or service (the workflow). Focus only on mainstream users and not early adopters. If the context allows it, solicit feedback from women customers

Benchmark against competing services, and work to improve the service

What is the absolute minimum that the product or service should do, and how can I make it the easiest to use? (less is more)

What intangible attributes does a customer like and dislike? (branding issues, customer references)

Design an authentic story – that helps the customer identify your company and understand why your service or product is the right one for her. Make her feel special

While building a product or service

(Re)design the interface to be extremely simple, showing only details that the customer must see, and thinks are the most important. Hide everything else.

Build the product around this interface.

Set up a companion blog for this product and allow users to interact with each other, and learn how to use this product better.

Set up a website to personalize the customers experience. Include a lot of articles, references etc, to build up an image of trustworthiness, efficiency, and knowledge leadership. Sell your design and research capabilities.

In the special case of services

Design the service to be transparent. This means that the client should know exactly what she is getting and when.

Design the touchpoints of the service to be of extremely high quality - as measured by the tangible and intangible attributes that the customer finds so important. These are the points where the customer experiences the service.

There are a few resources that you could look at:
The Signal versus Noise Usability blog developed by the company 37 Signals
Seth Godin's blog is always a good read

A really good pricing case study.. Monarch Batteries

I came across this case study on the McKinsey website. It highlights the work done by Monarch Batteries on improving pricing.
They focused on three issues -

Stop "leaking" of price in transactions

Evaluate the value of new innovative products and price near the value of the product. Always accompany this kind of move by proper communication

Stick to a course when increasing prices. You need competitors to support your prices. About turns on pricing initiatives creates ill-will with other competitors.

All this shows - the more things change, the more things stay the same in the area of pricing. But it's a nice how-to example on increasing pricing.