Pricing strategies and experiments - Product Tank London, June 2016:

The ever excellent Product Tank ran their latest meeting last night, dedicated to how as Digital professionals, we should be looking at our pricing in a number of different ways. Three great speakers with genuine insight and thought provoking material from all. Our highlights:

Tom Whitwell

Ex-Times head of Digital who led their move from free to pay wall, so knows a thing or two about this pricing malarkey.

TL;DR — pricing is emotional, so you have to experiment to work out the optimum. Always offer a good, better, best range of prices.
Ikea — the masters of emotional pricing

Pricing elicits emotions in all of us. If you are looking at a £2,000 handbag you might be feeling jealous, ambitious or depressed. These are not rational thought processes, they are in our heart rather than head.

Ikea exploit this ruthlessly in their Marketplace — with offers for everything from tea lights to mugs to garden plants, based around giving people a feeling that they need them. Wine pricing is notoriously based on the principle that no one buys the cheapest bottle, so the restaurant always places the most profitable option one from the bottom (or do they!?!?).

Based on research from Duke University’s Huber & Puto, it’s proven that if you offer 3 products, with varying pricing then the vast majority of people will go for the middle one. That gives you a lever to pull if you set the pricing of the 3 options in a way that pushes up the overall revenue as below. There’s a good write up of the experiment over at Strategy Peak.

The main takeaway though is that you should always offer a ‘good, better, best’ set of prices, significantly enhancing your chances of selling the ‘better’ product.

In the retail world, this form of manipulation and profit driving is rife and accepted. In the digital world it is less so — and if we are going to succeed it needs to become part of our strategies and tactics.

You aren’t able to talk about pricing with your customers. As discussed, reactions to pricing are emotional, so customers can’t tell you how they’d react to a particular price as they simply don’t know. That means you have to experiment in order to work out your optimum model.

You shouldn’t try and work out your pricing either. You have to experiment and go for it. The Times lost 98.7% of their audience when they put up their paywall, but they still made more money. Most people would struggle to pursue that as a business strategy, but at the end of the day it’s the more successful one in Tom’s view.

Anna Kuriakose

Ex EVRYTHNG, JustGiving, Alertme, Skype, Monitise, now CPO @ Network Locum.

TL;DR — pricing can support and drive your product strategy as well as conversion. There will be opportunities to make money once you have enough hard to reach parties in a network. Sometimes you need to ignore pricing and focus on another message.

Anna focussed her talk on multi party products — those that are made up of numerous individuals, organisations and audiences whose actions affect one another, creating an ecosystem or network. The reasoning for this is because there are more levers to pull in terms of pricing strategy and so more interesting opportunities. She walked us through 3 examples to illustrate what some of those opportunities are.

upWork — the largest freelancer marketplace in the world. The demand is created by the companies looking for services and the supply is created by individuals. Previously they made money by taking a flat % of the fee freelancers were able to generate.

Now, they have started signing up premium Enterprise memberships and want to encourage their freelancers to take those jobs over others. In order to do that they have reduced their commission on those jobs from 20% to 10%. This makes freelancers far more likely to pick up that work.

They also want to encourage repeat relationships between organisations and freelancers, so have put in place a tiered pricing structure for work. The 1st job they take 20%, the 2nd 15%, the 3rd 10% etc etc. There is an obvious incentive for freelancers to work with a client over and over again, thus driving quality.

Pricing can help you meet your organisational strategies and objectives, over and above just making money.

Spacehive are a community project crowdfunding site. They bring together local authorities, supporters and community organisers to fund projects such as playground improvements, high street makeovers or creating community cafes.

They take a 5% commission on all donations made to the projects.

They have now realised, that they are bringing together groups of stakeholders that have traditionally found it difficult to communicate with one another, and so there is value to be driven.

Local Authorities spend a lot of time and resource trying to find projects that the community wants in order to fund. Here they are able to do that easily and even have individuals help with the funding of them — showing commitment and helping to reduce pressure on budgets.

As such, they are now charging local authorities a membership fee, that will allow them to use the service in an enhanced way to find these projects and make them happen.

They have realised that their ability to bring together a network of particular stakeholders is valuable enough to charge for.

JustGiving charge a 5% commission on donations that individuals make to charities. They have traditionally focussed on ‘making fundraising easy’ for organisations and their supporters.

In 2009 a number of competitors started to emerge — who were willing and able to charge a lower % or nothing at all to the charities. As such, JG had to decide how to respond to this undercutting.

They have done so by illustrating how much more money charities will make from their ‘Social Giving Platform’. They are no longer about making fundraising easy, they position themselves as a partner that can help charities ‘raise more money and reach more people.’

They had the confidence in their product and business model to know when to move the conversation away from pricing all together, and focus on value.

James Routledge

Part of the Lean Investments team with a background in behavioural economics, finance and insurance.

TL;DR — Loss is felt twice as much as gain so nudging people to believe there’s a scarcity works. People always think others know better so use someone with authority to sell. Content is king but context is god — so think about how you can up your price in certain places. Find the smallest commitment to drive activation.

Do not to wait until there is a hole in the budget to think about driving increased pricing. You can still do this in an ethical and user customer focussed way. Make sure you have a baseline to measure against.

Scarcity

“only 10 days left!”

People naturally want more of what there is less of. Happens at the dinner table with yorkshire puddings all the time. This is down to the fact that loss is felt twice as much as gain. So if you find £10 in the street and then lose it, you will feel 100% worse than if you had never found it at all. This is hard wired into us and we can’t avoid it.

AirBnB use this tactic by telling you there are ‘only X listings left for these dates!’. You have no context whatsoever, but you’ve made an assumption that there’s scarcity and so you’re encouraged to purchase right away.

If you can introduce this fear of loss, then you can improve conversion.

Authority

“Jim the builder gave this drill 4 stars out of 5” or “there are 7 people looking at this listing right now”.

People’s assumption is that everyone else knows more than them and so will be more likely to purchase something if others have validated its worth or are also considering its purchase. Used to great effect across ScrewFix and Booking.com

Price is relative

If you are able to sell something next to a very expensive item, then you are able to charge significantly higher prices. For example, the insurance that is sold next to a mortgage package is 400% pricier than if you were to go out and find the exact same package elsewhere. But because it is next to a purchase that totals hundreds of thousands of pounds people are happy to pay it.