Tech firms and the obsession with pricing in a spreadsheet

Perhaps it is because I am getting old, perhaps it is because I am a pricing consultant and I don’t like giving things away, but there is something about the word ‘Freemium‘ that triggers a little retch in my oesophagus every time I hear it.

We work with quite a lot of tech companies, helping to price their offering and the conversation usually starts like this “We want your advice… here is our first stab at pricing… what do you think?”

We are then presented with what we describe as an ‘open grid pricing schedule‘. You have all seen one; a table with features down the left hand side and price packages across the top. The packages are either boringly called ‘Freemium’ ‘Silver’ ‘Gold’ and ‘Platinum’ or ‘Basic’ ‘SME’ ‘Enterprise’. Then someone has helpfully filled all the boxes with little ticks to show you what you get in each case. The list of ticks gets longer the further you go to the right.

This is fine if you are selling a standardised piece of consumer software or access to an online service for £20 a month or so. However we keep on coming across clients who are trying to sell sophisticated bespoke B2B software and service packages this way.

My theory is that being techies, their starting point was the ever-present Excel spreadsheet. Whilst setting out some rough segmentation and price positioning in a spreadsheet is OK, publishing it to the whole wide world is another matter. Those mesmerising little rows of boxes force you to think in a certain way… a way that is not necessarily helpful when setting prices.

Although it might seem open and friendly to plonk all of your prices on your website, we tend to start with the question: Do you really need to tell everybody what everybody else pays?

Open-grids work when you think people will be initially tempted with the cheapest option and then either at the point of purchase of subsequently, trade up to a better package. If you are pricing to the value the product delivers to them as a customer you will find a very much wider range is needed than would look sensible set out in one of these grids.

The golden (or should I say platinum) rule is that your web prices are the highest you will ever charge. What happens if your software or service package is worth millions to a really big client and stretching your Platinum package beyond £99 a month would look silly in the context of the grid?

The moral of the story is: By all means use excel to record your prices for internal purposes, but segment your market first before deciding to show your knickers to all and sundry.



Price Elasticity… Wrong Question

It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.

Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’

I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.

Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.

Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.

Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.

The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.

Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.

Keep in mind our motto at Burgin Associates:

Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!

We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.