The secrets behind the most successful pricing models final

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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

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Thank You!

Sagy Gulianka

054-4838453

[email protected]