Class: 2013 Summer Accelerator
Ubersimple, a NH based software company, has developed "AppPack" (a mobile app and website), to make it quick and easy to give out referrals within the mortgage and real estate industry. Professionals that rely on referrals for business can include their trusted business partners to participate, which allows consumers to have direct access to a network of professionals, locally and privately. See a 90 second video at http://see.apppack.me
8/7/2013 - Pricing
Capturing Value - The basics of pricing
The speaker today was Valerie Kilewski, Ph. D, UMass Lowell
This class was a great one since we had been debating our revenue model from inception, as I imagine most companies do. How do you price, whay that way? and how will customers perceive it?
We started off with some audience questions. With many companies in the room, we had a variety of questions about pricing our products and services like:
Volume Pricing (This was our question)
Charge for incremental benefit
"Medical model" pricing - i.e. co-pay
Cost Analysis - done by accountants
What does cost have to do with value?
Leasing vs. Buy - depends on customer
So how does Cost and Value relate?
(short answer, they don't)
* Internal numbers, Cost is used for cases of Internal numbers:
In the case of "Cost plus", it is a reactive action where you add some amount to the cost to produce and charge customers. (It's not a way to calculate "value" to customer. It's a way to know if you will be profitable.)
* Competitor situations uses an Experience Curve. This is a proactive method. (every time you double your volume, your cost decreases). This can be used to drive competition out of business, i.e. like Intel with computer chips...the better they get, the harder they are to compete with since they can keep doing more for less.
* Customer situations use: Value in use (what the value is to an individual customer)
* Groups of customers with a perceived value is more of a Market approach
At Ubersimple, we were most aligned with "Value" because our customers used it for their own needs and could realize the gain individually. But then how does the price get calculated? It can't just be a factor of what development and maintenance costs are.
You do need to know your costs before you price so that you know if your model will be profitable. But simply using cost is typically never the ideal solution to pricing.
Let's define costs:
Sunk Costs - your time, or money up to pricing/sale...
Fixed Costs - office, lights, A/C, salaries
Variable costs - paying someone to speak, host an event, etc
Then there are other costs which cannot be excluded:
your own salary
family, friends, fools, loan repayment
Employee income tax Withholdings
Forgetting to add these line items means you could quickly go negative balance on your revenue.
So you need to then work out what your break even volume is
This is known as the "Contribution Margin" calculated as (SalePrice - Variable.Costs = ContributionMargin)
Not going into all the gory detail, this basically means:
Set your price too low, and you have to sell more units. = Company might fail if you don't sell enough
Set your price too high, customers might not realize the value. = Company might fail if you don't sell enough
So the idea is to know what pain your customers experience, and what it is costing them. Then price your solution to a point where it has a value to them.
Another aspect to pricing is that you should not price yourself cheaper than your competition just to compete, you might lose, and you can rarely ever increase your prices successfully. Another approach is to offer your service with all the benefits and attributes you are selling, and if customers feel you are overpriced, you might be able to negotiate some of the attributes out to lower the price instead of lowering the price with all the attributes still included.
Pricing your product or service can seem complex, but a little research and asking questions can help identify the level you should be at, or at least the ceiling price.
Once you know your price, you can use cost to calculate profit, and how many units are needed to sustain your business.
We used this process in our pricing structure and were able to adopt the logic to our revenue model.
Since we offer a software service, we use value pricing on monthly billing basis. This allows us and our customers to have the profit and value we each need to mutually benefit.