Biz Growth Spurt blog

B2B SaaS Pricing Models

Ayon Bhattacharyya — Tue, 01 Jul 2025 00:00:00 GMT

Choosing the right pricing model can often be confusing, given the vast number of options to choose from, but it can also make or break your SaaS business!

Getting it right makes the difference between building a scalable business with profitable growth and joining the ranks of the 18% of startups that fail due to poor pricing strategy.

In this blog, we will explore the pros and cons of the different pricing models so that hopefully you can make a more informed choice.

1. Flat-Rate Pricing

The Simplicity Play

Flat-rate pricing offers a single price for all features, users, and usage levels. It’s straightforward and easy to understand.

Pros:

Clarity: Customers immediately know what they’re paying for.
Predictability: Simplifies budgeting for both the customer and the company.
Ease of Implementation: Minimal complexity in billing systems.

Cons:

Inflexibility: Doesn’t cater to varying customer needs or usage patterns.
Limited Upselling Opportunities: Harder to expand revenue from existing customers.

Best For: Early-stage startups with a homogeneous customer base and a straightforward value proposition.

2. Usage-Based Pricing

Pay-As-You-Grow

This model charges customers based on their actual usage, aligning costs with value received.

Pros:

Alignment with Value: Customers pay in proportion to their usage.
Scalability: Revenue grows as customer usage increases.
Accessibility: Lower entry barriers for new customers.

Cons:

Revenue Predictability: Fluctuating usage can lead to unpredictable revenue streams.
Complexity in Billing: Requires robust tracking and billing systems.

Best For: Infrastructure or platform services with variable customer usage patterns.

3. Tiered Pricing

Segmented Value

Offering multiple pricing tiers caters to different customer segments, each with varying needs and budgets.

Pros:

Customer Choice: Allows customers to select a plan that fits their needs.
Upselling Opportunities: Encourages customers to move to higher tiers as their needs grow.
Revenue Optimisation: Maximises value extraction across diverse customer segments.

Cons:

Complexity: Requires careful structuring to avoid customer confusion.
Potential for Misalignment: Poorly designed tiers can lead to customers feeling underserved or overcharged.

Best For: SaaS companies with a broad customer base and varying usage patterns.

4. Per-User Pricing

Scaling with Teams

Charging based on the number of users accessing the software aligns pricing with team size.

Pros:

Transparency: Easy for customers to understand and budget.
Scalability: Revenue grows as customers add more users.

Cons:

Limitations: May discourage adoption in larger teams due to cost.
Workarounds: Risk of users sharing accounts to minimize costs.

Best For: Collaboration tools or platforms where value scales with the number of users.

5. Feature-Based Pricing

Pay for What You Use

Customers pay for specific features they need, allowing for customisation.

Pros:

Flexibility: Customers tailor the product to their needs.
Upselling Opportunities: Easy to introduce new features as add-ons.

Cons:

Complexity: Managing numerous feature combinations can be challenging.
Overwhelm: Customers may find too many choices confusing.

Best For: Products with modular features catering to diverse use cases.

6. Freemium Model / Free Trials

Try Before You Buy

Offering a basic version of your product for free can attract a wide user base.

Pros:

User Acquisition: Lowers the barrier to entry.
Product-Led Growth: Users experience value before committing financially.

Cons:

Conversion Challenges: Not all free users will convert to paying customers.
Support Costs: Free users still require support and resources.

Best For: Products with a strong value proposition that becomes evident through usage, leading to paid conversion.

7. Value-Based Pricing

Pricing Aligned with Perceived Value

Setting prices based on the value your product delivers ensures alignment with customer expectations.

Pros:

Profit Maximisation: Capture more value from customers who derive significant benefits.
Customer Alignment: Pricing reflects the outcomes customers care about.

Cons:

Research Intensive: Requires a deep understanding of customer value perception.
Dynamic: Value perceptions can change, necessitating ongoing adjustments.

Best For: Mature products with clear, measurable outcomes for customers.

Strategic Takeaways

Understand Your Customers: Align pricing models with how your customers perceive and derive value.
Flexibility is Key: Be prepared to adapt your pricing strategy as your product and market evolve.
Test and Iterate: Regularly assess the effectiveness of your pricing model and make data-informed adjustments.

Remember, pricing is not a one-time decision but an ongoing strategy that should evolve with your business and customer needs.

Improving Pricing Power Is The Pathway To Profitable Growth

Ayon Bhattacharyya — Tue, 24 May 2022 00:00:00 GMT

Does any of the following apply to your business?

Are your competitors beating you on price, or charging more and still stealing your customers?

Is there an inability to scale due to weakening profit margins and cashflow position, leading to a lack of funding options?

Is there a lack of alignment between your sales, product and marketing teams? Maybe they are operating in a siloed way?

Is your business future proofed to deal with inflation if it rises to 10% or higher? Have you put off implementing price increases for fear of losing customers?

One of the biggest misconceptions in business and around pricing that I have seen in my career is that when businesses are losing customers, they are quick to assume “our customers are not buying from us because we are too expensive”, rather than “customers don’t understand our unique value”. Pricing quickly becomes a contentious issue when value is unproven.

If your business is experiencing any of the issues listed above, then this article will enable you to determine where you sit on the Pricing Power^TM curve so that you can take action to reduce the amount of forgone revenue being left on the table. This will give you the confidence to increase your prices, knowing that it is supported by unique value that your competitors do not provide, and will therefore be tolerated by customers.

The key to surviving inflation and creating sustainable cashflow growth is Pricing Power^TM!

In the famous words of Warren Buffett;

“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before you raise the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

Competitive advantage and value innovation is critical for sustainable growth because, without this, companies only compete on price which becomes a race to the bottom. For more on this, please refer to my previous article on “Find Your Competitive Advantage With Blue Ocean Strategy“.

Pricing strategy is all about monetising value and competitive advantage. Your pricing strategy must reflect the desired strategic positioning of your brand and proposition in the market.

Pricing is the engine or mechanism that drives your revenue, profit, and cashflow outcomes. Just as using a 4-cylinder engine will not win you any formula one races, your business needs a V8, or even better, a V12 pricing strategy to win the competitive race for your ideal customers. But before you can build a good pricing strategy, you need to revisit the core reason that your customers buy from you in the first place, which is the PERCEIVED VALUE of your product or service.

Improving perceived value comes about by first identifying what customers value the most, and then framing your proposition in a way that clearly articulates value in the context of solving their problem. This varies depending on the customer segment that you are targeting, which highlights the importance of understanding your customers and why they need your product or service. In companies that operate in the B2B space, sales teams play a huge part in improving this perceived value, as opposed to B2C where perceived value is generated via your website, marketing and advertising campaigns, and of course, purchases from happy customers who hopefully go on to become raving fans!

Apple is a classic example of a company that invests significantly in understanding what their current and future customers will value the most, ensuring that their unique technology differentiates their products from that of their competitors. Their premium price tag helps maintain the perceived quality and exclusivity of their products. Apple’s brand loyalty and perceived superior product quality provides them with this Pricing Power^TM and sets up an artificial barrier to entry for their competitors.

The Netflix vs Blockbuster saga in the early 2000’s is another great example of how disruptive technology provided Netflix with competitive advantage, whilst Blockbuster failed to pivot their strategy fast enough to prevent them losing market share. Netflix combined this with innovative monthly subscription pricing for unlimited, ad-free streaming which customers took to and enabled them to scale their market cap by over $150 billion over the 20-year period, whilst Blockbuster ended up filing for bankruptcy in 2010. Netflix have raised their prices six times in the last seven years with another price increase on its way this year, yet Netflix maintains the lowest monthly churn rate in the industry at only 2.4%.

Wouldn’t it be incredible if your business had this sort of Pricing Power^TM?

In the market, I see four levels of Pricing Power^TM based on a company’s ability to identify, create, measure, communicate value to their customers, and then capture / monetise value from their customers.

The four levels of pricing power: Cost Chaser, Market Pricer, Value Conqueror and Price Optimiser

Cost Chaser – Typically businesses without competitive advantage that are positioning their proposition in a commoditised fashion i.e. playing in a red ocean. They don’t do enough to understand their customers or competitors, adopting the simplest approach of covering their costs plus a margin (cost-plus pricing). These companies offer very few product variations and pricing either deters customers or fails to capture revenue from others willing to pay more. Whilst they may be profitable, Cost Chasers leave significant amounts of foregone revenue on the table given that they are completely ignoring demand.

Market Pricer – These businesses recognise the importance of gathering some market intelligence and are subsequently more aware of their market environment. This enables them to take their cost-plus pricing strategy and benchmark competitor pricing to ensure they remain competitive. They may have identified some simple customer segments that they can begin to develop product variations around and apply some differential pricing. This is a simple approach that relies upon internal financial data and market data, but it is hard for companies to sustain only on competitive pricing if they are not actively adding value to customer’s lives and don’t have a quality product. As a result, low profit margins lead to insufficient cashflow to invest back into their value proposition creating a vicious circle.

Value Conqueror – These businesses are focused on maximising their profit margin and cashflow potential and recognise the importance of value innovation in increasing Pricing Power^TM. They create sophisticated customer segments, as well as measuring, communicating, and monetising value across their customer base. Though many lack the expertise to do this effectively, by calculating price elasticity or willingness to pay, leveraging internal data and external customer research, Value Conquerors actively seek out help from experts. Cost will remain a baseline for them, but pricing will be value-based. Customer satisfaction is higher than previous levels given that the propositions and pricing strategies are value driven.

Price Optimiser – These tend to be industry-leading, disruptive businesses that, with the help of subject-matter experts, have identified a high number of sophisticated customer segments based on value and have a range of products to meet the specific needs and willingness to pay of these segments. When it comes to packaging, Price Optimisers leverage behavourial economic principles to drive the desired adoption outcomes. The customer proposition should not be overly complex and should be built on a ladder of value. Price Optimisers tirelessly seek competitive advantage (and blue oceans) through value innovation. They have a pricing engine with AI capability that enables them to price dynamically based on pre-set variables that balance value drivers with changes in supply & demand. Product, marketing, and sales teams are aligned and clearly able to articulate the unique value of their proposition and the competitive advantage that the business has in the market.

70 – 80% of businesses struggle to progress beyond the first 2 levels without expert help, with less than 5% achieving Price Optimiser status. Companies can learn so much about their Pricing Power^TM by leveraging historical sales data, competitor analysis, conducting price experiments, and choices analysis such as conjoint. The key to success is in the interpretation of the data points, and the creation and implementation of subsequent actionable strategies. The few businesses that can both conquer value and optimise price are able to sustain a healthy growth in market share, profit margins, and cashflow whilst benefiting from happy customers, employees, executives, and shareholders by continuously innovating and monetising value.

Which level of Pricing PowerTM is your business at?

Finding Your Competitive Advantage With Blue Ocean Strategy

Ayon Bhattacharyya — Sun, 22 May 2022 00:00:00 GMT

Put simply, competitive advantage is what you do differently that sets you apart from your competition. Competitive advantage gives your customers a valuable reason to choose you over competitors or alternatives. These unique aspects of your business should be difficult to replicate. Competitive advantage enables you to charge premium prices and therefore make greater profit margins.

Are your competitors beating you on price, and you find yourself having to continuously lower prices to remain competitive?
Are you struggling to meet customer acquisition targets, and having issues with customer retention due to competitive pressure?
Is there an inability to scale due to weakening profit margins and cashflow position, leading to a lack of funding options?

If you answered ‘yes’ to any of the above, then this article is written for you.

Examples of competitive advantage;

Cheapest cost base in the market
Best quality product or service
Highest customer satisfaction
Efficiency of processes – optimised value chain
Use of proprietary technology
First mover advantage

The principle of differentiation is to strategically find a way to not have to compete. I realise that may sound counter-intuitive but stick with me. This is the concept of blue ocean strategy as opposed to a red ocean strategy. Red ocean strategy, which is where businesses attempt to enter an established market whilst competing for the exact same customer segments, with a similar proposition, in the hopes of outperforming the competition. Adopting a Red Ocean strategy commonly results in a “race to the bottom”, as customers only care about your price and there is little else to differentiate your proposition. Your product becomes a commodity.

Blue Ocean strategies often disrupt the market through tech innovation, carving out a new segment, or finding a solution to a customer need that competitors are not servicing. But finding the Blue Ocean is only the first part of the innovation journey.

When a company finds and creates a Blue Ocean, it must find immediately a new one, while taking all appropriate business actions in order to maximise the new competitive margin.

Why is that? Because all Blue Oceans by definition tend to become Red Oceans and from the business perspective, maximising the competitive margin (although convenient) after a while it won’t be enough to keep the leadership of the market.

If you want to increase market share, profitability and sustainable growth in an established market, then Blue Ocean strategy is what you should aspire to, yet only 15% of businesses successfully implement it according to a study of 108 businesses across 30 industries performed by globally recognised authors, W. Chan Kim and Renee Mauborgne. So, how do you go about building one? A great starting point is to create a strategy canvas. To illustrate this, I am going to refer to the iconic example of Casella wines and their Australian wine brand, Yellow Tail;

Strategy canvas comparing Yellow Tail with premium wines across the factors the wine industry competed on

Casella wines shifted their customer focus by creating a new category of fun, easy drinking wine by unpacking the value proposition, benchmarking product categories, conducting customer research, and then identifying an opportunity (value innovation) to target customers from adjacent markets such as beer and cocktail drinkers. Through the research, Casella wines ascertained the reasons that non-wine drinkers were avoiding wine, and created a new category of wine that bridged the gap between adjacent products thereby making it more appealing to customers in those markets. This new category was simpler (less variants), more appealing packaging, not too sweet but not bitter to irregular wine drinkers, and produced at a lower cost. Yellow Tail went on to become one of the best-selling wines in the U.S. market by 2011, selling more wine to Americans than every French wine producer combined!

So, where is your business currently competing? The bloody Red Ocean or the coveted Blue Ocean?

The Strategy of Poker and Business

Ayon Bhattacharyya — Fri, 25 Feb 2022 00:00:00 GMT

I enjoy playing poker occasionally. What do business and poker have in common?

Here are some of the lessons from poker that I think can be applied to business.

Poker is all about stacking the odds in your favour through analytical thinking, risk management, and psychology to get a read on the strength of your opponents’ hand versus your own. As the round progresses and more cards are revealed (the flop, turn and finally the river), players aim to capitalise on the value of their own hands. Weak hands tend to fold early on, and stronger hands make bets to increase the value of the pot in the hopes of winning more. Players who bluff may win if everyone else folds, but get caught out at the end if they are forced to reveal their cards because other players did not fold.

The cards you are dealt are similar to your value proposition. You aim to build and grow value so that you can capture it eventually with an optimal pricing strategy. Your opponents are like your competitors, who are also trying to showcase the strength of their products or services, though some will be bluffing and over time lose customers and market share due to a weak proposition, being out of touch with customer needs, failing to adapt to changing market conditions, and providing a subpar customer experience. Never chase losses!

In poker, sometimes you might have a strong hand to begin with (like pocket aces), but as the round progresses, this hand may get weaker based on other cards on the board, so you are forced to fold them. Similarly in business, sometimes you will need to pivot your business strategy, products, and sales channels to respond to external factors. As a business owner, staying tied to a proposition that no longer has product-market fit will eventually lead to failure.

When I play poker, it helps to know my opponents, their tells and their playing styles. Likewise in business, know both your competitors and your customers. Business strategy is about setting the direction in order to achieve your vision, goals, and competitive advantage, but also anticipating your competitors next move. Like a game of chess, it’s important to think a few moves ahead. Poker is unpredictable and so is business. Consider the worst case scenario, and then act accordingly.

Bet sizing is of critical importance in poker, as is cashflow management in business. When you make over-sized bets without managing your risk, it is likely that, if you lose that hand, you no longer have enough chips left to play the next hand. You need to exercise financial discipline, even when the temptation to play the hand is overwhelming. Similarly in business, you need sufficient cashflow to continue to fund growth. Without a sustainable growth strategy and healthy financials, eventually you run out of cash.

Disclaimer: this article does in no way endorse playing poker as a way to succeed in business. It is simply some of my observations of the parallels between the two.

Capture & Monetise Value

Ayon Bhattacharyya — Tue, 04 Jan 2022 00:00:00 GMT

The premise for this article is that the business has already been through the journey of identifying the customer problems, creating value through product innovation, communicating value via sales teams and value messaging on the website. Now the customer understands the value of your proposition, how do you monetise it and generate more revenue?

This article will focus on 2 core areas;

Price segmentation
Pricing strategy

Price segmentation is the process of grouping customers based on specific attributes where their willingness to pay differs from other groups of customers. This often involves delivering more value to these customers which they are willing to pay a premium for, and therefore it is important to offer a more sophisticated range of products or services to cater for this. LinkedIn is a great example of this, and achieve this effectively as illustrated below;

The price of the subscription increases based on the value of features offered and the use case of the customer segment.

The level of pricing power that an organisation is able to realise can be identified on a maturity such as the one below, beginning with cost-plus pricing in the least mature state, followed by market-based pricing, customer segment differentiated pricing, and with value-based pricing ultimately leading to optimised product or service pricing at the highest level of pricing maturity. These principles can be applied to any industry where companies offer differentiated value propositions, and customer segments can be clearly defined.

As maturity increases, setting the price points becomes more complex and typically involves a good deal of research, analysis and experimentation. A value-based pricing approach is more resource and data intensive but will unlock far greater revenue growth potential than solely cost-plus or market-based pricing. It is highly unlikely that a business will land on its optimal price point on the first, second or even third attempt. This is an iterative process that needs to be reviewed regularly as value perception changes, competitors vary their price points or value proposition, and when new competitors enter the market.

Customers will always tell you when you are too expensive but rarely if you are too cheap. Even when they tell you that you are too expensive, it does not necessarily mean that they will stop buying from you. The best way to test willingness to pay is to just increase prices and measure the revenue impact over a reasonable period of time. Businesses can mitigate some of the risk by gradually introducing these increases to subsets of the customer base, but it is important not to roll back a price increase based on an initial adverse reaction. Customers may take a little time to adjust to the new normal, and communicating product enhancements, additional value that differentiates your proposition, ahead of any price increase often minimises any backlash. Often competitors are also waiting in the wings for an opportunity to increase their prices and will likely take their cue from you.

Communicating Value (B2B and B2C)

Ayon Bhattacharyya — Tue, 30 Nov 2021 00:00:00 GMT

In the B2B world, your sales team should be your strongest advocates of value and be able to clearly articulate this to the customer. Sales enablement training is key to ensuring that customer conversations are value-led rather than price-led. Value mapping is a useful exercise to undertake with sales teams to ensure that they are solutions focused, understand use cases, and talk to value drivers, rather than simply pushing product. Generally speaking, customers are either purchasing a solution to a problem, or an experience, and the best sales folks have a deep understanding of that customer problem.

Another important aspect of sales enablement is identifying buyer types. Reed K. Holden refers to four main buyers in his book ‘Negotiating with Backbone’ – Price Buyers, Relationship Buyers, Value Buyers, and Poker Players. Understanding these personas helps build an effective sales strategy and adapt your approach to value conversations accordingly.

For B2C segments, online customer interactions tend to occur via the website and digital marketing. Effective value messaging is absolutely key in this space to help your customers understand the value of various features and the differences between offerings. Here is an illustrative example from Trade Me Motors;

In this example, Trade Me have identified that their customers (sellers) care about attracting more serious buyers, which then leads to faster sale of their vehicle at a higher price. The value driver here is audience reach which is facilitated by the number of listings and so this is clearly stated through value messaging on the website as above. In terms of the product offering, customers have a choice of 3 bundles with various features associated. The customer really does not care about the specifics around these features. But what they do care about is how each of these options would improve the visibility of their ad.

Trade Me have also incorporated some behavioural economic principles to the positioning of the bundle. In most English speaking countries, people read from left to right and therefore your premium bundle is the first to be noticed. This is important due to the concept of loss aversion, which is to say that losing value is more painful than the utility generated from gaining more value. The second concept is around ‘the power of 3’ or the ‘Goldilocks principle’ which is the tendency for the majority of customers to choose the middle option when presented with three options and this is considered the ‘safe’ option (not too expensive, yet not too inferior).

Listen to your customers, innovate and create more value

Ayon Bhattacharyya — Thu, 25 Nov 2021 00:00:00 GMT

Successful businesses create feedback loops to continuously engage with their customers to both validate the customer problem and improve the customer experience. Valuable customer intelligence should be drawn from your sales teams via the CRM tool, post-sale customer surveys, customer research, such as focus groups and online questionnaires, social media, and in some cases, directly from the customer.

Greater customer engagement boosts customer loyalty and improves sales efficiency. Moreover, this forms the basis for Customer-Led Innovation which should be the backbone of your product development. According to an innovation specialist at Gartner,

“You cannot afford to stay still – business is a moving escalator. The world is moving around you – customer expectations are changing, competitors are always catching up and threatening to take away your business.”

Lab42 conducted a survey in 2015 which suggests that 84% of consumers want to buy from an innovative company*. Consumers are willing to pay a premium for innovative goods and services that solve problems and create value.

So Why Customer-Led Innovation?

Industries can innovate, design new initiatives and roll out new products – while still failing to give their customers any usable solutions. That’s because many companies innovate based on what they think is best for the market, but not what their customers actually need. They jump on industry trends without listening to what their customers are talking about, or only bring customers in at the product testing phase and not at the beginning of idea creation. Or they don’t innovate at all and rely on the status quo, not realizing that by ignoring customer needs and innovation, they’re becoming ripe for disruption.

If you want to build a company that puts customers first, here’s where to start:

Listening: Find out what your customers are talking about, what problems they’re trying to solve, and what options they have available. Listening to their stories and gaining their insight can help shape your innovation.
Partnership: Innovation starts with engaging your customers as partners. Solicit and implement their feedback, have them show you gaps in the industry, and give them great customer service.
Flexibility: Focusing on solving customer problems may mean changing or abandoning your previously-held ideas. Being flexible and adaptable will help you better put the customer first.
Culture: Innovation starts with a mission that is inherently customer-focused. Build customer interaction and partnership into the core of your company.

* https://customerthink.com/new-study-reveals-importance-of-innovation-to-consumers/

Leveraging Data from Every Customer Interaction

Ayon Bhattacharyya — Wed, 17 Nov 2021 00:00:00 GMT

Amazon, Netflix, and YouTube have mastered the art of AI technology, showing how machine learning helps keep customers engaged. This means that the content that you show to customers is more personalised, targeted, relevant and engaging which ultimately help to keep your customers in your sales funnel. But you do not have to spend billions of dollars on customer analytics to understand your customers. Most businesses would gain huge value from leveraging the data that they already have available to them.

Analytics platforms such as Google Analytics enables you to assess the efficacy of website design and content. A/B testing will allow you to iterate until you achieve the desired level of interaction or drop-out rate.

Sales data provides vital information about what customers are purchasing and how they prefer to purchase it.

The companies who are successful in turning data into above-market growth will excel at three things:*

Using analytics to identify valuable business opportunities from the data to drive decisions and improve marketing return on investment (MROI)
Turning those insights into well-designed products and offers that delight customers
Delivering those products and offers effectively to the marketplace

Data-driven product innovation, customer segmentation and channel strategies, all enable businesses to effectively allocate resources toward maximising customer value. Buyer preferences and market conditions shift over time, accelerated by the pandemic impact, and resilient businesses that are able to sustain competitive advantage over the long-term leverage insights from both internal and external data sources. The aim is to identify trends, test hypotheses, validate the customer problem, and pivot the strategy, product offering and/or business model.

For businesses with B2B customers, utilise your CRM data effectively to understand wins and losses. Along with customer feedback and NPS, this will be your primary indicator of issues with, friction in the onboarding or buying process, value proposition not solving the customers’ problems, uncompetitive pricing that is disconnected from the value perception, etc.

*https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Marketing%20and%20Sales/Our%20Insights/EBook%20Big%20data%20analytics%20and%20the%20future%20of%20marketing%20sales/Big-Data-eBook.ashx

People are not the same, and neither are your customers

Ayon Bhattacharyya — Wed, 22 Sep 2021 00:00:00 GMT

Let’s take a look at the importance of customer segmentation in building any successful pricing strategy;

The main objective of any successful pricing strategy should be to get as close as possible to charging customers the maximum amount that they are willing to pay. Typically, willingness to pay is a function of the value derived from your product or service relative to what your competitors are charging. So, to give a simple example, I might be willing to pay $20 for a nice cocktail in a fancy bar (pub A) with live music, great ambience, and where customer service is gold star, i.e. bartenders make bespoke cocktails for you following a customer conversation about what you like. However, pub B across the road serves standard cocktails for $12 on happy hour but staff are more focused on volume of drinks served than customer service, the floors are sticky, and the music blaring from speakers is too loud to have a conversation. Pub A may be more appealing to office workers, guys hoping to impress their dates, a great venue for business networking events, etc. Pub B will still attract customers that belong to specific market segments such as students and other patrons with low affordability. The two offerings are fairly distinct and akin to perhaps eating at KFC or McDonalds versus a fine dining experience.

Now to segments and why this is important. Let’s take a simple scenario; imagine I only sell one product to every customer at the same price;

Scenario 1: For some percentage of customers, I am charging them less than they are willing to pay thereby leaving money on the table (happy customer but lost revenue opportunity). Due to the effect of anchoring, which is where customers expect to pay a specific reference price for a product or service based on past experiences or research, over time, these customers’ willingness to pay will also reduce making it more difficult to raise prices in the future. Another potential risk is that your customers may perceive the product or service to be of inferior quality since the price is lower than they were expecting to pay (the concept of “you get what you pay for”).

Scenario 2: For some percentage of customers, I am charging more than they are willing to pay. These customers will likely not purchase and will choose to go with a competitor therefore a lost acquisition opportunity.

Scenario 3: I might get lucky with a few customers and price matches what they are willing to pay

Price segmentation or discrimination (a less favourable term for it) is where a business charges different prices to groups of customers buying the same product or service based on their willingness to pay. Generally, the more price segments that can be identified, the more profit is captured (assuming costs remain constant). See illustration below;

Airlines are able to achieve this effectively by applying segmentation criteria such as time sensitivity, flexibility, trip duration, and distribution channel. Broadly speaking, they use fare rules to distinguish between leisure and business customers, charging higher fares to the latter group on the basis that they are typically less price sensitive as travel is less discretionary. However, applying the same principle to many other industries can attract a backlash from customers who deem it unfair to change reference prices for the same product to generate more profit.

Price fences are product rules put in place to discourage segment creep between price segments (arbitrage) to achieve a lower price. Examples of such mechanisms include geographic fences such as using postcode, and requiring customers to prove they belong to a specific segment to avail of a specific product or price (e.g. student ID, healthcare workers, seniors). Larger customers typically have more bargaining power therefore often expect to pay less. Volume-price tiering can be an effective price fence for this segment.

Another effective way to achieve this is by varying the amount of value offered at each price point, which relies upon customers to self-segment based on their needs and choice of product variation. There is some risk that some price sensitive customers may switch to an inferior product variation forfeiting value, but this is minimised by its relevance to the target segment. A great example of this is LinkedIn’s latest product offering;

Each feature bundle is customised to the needs of its target segment and priced uniquely based on the value of that solution. This achieves a tailored approach to product development, enables better targeting and sales conversion, as well as maximising revenue since monetisation of features aligns with providing customer solutions and willingness to pay. On clicking ‘Learn more’, customers are able to view a more detailed set of features, price points, and quantified value messaging e.g. “Premium Business members get an average of 6X more profile views”

Please feel free to check out my podcast interview with Mark Stiving to learn more about segmentation and how I have applied these principles to revenue optimise in businesses across the UK, Australia and New Zealand.

Which pricing research techniques can help you work out optimal price?

Ayon Bhattacharyya — Fri, 05 Jun 2020 00:00:00 GMT

Which conjoint or “trade off” analysis is appropriate for building your pricing strategy?

Well, it depends on your objective. The 2 most common methods are Van Westerndorp (VW) and Gabor Granger (GG).

VW helps you to understand the acceptable price range through asking a series of questions to assess the respondents’ attitudes towards various levels of price. The study is designed to enable you to gauge price points that are “too cheap” vs “cheap” vs “expensive” vs “too expensive”. These responses then enable you to plot a Price Sensitivity Meter (PSM), lines for each of the above which intersect to provide you with the acceptable price range. The obvious flaw in this is that the questions are more open ended, not requiring respondents to make specific trade offs between product features and price points. Results can often be skewed with more respondents opting for “too expensive” rather than “too cheap”.

Conversely, the aim of GG is to find the maximum price that each respondent is willing to pay, therefore projecting price elasticity and the revenue maximising price point. I believe this technique to be a more precise way to measure willingness to pay as you are asking respondents to determine whether they would purchase a product at a specific price. Each subsequent question is an adaptation based on the previous response allowing you to map out the price elasticity curve.

Source: https://www.decisionanalyst.com/blog/pricingblog/

So, in this example, $200 is the revenue maximising price point. This methodology often works well once you have already established your product strategy and what your value proposition would look like, and have made some estimation of an acceptable retail price range (perhaps using VW).

Ultimately, any conjoint (trade-off) analysis or choice modelling survey using a realistic competitive set, provides an effective way for you to understand buyer preferences and willingness to pay. This can assist with optimising price, refining your product strategy in regards to prioritisation based on value, and enable you to build an effective bundling strategy. On the flip side, it can be a time consuming and expensive process, and you need to be confident in your understanding of customer value creation for each product feature before considering this approach (since it needs to be clearly articulated to respondents in the survey process).