Design Your Pricing
Bringing a new offer to market is one of the most difficult things a business does. There are a lot of moving parts and it is difficult to keep all of them aligned. Pricing is something that often gets left to the end of the process.
"Oh yes, we need a price, what are other people charging?"
"Oh, you actually want to buy this! How much do we charge? Uhh, how much would you pay?"
"Ok, now we need a pricing page, let's be nice and direct and just tell them what it will cost."
Or the opposite approach is sometimes ...
"Price? Have no idea. Let's not publish anything, just have them call us and we can talk it through."
Each of these are recipes for failure, but we see them happen all too often. They are the result of a failure to purposefully design pricing.
Design pricing! Is pricing designed?
Well, in some ways. The best practices developed in the design thinking and service design communities can and should be applied to pricing. Here is how we do this at Ibbaka.
- Understand the emotional and economic value of the new offer (which requires a lot of empathy)
- Compare this to the next best competitive alternatives
- Build a market segmentation based on value drivers and buying processes (a good segment is a group of potential customers that get value in the same way, that buy in the same way, and that can be reached through the same channels - ideally the buyers in the segment talk to each other as well)
- Choose and sequence target segments (what are the best segments to go after in which order)
- Figure out the value metrics (the units of use associated with value), this is an iterative process that requires a lot of interactions with potential buyers and users
- Design the value model and usage model and connect them, try to get them designed into the offer's data model
- Brainstorm and test different pricing metrics (the units of use that the buyer will be charged for, this is a major area of innovation)
- Choose the pricing metrics that will resonate with the target segments
- Design a pricing architecture with clearly defined roles for each tier; use value metrics not chosen as pricing metrics as fences to guide buyers to the appropriate tier (you can also use functionality as fences so that different tiers get different functionality)
- Revise the data model so that the data needed for the pricing model can also be captured (now we have three connected models - value model, usage model, pricing model)
- Set pricing levels
- Monitor and see how buyers are responding (analyse the sales funnel), how competitors are reacting, how pricing and usage are correlated and to ensure that users are getting the intended value (and we hope some unexpected value)
Design Thinking: Apply design thinking to your pricing process. Design Thinking is a term popularized by Tim Brown at IDEO and Roger Martin (then at the Rotman Business School at the University of Toronto). The d.school at Stanford University offers an excellent program and set of resources. Design thinking begins with a deep emotional understanding of the buyer and user needs. Multiple designs are generated and explored, tested with users and refined. Over multiple iterations the design is clarified and focussed.
Service Design: Use service design as part of the pricing design process. Service design is an approach to design thinking used to develop services (B2B SaaS and Internet of Things solutions are best thought of as services). For pricing work, consider each touch point where the buyer builds awareness, understanding and consideration of value and make sure that value comes before price in the revenue generation process. Design communication so that price is always put in the context of value.
Don't set prices. Design pricing.