This is Part 3 of a series of four posts on pricing a solution portfolio.
Part 3 - Looking for Interactions (This Post)
Part 4 - An Integrative Solution
Please take our survey Value, Innovation & Pricing Insights from CEOs
This series is focussed on the challenges of pricing a portfolio of offers. In the first two posts, we looked at how pricing changes over time and how to set goals for a portfolio of offers. Now, we move on to the most difficult part of pricing a solution portfolio. Working out how to make the interactions between different offers work in your favour. We also look at some of the pitfalls.
There are three key things to consider in building a portfolio: framing, paths, combinations (packaging and bundling). Using these together is the key to successful portfolio pricing.
Framing the portfolio
Behavioural economics and prospect theory have taught us the importance of framing perception and decision making. Each offer in your portfolio frames the others and one has to plan how potential buyers will compare offers to each other. The sequence by which this comparison is made will also shape willingness to pay (WTP).
Which part of your portfolio provides an anchor, relative to which other offers are compared? This is one of the critical decisions to make. If you leave this to chance, you will lose control over how your pricing is perceived. There are several strategies possible here. Take the example of two restaurant chains. One is positioned as a family restaurant offering great value for price. The menu is designed to call people’s attention to the top right offer, which is designed to have a low price point but to lead the customer to add-ons needed to fill out the meal. The customer enters the buying process with the framing that ‘this restaurant offers great value.’ Another restaurant, right across the street, is positioned more up market. It wants to attract people who are giving themselves a bit of a treat, perhaps celebrating a life event. Its menu has a very different design. There is no low priced special. There are specials, but they are priced higher than the daily fare and positioned as being something special or in season. The goal is to frame a high price so that the rest of the menu seems reasonably priced. When we analysed spending for each business the average was about the same, but for the family restaurant the median was lower than the mean (the distribution had a negative skew) and for the destination restaurant there was a positive skew. Speaking with the owners (who asked not to be identified) it was clear that this was a strategy and that each was aware of what the other was doing.
Never make a pricing decision based on averages without checking the skew of the distribution.
A full understanding of framing and its effect on decision making requires a good understanding of behavioural economics, something we will dig into in future posts.
Paths through the portfolio
In most cases, there will be a defined set of paths that you want customers to take through your portfolio. Designing these paths and the pricing that supports them is a key part of portfolio pricing design. These paths are also known, in sales, as upsell and cross sell. Ideally, upsell occurs as a customer becomes more and more able to take advantage of advanced functions to get more value. Cross sell is most successful when the combination of two or more offers, each of which provide value independent of the other, provide even more value when used together.
One way to think through paths through a portfolio is using the concept of a maturity model. These models are popular in many contexts and smart companies are developing maturity models that guide upsell. The basic idea is to have an offer for each stage of the maturity model and a well supported path to get from one phase to the next. Below is an example of a Customer Communication Maturity Model from GMC software. This makes the upsell paths clear. The pricing challenge is to capture more revenue as one moves up the maturity model while not putting in any barriers that discourage customers from using your solutions to get to higher and higher levels of maturity.
There are other ways to think about paths, especially in the context of the technology adoption lifecycle. (see Pricing strategy changes across the technology lifecycle). Paths are especially important when the market is transitioning from one phase of the lifecycle to another, but not all parts of the market are changing at the same time. For example, at the end of life one will want to have well defined paths that lead customers to the next generation of your solution.
Combining parts of the portfolio
The other consideration in portfolio pricing is understanding how different offers will be bundled to appeal to different parts of the market. To do this well you need to have a well thought out value-based market segmentation (see Why good pricing strategy starts with market segmentation). Bundles should be designed for each target segment. Take a holistic approach to bundling. In today’s world, a bundle usually includes products (often priced using subscriptions), professional services and access to data. Your pricing model has to be able to integrate each part of your offer in a way that helps to communicate value and that will make sense to your customer.
Here are five questions that can help you find the interactions between different parts of your portfolio and design an effective portfolio pricing strategy.
What is your value-based market segmentation and what segments are you trying to target?
Are the segments independent or do they interact with each other? (One segment may act as a reference for another, or there could be great markets.)
How do offers frame other offers, within a segment and across segments? (Framing needs to be designed to align with your strategy and positioning, think of the two restaurants described above, who used very different farming strategies.)
What paths do you expect customers to follow through your portfolio as you cross sell and upsell?
How will you combine offers (including professional services and data) to provide exceptional differentiated value for your customers? (Differentiated value is the value that you provide that it is very hard to get from a competitive alternative. It is the source of your pricing power.)