Archive for March, 2011
The New York Time recently announced their new pricing strategy. Several people have pointed out that it is way too complex for mere mortals to understand. I especially enjoyed this blog post from John Gruber where he emphasizes that when pricing is complicated for customers to understand they are less likely to purchase. I absolutely agree. John also held up Apple as an example of nice simple pricing. A great example.
However, this does not mean that you should not segment on pricing. Let me restate that sentence without the double negative. You should still segment on pricing. The lesson from the New York Times and Apple is that we want to present simple pricing to our customers. When customers see simple pricing they are more likely to make a decision, resulting in a sale. When they see complex pricing they are less likely to make a decision, meaning no sale. However, presenting simple prices and price segmentation are not mutually exclusive.
Even though Apple’s pricing appears simple, they are still segmenting. Apple is clearly segmenting on price using the versioning technique. They may also be segmenting in ways we don’t see. Are they offering bulk purchases to some companies at discounted prices? Are they offering lower (or higher) prices in other regions of the world?
Think about shopping for something on Amazon.com’s web site. What you see is the item and a price. Very simple. Amazon may have extremely complex algorithms that look at their customer’s purchase history, their zip code, maybe even the credit limit on their credit card to determine what price to charge each customer, but in the end Amazon shows only one price to their customer. Complex segmentation, simple price presentation.
The New York Times seems to have violated this keep it simple stupid (KISS) rule for their pricing. The lesson we should learn is that we need to follow KISS when presenting prices to our customers. Don’t take the wrong lesson. Continue to segment on price.
If you set pricing strategy and want to maximize profits (or at least increase them), then you must use some sort of price segmentation. After all, not all customers have the same willingness to pay. You make more money when you let people who are willing to pay more actually pay more.
But is this fair? Is it fair that we charge some people one price and other people a lower price? Do you like it when you pay a price, and find out that someone else bought it cheaper?
What is fair? It turns out that fair is in the mind of the beholder. Every individual determines whether or not he or she has been cheated. Every person has their own sense of fair. However, there are many examples where it appears we have consensus on what is fair. Let’s look at some examples.
Students getting into movie theaters at a lower price. – Fair
Seniors getting cheaper coffee at McDonald’s. – Fair
Vacation travelers paying less for flights than businessmen. – Fair
Paying more for Coke on hot days than on old cold days. – Unfair
Paying more to check your bags on an airline. – Unfair
As we think about these and other examples, there seem to be three criteria which makes something “fair.”
1. The segmented price is a discount to one group, not a surcharge to the other group.
2. The pricing rules are known to the customers. The customers have learned to play by them.
3. The rules do not change. If they do change, they better change in the customers’ favor.
I’m still amazed that people are so upset when the airlines charge more to check a bag, but they do not complain when they now have to buy a meal. It is to your benefit to segment your customers and charge them different prices, but if you want to avoid customer protests, pay attention to these 3 rules.
The original subscription web site offered both annual and monthly subscriptions with the default value of monthly being selected. They had about 11% of their subscribers sign up with annual subscriptions.
They changed the web site so the default selection was annual. Now 33% of their subscribers sign up with annual subscriptions. Pretty impressive effect.
One reasonable explanation is that many consumers are relatively indifferent between the options and are swayed by the default selection. Another explanation is that the consumers didn’t even notice that they had a choice. Regardless of the explanation, a much larger portion of the customers made a larger commitment simply because the company changed which choice was selected as the default.
Do you have any other examples similar to this?