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Simple Dynamic Pricing for Mobile Games and Apps

There are many tactics mobile games and apps can borrow from retailers and e-commerce stores when it comes to selling In-App Purchases. Dynamic Pricing is one of the most powerful of them. This post is going to look at the low-hanging fruit with dynamic pricing that almost every mobile app or game can take advantage of, quickly and effectively.

WHAT is Dynamic Pricing?

Changing the effective price of an item based on the situation or context is dynamic pricing. Note that it is “effective” price. If the grocery store stocks half a gallon of milk for $2.00, and one gallon of milk at $3.00, the full gallon is actually cheaper even though the total dollars paid by the customer is more.

The simplest way to change the price is to offer a straight-up discount to the customer: a dollar off on a $2.99 item.

There are other ways to vary prices:

  • Quietly sticking a new price on the tag.
  • Creating a bundle of different items with a single price tag such that the individual prices cannot be determined.
  • Creating a premium class of the item via additional value (organic milk?) or a limited supply.
  • Etc.

For the low hanging fruit, we will just focus on discounts.

HOW can you give discounts on the In-App Purchase items?

Both Apple and Google require you to declare your In-App Products up front (in iTunes or the Play Store) and assign static prices. The workaround is to create multiple products for every item, but at different prices. The SKU or Product ID will be unique, but you can create a “disable ads for $0.99″, a “disable ads for $2.99″ and a “disable ads for $4.99″ item that all maps to the same item / functionality.

Here are instances of some of the popular apps doing this (showing examples from AppStore because PlayStore doesn’t show IAPs):

Go to the LinkedIn App in the App Store and scroll down to the In-App Purchases section. This is what you will see. Notice the same items at a different price?

Here are Hay Day, Candy Crush Saga and Spotify too:

Or, some games offer bonuses at existing price points like this:

WHEN should you give a discount?

This is the “dynamic” part of Dynamic Pricing. Big businesses, especially retailers, have teams of data scientists trying to determine the most optimum answer to this very question.

The low hanging fruit for mobile games and apps is in determining the basic rules or conditions under which a discount will get a user to make the purchase. Obviously, discounting the same item for everyone at the same time is a really bad idea – you should only do that when having a closing sale: “everything must go”.

Here are some instances of when you should offer a discount:

  • An Abandoned Cart: A user clicked on an IAP but cancelled out at the confirmation dialog from iTunes or PlayStore. Track these events and offer a discount to that user for that item the next time they are in the app. Will this teach users to hit cancel and wait for the discount? It could. One way around it is to offer the discount only when the abandoned cart is by an infrequent buyer.
  • Free Users: Users who have been using the free version of the app for a while and are not paying for the premium upgrade or game currency likely think the price is too high. Offer them a discount once they have used the app for enough time. Extra effectiveness if you offer the discount at a time when they will immediately be able to benefit from the upgrade (extra health just after running out of lives?).
  • Potential Power Users: If there are users who are buying the small packages: the weekly subscription instead of the quarterly, the $1.99 coin pack instead of the $4.99, consider giving them a discount on the larger items to give them a nudge into becoming power users.

These are three “dynamic” discounts your app should have as soon as it goes out of the door. There are lots more, and if you want to pick our brains about them, drop us a line!

HOW MUCH discount?

The next question is obvious: how much should you discount? 10%? 20%? 50%?

The answer is not as obvious: do not pick a number based on your gut. You will invariably be wrong. The human psyche has a tendency to qualitatively evaluate numbers based on the nearest comparison. You might decide 20% is a lot of discount, based on what you see in the grocery store down the street. But the grocery store has a different cost structure and RoI than your app or game.

The right answer would be to test a few different discounts levels: 20% and 40% are good numbers to start with. Apple makes the price choices a little easier by letting you change the price only in $1 discrete amounts.

Also see what other similar games or apps do. If you see the Hay Day example above, they drop the price of their “Bag of Diamonds” from $4.99 to $0.99 – that a huge 80%! The level of discount can also depend on when you are offering the discount: if it is to a first-time buyer for their first purchase only, getting the conversion is more optimal, so the largest discount is the right strategy at that point.

Don’t you incur a loss by dynamic pricing?

Not if your product is 0s and 1s getting duplicated in computer memory. The cost of duplicating is 0. Any price you sell the item at is a profit. In fact, you incur a loss if you DON’T do dynamic pricing. For every user who does not buy your product because the price was too high for them , you incur a loss of the price they would have bought at. This is true of all products that have a zero marginal cost.

All you should focus on is the total revenue, which needs to be greater than your total cost of building, marketing and running the app. Price per unit is not important.

The Lattice system is built to automatically do dynamic pricing in your app. If you want to find out what it can do for your app, drop us a line!

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Pricing your SaaS Product and how we did it at Sosio

In case you aren’t updated on the current affairs, 2014 is shaping up to be a controversial year; and we’re not referring to Justin Bieber’s antics, Mr. Kejriwal’s dharnas or Mr. Modi’s development stories. Instead, a new contention is brewing in the annals for us which is every entrepreneur’s one of the worst nightmare: deciding how much to charge for your product 😉

Pricing is one of the most difficult things to get right. There are several questions that come to us, and its good if we can get an answer for each of them. Should my MVP be free? When should I start charging? How much should I charge? Will I lose my first customer, if I start charging higher? Will the freemium model work?

We get into these FUDs(fears, uncertainties, doubts) because whenever you ask for money, there is friction, which cannot be removed, it can only be minimized. The best way to overcome these objections is to prevent them from happening. Well, I tried to study, how other people, were addressing the same problem, and tried to come up with one for my own product. Its taken more than 6 months, and hours of brainstorming with few of the amazing folks for me to reach here. I will try and summarize few of them.

The trouble with software pricing

Pricing is a basic economics thing. Unlike traditional manufacturing products, where there is a fixed cost of raw material, labour, transportation etc. a cost price for each unit is pretty clear. On this objective value for each of the unit, the sales team, tries to create a perceived value of the product, based on reference points of competing products, and after a basic survey of the demand curve, a price point is generally arrived.

For softwares, the case is slightly different. After break even, the price of a new unit, tends to be negligible. So defining an objective value for each unit becomes tough. Chances may be, the product you are creating may not have a direct competitor, or if there is an alternative it might be free. In that case, extrapolating from a reference point becomes tough.

The price tag you put on your software, is one of the most challenging thing to get right. Not only, it keeps you in business, it also signals your branding and positioning. Iterating on the product, is far more easier than on the price. Lowering the price is generally easy and appreciated but it takes to be an Amazon to demonstrate it profitably. Increasing the price, is tough, because it adds to the churn. So doing the most you can, to get it right, generally accounts for a successful business in making.

Addressing few of the initial Questions

Should I charge for my MVP?

Despite validating the problem that I was solving, and clearly mentioning the price point during the customer interviews in my initial stages, I used to be afraid of asking money for the product, because I had a fear, the product is not ready, the Minimum Viable Product was minimal, I was not sure of the hidden bugs and I was not sure, how deeply have I solved the problem.

The two thought leaders Steve Blank and Sean Ellis had the following to offer –

Steve mentions pricing to be one of the important questions in your customer interview, this helps you validate that the product’s value proposition is compelling enough for them to pay, and the problem is worth solving. Once the MVP is built, Steve asks you to sell it to your early customers. There is no clearer customer validation than a sale.

Sean Ellis, removes pricing to the post-product/market fit stage:

“I think that it is easier to evolve toward product/market fit without a business model in place (users are free to try everything without worrying about price). As soon as you have enough users saying they would be very disappointed without your product, then it is critical to quickly implement a business model. And it will be much easier to map the business model to user perceived value.”

Well both of them have their own merits. So I did an A/B with my customers. I offered two of them, the software for free, and mentioned to the other that we will be charging. The folks who were given free product, did not use it and it got shelved, whereas the ones who were paying, had feature requests, reported few of the bugs they came across, solving these bugs, and responding pro-actively helped me develop better relations with them. The free users asked for additional features, whereas the paying users asked for improved features, which eventually meant a better product.

Personally, I align more towards Steve’s side, because, the best validation you can get for products value prop. is the customers’ bucks, and if it gets figured out initially, nothing like it.

Should I go for a freemium model?

Lincoln Murphy has a white paper on The Reality of Freemium in SaaS which covers many important aspects to weigh when considering Freemium, such as the concept of quid pro quo where even free users have to give something back. In services with high network effects, participation is enough. But most businesses don’t have high enough network effects and wrongly chase users versus customers. The notable point in the above paper is – “Freemium is a marketing tactic, not a business model.”

People have struggled with freemium, and dropped it, with few exceptions of Wufoo and FreshBooks. The conversion for free to paid accounts has been relatively low even for Pandora, Evernote, and MailChimp. 37signals has greatly deemphasized their free plans to almost being fine print on their pricing pages.

Its not impossible to launch successfully with a free plan but things can get easy, when we simplify freemium, not look at it as a business model, with the only objective for it being to get people using your product in a manner that makes them want to pay for more advanced features.

What should I consider while pricing my software?

There are a number of ways to approach this problem.

The amount of money a customer is willing to pay, primarily depends on the following two factors –

  1. Value extracted from use of the product
  2. Emotional Willingness to Pay, which is an after effect of perceived value of the product.

And hence, two of the most obvious pricing strategies are –

Pricing based on the value provided

This is customer-first strategy. The amount of value each customer gets out of using Sosio, corresponds with the amount they pay us. Tried doing it, but devising an excel sheet, where in we could go and show, that you used sosio for X, and it increased your value Y times, is something, we are yet to find.

Pricing based on cost

This strategy takes care of our engineering team, sales cost, server and other rentals. This is generally intuitive from an engineering perspective. Pricing based on the number of accounts, the amount of data that is processed and saved, give us a good number, as to how much we should charge.

But the above approach makes it a uni dimensional pricing strategy. Our product is not just the product, its the customer support, its the number of users, its the problem that we are attempting to solve. The Quality of Support we provide, the response time of the support, Email Support versus phone support versus in person support, number of support incidents, product features and depth of usage are other metrics are other dimensions to reflect upon while deciding the pricing.

There are several params, to consider, and you can go on complicating your pricing and creating complex tiers. Even, I was doing one, till I read this post by Dharmesh Shah, and how he randomly arrived at a price of USD 250. I could have gone for a ballpark of maybe 20k INR, but here is how I arrived at what I arrived – I had few features, which other softwares, were providing as well. I have tied down features, uniquely, but my software, as of now, lacks the depth that these enterprise softwares offer, primarily for 2 reasons –

  1. those features will add to the complexity of the product and cost.
  2. the customer segment, I am targeting, does not require such depth.

What I tried was, brutally trimmed the price 10 times, of each of the features, and talked to customers. They were not willing to pay that much, but because I wanted to get started, I reduced it 50% further, the ones who were, happy, continued, the rest were a good bye.

With subsequent improvisation of the product, the prices will increase, and we will keep iterating on it.

Another advice, I got, while I was discussing my pricing strategy with Prof. Prem was to charge for the service and strategy. Well I don’t want to go into the details of how, an analogy can be if you are selling Adobe Photoshop, reduce the price of software, and charge for educational offers. It is working for me, two of my customers are happy with it.

Deciding a pricing tier

The four things to be taken care of, while deciding on pricing are –

  1. The price tier should be simple(Mixergy just uses the names of the plans as calls to action)
  2. It should be easy to compare, with the competitors.
  3. You should help people choose a plan.
  4. Avoid giving, too many choices. (The paradox of Choice)

An easy way of arriving at the tier is, creating customer persona, and segregating them.Your pricing tiers are a visual representation of where your buyers fit in your business model, and each tier should align to one type of customer.

Tiers makes sense for a lot of startups. But as of now, we are doing without it. Because based on the 50 customers I talked to during the sales process, most of them, got stuck, while I was explaining them the pricing model. If you’re a startup (or any software company) consider if your customers really need the additional pricing levels.

To end it all –

“Although scientifically purer, it often doesn’t make sense to change a single variable at a time. Theoretically, you shouldn’t change the price of your product, your discounting strategy and the types of bundle that you sell, all at the same time. But practically, it can be the right thing to do. It’s more useful to fix the problem than to understand why it’s broken. When a scientist goes on a blind date that doesn’t work out then, in theory, he should fix one variable at a time, and re-run the date. first, he should change the partner but go to the same film and buy the same flowers. Next, he should keep the partner the same, vary the film and keep the flowers the same, and so forth. but the pragmatist in him will, or should, change the girl, the film, the flowers, and buy some new clothes and shave too. If it works, he might not understand why, but at least he’ll have girlfriend.” – Neil Davidson

And this awesome piece by Seth Godin –

Go ahead and act as if your decisions are temporary. Because they are. Be bold, make mistakes, learn a lesson and fix what doesn’t work. No sweat, no need to hyperventilate.”

Guest Post by Saket Bhushan, ADFL at Sosio Technologies

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The Art and Science of Product Pricing

Product pricing is a touchy feely subject, hence the following disclaimers for I get into it…

  1. There is NO one-size-fit-all solution to your pricing problem.
  2. Don’t look for a one time silver bullet for product pricing.
  3. Pricing varies drastically between verticals, products, company stage, etc.
  4. This article is meant to give thought frame work around pricing and not a meant to be a perfect solution to your product-pricing problem
  5. Hence read this article and make it your own for addressing your product-pricing needs…

Getting the product price right is one of those ever elusive goals that almost all product companies are after. Companies undertake product-pricing activity for many different reasons, for example:

  1. New product introduction
  2. Updates to existing product
  3. Changes to sales / revenue targets
  4. Changes to product costing
  5. Changes to competitive landscape

Just like other product related activities such as product management, product development, support, etc., product-pricing activity should also be given its due time, resources and priority. Without thorough data driven process companies will find themselves not convinced about product pricing and end up going to square one again.

Hence before beginning on the product-pricing endeavor, here are some of the steps that companies should think about.

Again, a word of caution before I delve into various aspects of the framework given below… this is a simple framework, and companies should pick up the pieces that are applicable to them, as opposed to strictly following the process. I’m not a believer in blindly following any framework and neither do I promote it. I encourage companies to study various frameworks and then pick the one that they believe will benefit the most for their specific situation and then look into the application of it. I recommend that companies should not look for silver bullet or ‘one size fits all’ approach cause there is none!

Having said that, the first step in product-pricing exercise is to really nail down the reason for undertaking the exercise. Instead of CEO, Business head, Sales head initiating the conversation, it’s recommended that once a quarter there should be a pricing check point. There are a couple of benefits of doing that:

  1. Sales head can provide you with the market pulse on the manner in which competitors are positioning pricing and customer input on pricing
  2. Product Marketing Manager can share insights on changes in competitive pricing.
  3. As a team, companies can determine the circumstances under which pricing needs to be looked into on emergency basis. For example recently airlines suddenly started cutting their ticket prices, telecom operators slashed priced of Internet usage, etc.
  4. Identify any data collection tools that need to put in place or updated so that right data is collected on ongoing basis so that it can be used for objective decision making.

The discipline of having these conversations periodically helps companies keep an eye out for any ecosystem changes that might force them to think about changes to product pricing. In case the company has multiple products or product lines that are related to each other, then it becomes even more imperative to have these periodic checks. Through these meetings companies should be able to nail down if product-pricing changes are required and if, yes, what are the reasons for those.

Pricing Process
Pricing Process

 

It always helps to keep track of various industry best practices around pricing. This is an ongoing exercise. It helps you in understanding the following:

  • Industry rules and regulations specific to the industry vertical that company operates in. For example recently SpiceJet was pulled aside by government for selling tickets for Rs. 1
  • Accepted pricing norms in the industry.
    • Who pays for what?
    • Acceptable price range
    • Things that can be included or excluded from pricing perspective
    • Pricing transparency norms, etc.
  • Pricing models that customer / consumers are familiar with and can relate to.

The idea here is to get pulse of the eco system and understand what’s working and what’s not.

Know thy Customers! Understanding your customers purchase psyche is extremely crucial. You should know atleast the following things about your customers:

  • Customer’s perception about value of the product category
    • Is it a must have or a nice to have?
  • Buying process: The end-to-end process that Customers go through as part of product purchase.
    • How are budgets approved?
    • Who is the buyer?
    • Who is the approver or approvers?
    • How do customers compare products?
    • How do they use the product?
    • Which features matter to them the most?
    • How long is the buying process?
    • How far in advance do customers plan the purchase?
    • Payment recovery once the product is sold
    • Objections raised by Customers in the buying process
  • Customer segmentation: All Customers are not born equal. Broadly customers can be grouped into various categories. This categorization or segmentation can help in creating pricing models based on Customer’s ability to pay for and use the product. For example:
    • Volume (High / Medium / Low)
    • Global (Users from multiple geos using product)
    • Number of users (High / Medium / Low)
    • Bargain hunters
    • Smart cookies

Each of these segments should be studied in-depth so that product offering and pricing can be tailored to them.

  • Data capture: Customer segmentation can be done successfully only if data is related to customers is captured by Sales, Support, Marketing and product teams. Without this data, Companies may be flying blind and not know what’s working for them and what’s not. Typically, the longer time window data companies have to work with the better it is. In case, the of new product release, this may not be possible, but then put the systems in place from day one so that the data is captured from the get go. Companies can use CRM systems, home grown systems, etc., but they must use some system. Otherwise the data is lost in emails and permanently lost when folks move on from organization.

Then comes the Competition, the ever changing and ever present force that impacts various aspects of your business, including pricing. In order to consider competitive impact, Companies’ should first know the following:

  1. Who is the core competition?
  2. Competitions’ geo presence
  3. Who is the secondary competition and beyond that?
  4. What pricing models do they have?
  5. How big is their product adoption?
  6. Feature comparison
  7. How long have they been around?
  8. Pricing model presentation
  9. How often does the competition shows up sales scenarios?

The key here is to really use the competitive information to figure out the real threat that the competition poses in Company’s grown strategy.

Companies should really have handle on the product costing. Many companies in the B2C space create product and put it out there based on the way their competition is pricing the product. They assume that the pricing is such that they will be profitable anyways after a while. But this approach is suicidal! Because companies then one day suddenly realize that despite of high product sales volume, they don’t have a lot of margin and to be really profitable, they would drastically need to change the pricing or increase sales or cut costs.  A number of books have been written on product costing and it’s recommended that Companies should work with certified cost accountant for getting a handle on their product costing.

Product pricing is also a function on Sales and revenue targets. This is part of the top down approach of product pricing. A company can decide that they have to reach a certain revenue goal and work backwards from there to come up with an approximate price of the product. At this point they may realize that they have to price the product much higher that what the market is ready for or the other way round. In either case, the Sales team needs to be always involved in the pricing conversation, so that they can bring their market knowledge to the table. At the same time it’s necessary to note that they don’t use pricing as the reason for not being able to reach their sales target.

Pricing Models and Analysis is the most fun part of the product pricing exercise. This is where all the data that has been gathered internally as well as from external market is used for determine product pricing. Here are some steps that should be taking as companies try to come up with pricing model:

  • Identifying the key-pricing drivers:
    • By users (Customer Types)
    • By organization
    • By product units
    • By transactions
    • By functionality

There can be many more. Ensure that pricing is in line with the value the Customer is getting out of it.

  • Impact analysis: Every time changes to pricing / pricing model are suggested, impact on the following should be taken into consideration before rolling out pricing:
    • Existing customers (to grandfather or not)
    • Sales and support process
    • Revenue and Sales target
    • Profitability
    • Product buying experience
    • Acquisition of new customers
    • Product Management
    • Product Marketing
    • Product Engineering
    • Billing related changes
  • Pricing models: When coming up with product-pricing models, ensure the following:
    • Easy to understand
    • Easy to explain
    • Easy to pay (annual payment option)
    • Relates price to value (value driven)
    • Room for Sales to provide discounts (introductory offer, seasonal discount, regular client discount, one time annual payment discount, etc.)
    • Enables differentiation (charging for unique value as opposed to commodity)
    • Has low barrier to entry of first time users (freemium)
    • Has options for attracting large prospects (future customers)

Note: Void the word ‘unlimited’ in the pricing model wherever possible. Incase ‘unlimited’ word is being used, then should be explained in the terms and conditions.

  • Scenarios modeling are very critical to really understand the impact of pricing and pricing models. To do this, take existing customers and future customers and find out before and after impact. For example with current pricing Customer was paying X with new pricing customer will pay Y. Create real looking pricing page, rate sheets to understand the visual impact. Perform this activity for every customer segment and analyze the impact. Be especially sensitive about the impact on the customer segment from which the company is making large revenues. If this segment is adversely getting impacted then, the new pricing might have over all negative impact on the revenue.

Pricing roll out is equally, if not more as, crucial as the pricing model itself. A lot of internal and external training needs to happen before new pricing can be rolled out. Consider the following as part of new pricing roll out preparedness:

  1. Overall roll out plan with departmental ownership.  Timing of rolling out of pricing changes is critical. Make sure that it’s not in or just before the time when you get the most orders (busy season, if there’s one for Company’s business). There is enough time to explain changes as necessary to the high value customers.
  2. Marketing:
    • Website
    • FAQ
    • Pricing collateral
    • Checkout process (if there is one used for online purchase)
    • Video (why is the change being made and how it impacts you – the customer)
    • A-B testing readiness
  3. Product:
    • Incase there are features that need to be added to ensure correct pricing
  4. Sales and Support:
    • Updating sales and support process
    • Training sales and support team
    • FAQ (internal and external)
    • Special process for High Value customers
    • Process for breaking the news
  • Email
  • Phone
  • In-person

5. Setting benchmarks: It is essential to capture benchmarks before rolling out new pricing, so that impact of pricing can be checked objectively. Here are some of the benchmarks to that can be captured:

  • Lead Generation benchmark
    • Number of leads / week / geo
    • Average deal size by vertical
    • Type of leads (lead mix)
    • Lead sources

6. Sales and Support Cycle benchmark

  • Time to close deals
  • Competitive references during price negotiations
  • Number of price discussions when closing deals
  • Feature usage by customers
  • Number and type of support queries

7. Revenue and process benchmarks

  • Revenue by Geo and by Vertical
  • Revenue by Customer segment
  • Changes to customer segment mix

Once the pricing is rolled out, either to pilot group, or to everyone, the impact of pricing must be tracked. There are a number of ways to track impact:

  1. Collect the KPIs and compare them against the benchmark
  2. Get on call / emails with customers to get their reaction
  3. Use the data from A-B testing to track change in customer behavior
  4. Take corrective measure as necessary
  5. Keep track of macro-economic changes as well, which may coincide with pricing rollout.

So before you take on the pricing exercise, ensure you the have time and resources to do justice to it…

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Product Pricing – The biggest mistake companies make is to fix the price based on their costs

There is no magic formula for pricing a product. You can make a start by getting answers to these queries:

  • Can you estimate the value to customer in terms of increased revenue or cost savings?
  • How does your competition price their product?
  • Should your product be priced higher/lower based on more/less capabilities?
  • What is your total investment and annual expense (development, support, sales and overheads) in building the product? How many copies do you expect to sell in next 2 years?

The biggest mistake companies make is to fix the price based on their costs. The primary reason to be in product space is to generate non-linear revenue based on value being delivered.

Early pricing

Based on competitive pricing and your own value proposition, you can have a pricing band as a starting point. The next decision is whether to be a high volume/low price player or a premium provider. You can then set a tentative ‘list’ price.

Test this pricing with early customers. Be consistent with the quoted list price, but offer variable discounts based on what it takes to win early deals.

When you start selling, you will be eager to win deals, and may compromise heavily on rates. This is natural. Win those early birds with steep discounts, but try and select the right ones first.

Ideal first clients (‘anchors’) are strategically important for their brand value or volume of business. Signing up a well-known company becomes a great validation of the product. Pricing should not stand in the way of closing such deals.

In some accounts, the person you are dealing with will have a certain spending limit. If possible, structure the offering to be within this limit and avoid another level of approval. Occasionally, the customer will tell you at what price they will buy. If it fits into your discount structure, and the business is important at that time, go ahead.

Pricing variables

Payment terms may consist of some advance and rest against deliverables such as installation, customization, deployment and acceptance. Actual payments at each stage can vary from immediate to 45-60 days from date of invoice. Cash flow is an important consideration, so maximize initial payments and minimize invoice to payment time. When finalizing a deal, offer to trade more discount in return for a bigger advance.

If you have a mix of licensing options (permanent, subscription, lite/standard/premium, usage based etc.), it can enable you to offer a broad range of pricing options. This can be useful at times, but can also cause the customer to get more confused. Experiment with two or three choices and assess what is working.

Stabilizing the price

Once you have gained some confidence with customers signing up and revenue coming in, then it is time to adopt a more business-like approach.

If you are getting clients easily, without significant discounting, then your product is probably priced too low. Conversely, if most prospects are not signing up, look for root cause. It may not be the cost – the problem may be in the product, how you sell, or which customers you are pitching to.

Test the elasticity of your pricing with higher rates for the next few prospects. Deals may be delayed or lost at higher price, but fewer deals may still bring in greater revenue. For example, at twice the price, you need half the deals to earn same revenue. Higher rates can delay decision making, while low price means you have to be targeting more prospects.

Theoretically, if you plot quarterly revenues against unit price, it should result in a bell curve. Revenues will first rise with incrementally higher revenue per sale, but will peak at a certain price beyond which it is considered too high by the market. In practice, there are too many variables for such an exercise to be worthwhile.

Instead, experience will tell you what is working. The right selling price is the one when you are winning most customers with low to moderate discounts, and losing only a few. Hopefully, at this price, you are making a reasonable profit too.

With increasing confidence and maturity, you will learn to be patient when negotiating deals. Do not concede on rates quickly. If your product is good, clients will pay. Learn to walk away from a deal if the price is too low.

As your client base increases, the list price, discounts and payment terms will begin to stabilize. However, business is always in flux. Keep tracking factors that influence rates: competition, more value from new releases, cost increases, profitability, deal loss rate, new pricing models etc., and always strive to maximize revenue.

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Premium vs Freemium vs Subscription

For mobile apps, there are three dominant pricing strategies: Premium, Subscription and Freemium.

According to a report by app-store analytics company, Distimo, freemium now accounts for 71% of Apple AppStore revenues in the US, up from somewhere around 50% last year, and rising. In Asia, freemium is 90% of App Store revenues.

71% app revenue from freemium

Is freemium always the most optimal? What factors should you consider when choosing a pricing strategy?

Firstly, here is what these different pricing models mean, as applied to mobile apps:

Premium apps (or Paid apps) have an upfront price before they can even be downloaded. Similar to licensed software, except that the App Store makes all future upgrades to the premium app free once purchased.

Contrast this with freemium (a portmanteau of “free” and “premium”), where the app is free to download and use. However, some features inside the app are unavailable until you pay for them. App stores make it dead simple for developers to charge small amounts of money inside the app.

Subscriptions are a regular fixed fee the user is charged automatically via the App Store for using the app. Magazines in the iOS Newsstand are usually subscription-based. Subscriptions can actually overlap with either premium or freemium models. For example, Spotify requires you to have a subscription to even use the app (premium), while Pandora is closer to freemium where you can pay a subscription to get ad-free and unlimited hours of music.

How do you decide which to choose?

Premium has very limited use today

Perception is a large factor in how high a price is acceptable, and going premium helps create that perception. With premium, every user pays upfront, but the amount each user pays is fixed, regardless of how much utility each gets. Also, users have come to expect apps in the $2 – $5 range (a few niche apps can charge $10-$20) and there is no way to get higher ARPU.

In general, premium works in the following situations:

1. There is a strong demand for your app – niche areas are good candidates here.

2. You have a strong brand already and can establish trust with users where they are willing to pay before they download the app.

3. There is not a lot of competition that will almost certainly drive the price down.

4. You don’t care much about reach – which will be much smaller because of the “pay gate” into your app.

5. There are no ongoing feature or content costs that can drive up the average cost of of supporting a user to levels higher than what the user paid for the app.

Freemium helped create those million-dollars-per-day games

Freemium was popularized by casual games in Japan and Korea and has quickly become the winning model in mobile apps. It works really well in the following situations:

1. There is enough competition that users invariably have other cheaper or free options (low barrier to entry). This has been partly the reason for most mobile apps today moving to freemium.

2. When reach is important. You need large amount of users quickly to create network effects. For example, to drive virality or gather significant data.

3. When there are a small % of power users willing to pay significantly more than the other light users. The pay-as-you-go model facilitates this. Hard core users can drive as much as 100 – 1000 times more revenue than the other users. This is why some free-to-play games are reaching a $1MM per day revenue runrate.

chart of freemium vs fixed priceMore users in freemium, but a small percentage of them drive astronomical amounts of revenue.

The mobile app economy has progressed to a point today where all of the above usually hold true. Freemium does require some operational effort in managing your free and paying users, converting the former to the latter, and driving repeat purchases. However, this helps create a sustainable business rather than a one-time hit.

Subscriptions: the Holy Grail?

A subscription provides a guarantee of repeat transactions and hence, businesses with subscription revenues tend to be valued far higher. The subscription price is usually smaller than the one-time price to incentivize the user into a longer term commitment. As the seller, you make up for the discount by being guaranteed future transactions.

A single issue of The New Yorker costs $6, but a year’s subscription of 52 issues is $70. That is a 77% discount and is still better, revenue-wise, than selling individual copies. Of course, they make a lot of money through advertising, so a guaranteed customer in the future is far more important to them. This may not be the case in all businesses. Amazon gives you a ~15% discount to “subscribe” to certain household items.

But the subscription model does have a few drawbacks:

1. Like premium, there is a single price for all users, regardless of how much they use. There is a lot of money left on the table because hardcore users willing to pay a lot more cap out at the fixed price. There is some more money left on the table where the subscription price and commitment is too high for a large number of light users who will not sign up.

2. Tiered subscriptions does let you set different prices, but still creates ceilings on both price and consumption. Netflix has a 1 DVD plan for $8, 2 for $12, all the way up to 8 for $44. The lost opportunity? (a) A user can only do 8 DVDs. There may be a few subscribers who want much more. (b) A $44 price tag for DVD rental has a sticker shock. It is easier to charge $5.50 eight times than to charge $44 one time.

So when should you use subscriptions? Whenever you can – subscriptions are considered the holy grail of revenue models, BUT it is important to make sure you are not leaving money on the table just to get a subscription commitment from a customer.

The ideal pricing strategy

loaded grocery shopping cartEscalators are faster than stairs, even faster if you run up them.

At the risk of over-generalizing, a combination of freemium + subscription would be ideal for most apps.

Not everything being sold lends itself to subscriptions. Impulse purchases typically don’t. For example, a power-up that will help you cross this level in a game, or an Instagram filter that makes this photo of yours look exceptional. In such cases, it is best to start with a freemium model and then offer subscriptions to your  regular customers to drive  purchases further. Content (magazines, music streaming, movie streaming)  has more commonly been a subscription business. For these, it is a good idea to start with the accepted subscription, but remove any ceiling on purchases and consumption by offering more content that can be purchased in-app in addition to the subscription.

The mobile app economy is already large and growing even bigger. Get all the value you can out of it.

Drop in a comment, or shoot us an email if you want to chat about this for your app. We’re happy to help!

Update:

Marco Arment wrote his thoughts about our post:http://www.marco.org/2013/10/02/lattice-labs-freemium. Do read that too – it is an interesting debate and certainly not over yet!

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Piracy and freemium killed the Indian software buyer

Nobody in India buys software.

If the above sentence draws your attention, read on! If you are based out of India, think of the last time you bought software (yes packaged products). Now think of all your friends and guess when they bought software. Now, here’s the clincher, “When was the last time you bought software made in India?”. 99% of the people, irrespective of their socio-economic status will respond in the negative. lr-processed-0399

Product evangelists will now talk about the cloud/SaaS and the subscription economy, and how it is the great leveler when it comes to software products. As an entrepreneur selling a SaaS software in India, let me be the first to tell you that it is really hard work. Most entrepreneurs have told me that the Indian customer is price sensitive, I say, a majority of them are insensitive. Now don’t get me wrong. I don’t wish to rant. I am trying to catalog and present reasons why selling SaaS software is hard. Here’s what I think it is:

Let’s talk a little bit about the Indian software market

In the last two decades, India has seen two revolutions which helped create a large software market. Firstly, the economic deregulation in the 90s which enabled a steady growth of the economy, disposable income and import of technology. Secondly, the telecom, and subsequently the PC and mobile revolution that has created a (supposedly) large software consumption market. PCs, Laptops and tablets are now commonplace in Urban and Semi-urban India and the latest numbers indicate 15 Million broadband and about 100 Million mobile internet users. A look at these gargantuan numbers and you might begin to assume a large consumption market, but to give you a sense of reality, let me ask you the same question one of my mentors asked me – “Name 5 large Indian software product brands selling in the Indian market”

Enterprise software is probably your best bet

If you are selling software, the enterprise market is probably your best bet. Bharat Goenka, co-founder of Tally solutions, said that “In developed economies, SMBs act like enterprises and in emerging economies, SMBs act like consumers“[2]. Many of our customers are SMBs who are looking to use technology to grow some component of their business. And most of the times, we don’t deal with the company, but with empowered employees. The ones who have a budget at their disposal and are forward looking in their outlook. What we found was that the same stigma that existed in the 70s and 80s in the US software markets exists in the Indian SME customers of today. A lot of them look at software as something that will displace them in the organization and are extremely defensive in the matters of adoption. But we all know how that worked out in the US and UK markets and I am hoping India follows a similar trend.

Oh wow! I never knew you could do this

A lot of people we have met have been genuinely surprised at what our product does. It’s tough to manage these customers because we spend a lot of our acquisition time on sensitizing them about the problem before we present the solution. Even if you are doing something radically new, it is easier to bucket yourself into a genre that is popular and accepted. For example, we are a customer conversations player, but it helps if we refer to ourselves as a Social CRM or a marketing insights product. Ignorance about a genre of products has a big pitfall – customers don’t know how much to pay for the solution. This is really tricky because it usually leads to a customer deliberating on paying for the solution.

“But we can do this for free on Google”

Freemium is both a good and bad thing. Almost every customer of ours expects a free trial for a few days. In the products eco-system it’s become a norm,  but a lot of productized service companies I know have been asked for a free trial on bespoke software. Most users don’t understand the price they are paying when using services like Google or Facebook and usually expect the same when we tell them about our “use on the browser” service. Usually this means we have to get into a lengthy explanation about  why our product costs so much. The best experience I have had was when a customer, who understood the online advertising economy, asked us if he could use an ad supported model of our service for free!

Freemium might be a viable option early on but when looking at growth and scale, I don’t believe freemium is a sustainable economic model. It is a marketing tactic at best!

“muHive crack codes”

One morning, while peering through our website analytics, we were surprised to find a search keyword “muHive crack codes” in the list. This was a good and a bad thing: good because some customer actually found our service good enough to look for a cracked edition, and bad because we knew this customer wouldn’t pay. And yes, if it’s crack worthy, then it is probably good software – that’s the Indian psyche. Industry estimates put the total value of pirated software used in India to be upwards of $50 Billion[3]. Why won’t we pay for software? That’s a long post in itself, but to be brief: piracy was not controlled in the early days of the PC revolution and hence the assumption that software is free. Also, cost of software has always been calculated based on the affordability and costs in developed markets. To illustrate my point, I will end this section with a question – If Microsoft Windows were to cost Rs 1000 instead of $149 (Rs 9000) would the piracy numbers be different?

The pricing slope

Researchers put the Indian middle class at earning $10/day or roughly $300/month. To give you an estimate of why this matters, the urban poverty line stands at $14/month – yes, a month. The Indian middle class is about 100 million people and $300 per month usually supports 2 to 3 people on an average. Now when you think in these terms, you can imagine what the cost of ownership of a $149 software sounds like. Add the fact that software is a non-tangible artifact and you understand why Indian customers are extremely cautious when it comes to software purchases.

Even with enterprise customers, your pricing strategy has to be “just right”. And you have to account for discounts. A majority of the Indian customers we meet ask for some form of special pricing. Now, this might not be a trait which is unique to the Indian market, but understanding the cultural and economic context of the demographic becomes very essential when it comes to pricing. Marketers talk about using tricks like prepaid accounts (India has a large prepaid mobile subscriber base), daily subscription and data based pricing but all of them have the underlying assumption that the customer is willing to pay and understands the cost of the solution.

In conclusion

All these are what we have found to be the issues with selling software in India. Even though we have good answers to some of the questions our customers pose, in my opinion, it will still take a long time for the Indian software buyer to evolve and for good product companies to make a mark. Rather than end on a dismal note, I will now list down what actually seems to be working for us, and also some insights from other producteers.

– Customer don’t mind paying for bundled software. Hardware, especially mobiles and tablets might actually help in software sales.

– Customers will pay for immediate utility. What someone referred to as “First order business” solutions; meaning something that can make them more money instantly. Example: Email and SMS marketing solutions. Customers don’t mind paying for advertising and reach.

– Customers usually pay when they feel they are missing out on revenue or an opportunity. A loss averse technique to selling is what we have seen work best.

References:

 

 

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SaaS Pricing – the role of customer value proposition

The trend of pure-play SaaS providers and on-premise software ISVs diversifying into SaaS is on the rise. SaaS revenue for global top 10 ISVs forms 40% of all software revenues. According to Gartner, the SaaS revenues will grow annually at 17.5% to form 24% of all software revenues in 2016. This would amount to USD 22.5 billion up from USD 14.5 billion in 2012. While SaaS makes a perfect business sense in the long term, in the short term, SaaS providers face unprofitable business for two or more years among other challenges in marketing and product management. SaaS has given birth to new ways of pricing like fixed-fee or usage based pricing, pay-as-you-go, freemium model and so on. Pricing is an important aspect of SaaS business.

I will be covering SaaS pricing through a series of blogs on topics like concept of value pricing, role of segmentation and tiers, pricing structure, metrics, managing pricing over product life cycle, competition and product positioning. I start with concepts of value and role of segmentation.

A Google search throws up ‘n’ number of SaaS pricing models. But success of any pricing model is always rooted in a sound value proposition of the offering. Cost plus pricing is common, seems financially prudent thing to do but is known to leave a lot of money on the table. Also remember, even when offered free the customers would not pick up your offering if they do not perceive value in it. The first step in pricing strategy is to ascertain value of your offering.

Demonstrate value of your offering

The economic and emotional values are the primary drivers of purchase decision. The economic value of your offering is has two components – price of the next best alternative and the value of what differentiates your offering from the next best. You have no control on the competitors’ price. Therefore differentiation is the way to go to provide better overall customer value and better price. Sometimes customers may not perceive the value. It is critical your marketing communication ensure what is important to customer, specially differentiated features and benefits come to the buyers’ notice. So develop your value proposition and communicate it clearly to the customers.

A simple equation for the value proposition is (Value = Benefits – Costs). For this, you must quantify the economic value of your products features together with the emotional and psychological value. One way to do this is to quantify impact of your offering on customers’ revenue, productivity, profitability and so on. Here is an example of computing economic value of a feature.

A midsize software product MNC in India was considering moving to Google Apps. Google Apps offer benefits to two entities in an organization – IT and end-user. The IT benefits include cost savings on licenses, IT infrastructure and operations and maintenance. The end user benefits include – 1) productivity gain due to improved email search, spam filtering, archiving and improved response times, 2) quicker issue resolution and decision making thru shared editing of documents and 3) improved response time to customers and partners. Let us see how we can calculate productivity gain from just one benefit, say, and faster email search. Assume –300 employees, 5 day workweek, 50 work weeks, average per hour employee cost of $10, average 1 hour email usage per day, and a 10% saving (estimate based on previous implementations). This translates into an annual productivity gain worth 300 x 1 x 5 x 50 x 0.1 x $10 = $75 K.  The total benefits (productivity gains + IT cost savings) for three years operations worked out at $81K, $111K and $123K. Total subscription costs in this period were $18,900 (300 x $63 per user) per year. There were initial costs for transitioning from legacy system, testing, pilot and training amounting to $5K.  The overall risk adjusted net present value of benefits (including several other benefits like archiving, SPAM filtering, threading, IM etc.) was $205K. The customer went ahead with the purchase.

Segment your customers

All customers do not have same needs, value perceptions and the willingness to pay. Targeting the whole population with one product and one price is not the way t best financial performance. It leads to leaving money on the table for some customers who are willing to pay higher and losing out another set of customers who can’t afford the price. Thankfully, the customers can be sub grouped or segmented based on certain similarities. Value based segmentation helps create pricing commensurate with the perceived value by those customer segments.

Segmentation requires creativity in addition to analysis. It must reflect your marketing strategy. For example, Zoho, Google Apps and Microsoft Office 365, compete in online document management area (word processor, spread sheet, presentations, email).  However, Zoho Docs views the market in three segments represented by personal, standard and premium licenses priced at $0, $3 and $5 per month per user. Office 365 has more complex view of the same market. It segments it into seven segments, namely small, midsize and enterprise business, education, government, professional and home with fourteen different licenses ($0 to $20 per month per user)! In contrast, Google Apps has just one offering at $5 per month per user. So, why does Microsoft has seven segments and fourteen price points? A closer study would reveal that the breadth and depth of features / functionality offered by Office 365 far outstrips Zoho docs and Google apps. It allows creation of diverse bundles of features and pitch them to different segments at price points that meet respective value perceptions. By doing this Microsoft is able to capture the students segments (low paying capacity) while maintaining premium pricing for the enterprise. Microsoft would lose both lot of money and a large chunk of market if they decided on just one segment with one price. Interestingly, it is possible to create segmentation and variable pricing without bundling different sets of features i.e., on an identical offering. For example, railways transports grains at much cheaper rates compared to manufactured consumer goods in the same wagon. There is very little difference in the inputs that go into transporting the two items. I have yet to see this in software or SaaS.

One more point in favour of segmentation is as follows. In a high fixed cost industry like software and SaaS, it is a good strategy to capture the large volume of customers in the long tail with a price that is just equal to the offering’s variable cost. This is good for revenue. Generally, more segments the better. The factors that limit number of segments are complexity and sales administration cost, smaller differentiation between the offering for adjacent segments and customer propensity to select the lower priced segment when differentiation is small.

I will close this blog with a quiz. Given below is the old pricing page of Serverdensity (http://www.serverdensity.com). Serverdensity is a provider of cloud based server monitoring. They have tiered pricing based on number of servers that a customer has. What is good, bad and ugly about this pricing?

Please look for the next blog on SaaS pricing metrics.

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Pricing dilemma

A year back I was involved with a leading mobile apps company on an issue related to product pricing. The company developed customized mobile apps for business. At the time it had a staff of 20 programmers and reasonably successful – having on its customer list several top global corporations like cola companies, few leading banks, advertising giants and others. It had revenues close to USD 1 million. The company had identified 20+ software functions (routines) that were commonly used in most mobile apps. They had put these together into a single library that programmers could access from a central repository when working on a mobile app project. Examples of such routines included memory management, real-time authentication, camera control, text messaging within the app and so on. Use of this central repository of frequently used routines had resulted in 30% saving in programmer time, standardization and uniform quality across projects, shorter time to market and finally the monetary benefit.

The company saw a window of opportunity externally. They knew the mobile app business was growing at a fast clip with app vendors mushrooming all over. They were also aware of the trend of end customers developing mission critical apps internally. Both these customer segments would see a value proposition in the library if the company offered it. The company was at a critical point – thinking how to breach the psychological revenue barrier of USD 1 million. It faced fierce competition that had brought down margins from 80% to 25% in just two years. They thought the library was a ticket to new profit stream and improved competitive position. They were debating how to price and market the product.

However this meant a sea-change in the way the company thought and worked. So far, they delivered single project as per known customer requirements to a single known customer at fixed price. They did their best to deliver within time and budget. They priced their services at cost plus margin. Any delay ate into their margin. Selling the tool externally would involve selling a generic product to external customers whose size and number was unknown and uncertain. They had a hunch but did not know for sure the external customers would really see value in the offering. For example a tribe of software programmers take pride in and get thrill from solving tough problems. They would not care for such a product. A few team members even felt that their competitors would also acquire the library thus diluting company’s competitive advantage in the market.

The company sought answers to several questions:

1. Should they sell the library externally at all?
2. Should they price it on cost plus basis or some other method e.g., value based pricing?
3. What should be the list price of the product?
4. What should be the license structure i.e., kind of licenses they should offer?

The company made a set of decisions. I will share those in the next post. Meanwhile, I invite you to share your suggestions on the questions facing the company.

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5 Essentials of SaaS Revenue Models for Product Companies!

Enterprise as well as Consumer Software is moving fast towards a Software As A Service (SaaS) model. Who would not like paying a per user, per month charge as opposed to doling out huge amounts of money for licenses upfront and paying 16 to 20% Annual Maintenance Charges year after year! But the short history of SaaS companies is already full of companies that grew too quickly, or chose the wrong pricing or customer acquisition strategies, ran out of money and had to go out of business! The same revenue model for a SaaS product business can also become its Achilles Heel if it is not understood and managed properly!

Understanding SaaS Revenue Models in all their glory is key to building a sane, reliable and successful way to build a product company. There are a few venture capital companies that have had lots of practical experience building successful SaaS companies and can share with you a lot more detail. Like Matrix Partners’ David Skok who has written almost a thesis on SaaS economics – here is a sample –  The Saas Business Model – Drivers and Metrics. David has partnered with HubSpot and NetSuite for all of this exploration and they must know what they are talking about! Other good references are  Doubling SaaS Revenue by Changing the Pricing Model and SaaS Revenue Modeling: Details of the 7 Revenue Streams.

But for a start, here are 5 essentials of SaaS revenue and pricing models a product startup needs to remember for success:

1. Monthly Recurring Revenues Vs. Getting them to pay Annually:  Get your customers to pay annually if you could (depending on the nature of your product – enterprise or consumer facing). It’s a hassle for them and you to process these invoices every month and follow up on late payments, etc. It has a clear effect on the cash flow. Plus you may not have to worry about churn that much since they are not making that decision to pay you month after month where they could pause and decide to churn! If Annual billling does not work, try at least a quarter at a time. It may not be worth all the processing time doing it month after month.

2. Churn and Negative Churn:  Churn is the periodic turnover of your customers. Companies mentioned above have found that about 2.5% to 3% churn is OK. You need to be concerned if it goes beyond that. However with Up-selling and Cross-selling, you can actually make it positive churn too! This is when the marketing funnel that becomes narrow from the top becomes broader again with upselling and cross-selling. Which brings us to discussing more of the shape of the Marketing Funnel when it comes to SaaS Vs. non-SaaS product companies!

 

 

 

 

 

 

 

 

 

3. Marketing Funnel Economics: 

The marketing funnel on the left shows a typical one for non-SaaS product companies. The one on the right shows the one for SaaS product companies. The main difference is the top of the funnel is much wider and uses organic traffic, in-bound marketing, search engine marketing and optimization and prospects from other paid sources.

 

 

 

 

 

 

 

 

 

The relative sizes of the tops of the funnels also show the difference between how wide the top of the funnel needs to be for SaaS product companies!

3. Balancing Customer Acquisition Cost (CAC) vs. Customer Long Term Value (LTV):  There are only 8 hours in a day for selling. Traditional licensing models offer an initial large amount in a sale and annual maintenance fees of about 16 to 20% every year after that. SaaS models may offer a smaller initial set up fee and uniform cash flow month after month, year after year after that if you keep the customer. So you need to line up more clients in a SaaS model for reaching the same level of sales as when closing traditional licensing sales deals. So you need to necessarily reduce Customer Acquisition Costs (see the widened top of the marketing funnel in the figure above – that’s what that represents).  Some rules of thumb regarding CAC and LTV are that the Long Term Value of the customer needs to be greater than 3 times the Customer Acquisition Cost and the months to recover the Customer Acquisition Cost should be less than 12 months! This also makes a compelling case for designing and developing related products and do some effective cross-selling and up-selling enabling you to realize that Long Term Value even if your CAC is high! Also making sure that you get the Customer Acquisition Cost in less than a year takes care of the problem of churn and if they continue after a year, you have already made your money!

4. Repeatable Sales Model:   SaaS product companies rarely can afford the same direct sales model that non-SaaS models do. This is just given the smaller initial sales numbers even though the revenues are recurring rather than an initial large amount and 20% every year after that in maintenance fees in the non-SaaS traditional model. This makes it imperative that the SaaS sales model is easier, quicker and repeatable.

5. Scaling Pricing with Customer Value:  Many SaaS product companies shortchange themselves by improving their product so much that they provide much more customer value than they are charging them for. Scaling pricing by clustering value adding features together and packaging them and offering them as upgrade packages is key in ensuring that your pricing keeps up with the value your are providing.

These are only some basics. I highly recommend checking out the references I have earlier in this article. There is a treasure trove of experience and knowledge about how to make it work, all online and free!

In sales, a referral is the key to the door of resistance – Bo Bennett. 

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Lean way of sales

“Not meeting desired sales target?” is perhaps the most important question in any of senior management meetings.  But how do most companies react? Answer: “Re”setting the targets,“Re”structuring marketing campaigns and finally “Re”placing sales team (starting from executives ending up replacing sales director) and what will happen by doing several “Re’s” together…absolutely nothing. On the contrary such measures can damage team morale.

It is time to change, to replace traditional methodologies, to innovate and to spark. Time to analyse the mistakes.

Let’s rethink

What is a sale?  Act of selling a product or service in return for money or other compensation

Whats makes a sale?

  • Make the relevant presentation – Yes.. its necessary
  • Create connection between product/service and prospects. .. – Yes.. its necessary
  • Get to the point – Yes…its essential
  • Be animated … OK
  • Use showmanship… Ok ok
  • Use physical demonstration … Yes It’s necessary.
  • Believe on your product and Services… Aaahhhhhh….Its impossible….I have never seen it never utilized it ..how can i.. yes but I have capability to convenience customer though I haven’t  Utilized it …” True Salesmanship J”

And How much % this “making of a sale” will individually or contributed generate sales ?…Can’t Say. May be our sales guys are not proper… (In reality, sales guys are the most smartest guys in any of the organization).

It’s time for thinking…and changing. Let’s  make it the Lean Way…change “Re’s with Do’s

  • Do we are really addressing customer problems, completely?
  • Have we minimized cost of consumption (Price+ Time+Hassle)?
  • Do we provide exactly what customer wants?
  • Do we deliver value where customer wants?
  • Do we supply value where customer wants?

Remember, first sale to a customer could be important but it is the second sale that matters the most. Second sale will happen only if customer the is satisfied. Maximum value and minimized organizational waste is key to customer satisfaction. These are the only things that make a sale, make a customer buy, make it a competitive.

Guest Post Contributed by Meghshyam Gholap, Lean Sales Specialist

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Lessons on Pricing for Product Startups – Consumer and Enterprise!

Since the time Philip Kotler wrote his valuable tome on Marketing, technology has evolved so much that new pricing models like Freemium pricing are possible for both Consumer-oriented and Enterprise-oriented product startups. In addition, Free Trial pricing models and conversion to paid ones are common in both. In a price-conscious society like India, pricing can mean all the difference between a successful company and one that is not!

What have been some valuable lessons learned by companies in the recent past using all of these pricing models? If you were a product startup, what would be some of the pitfalls to watch out for?

Main lessons from using a Freemium Pricing Model for Consumer Internet Businesses

First, here are a few YouTube videos of Drew Houston presenting DropBox’s use of Freemium pricing with consumers, the lessons they have learned, and the pitfalls they encountered.

  • Use of SEO for lining up free users is very expensive
  • Affiliate Marketing is also expensive and does not work very well
  • Make sure that there are enough Paid Users that can support Free Users and you can still make money! Make sure that the Long Term Value (LTV) of Paid Users > Customer Acquisition Costs (CAC) of all users. Otherwise, the more users you line up, the more you lose!
  • Build as many tools that help your free and paid users do viral and word of mouth marketing for you as you are building features!
  • Once you have given something for free, it is very difficult to take it back! But it can be done, as the videos show!

Drew Houston : Freemium for Consumer Internet Businesses, Part 1

Drew Houston: Freemium for Consumer Internet Businesses, Part 2

Drew Houston: Freemium for Consumer Internet Businesses, Part 3

Main lessons from using a Freemium Pricing Model for Enterrprise Businesses

First here are a couple of YouTube videos of Aaron Levie presenting Box.Net’s use of Freemium pricing with an enterprise product, the lessons they have learned, and the pitfalls they encountered. Their product is an enterprise collaborative portal that competes with Microsoft Sharepoint Portal but is hosted by Box.Net.

  • Tomorrow’s Enterprise decisions are made by today’s free users. So keep them happy! They are your marketers inside the company.
  • Sell enterprise freemium models to end users, not IT.
  • Unlike other models, Inside Sales will be taking calls from already existing free users – no need to prospect them. They come already qualified!
  • Conversion is key and is harder in enterprise freemium. This is purely because of the sheer larger numbers in the consumer space as compared to enterprises.
  • Understanding the difference between a “Free Trial” customer and a “Freemium” customer! Freemium customers stay on long after Free Trial customers are gone because their trial period ran out!

Aaron Levie: Freemium and the Enterprise, Part 1

Aaron Levie: Freemium and the Enterprise, Part 2

Dumb Pricing Mistakes

Here is an interesting video on dumb mistakes that people make in pricing, especially multiple tiers with different sets of features. And how to fix them!

Pricing Strategies: The dumb pricing mistake people make (and how to fix it)

Price is what you pay. Value is what you get – Warren Buffett

 

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#PNMeetup – Delhi (15 December 2012) Pricing for Enterprise Sales

The event was kicked off by Arvind Jha starting out with a round of introductions. It was quickly realised that the community was well represented and people coming from Noida, Gurgaon and Delhi was heart warming to see. Arvind then went on to describe how diversity is important when you are running a business. Different regions, different customers and hence different pricing make it a much complex environment. It is in this scenario that choosing a good pricing model becomes important in accordance to your business model and scaling needs. Arvind then went on to invite Tushar from Saigun Technologies to share his thoughts and take the meet forward.

Tushar started out speaking on the relevancy or the need of pricing. The context here was clearly set when he announced that the discussion here is setting up ideas on enterprise pricing which is a whole different ball game as compared to consumer pricing. Factors like evaluation of potential customers, kind of money received from them, directing sales teams, consistency and setting a value to the offering brings in the need of pricing. He then went on to speak on the various challenges in enterprise pricing such as long decision cycles, decision matrix complexity and competition, no matter how good or new the idea is can never be neglected. A great example he shared was the case of Saigun’s HR product which is different to an HR manager and to a CEO. An HR manager would see it as tool which would reduce his work and a CEO would see it as an investment and in turn happily show a few pink slips to some of his HR managers. Tushar also spoke lengths and breadths on total cost of ownership of the product as well as the brand image when setting up your price. A cost is not just determined by the development cost but the service associated with it, the tenure of such a service is an important consideration. One cannot afford to give service away free. Brand becomes important in case when you have an established player in the market already. A SAP can price its product at 2 million but it is fairly practical to say that only SAP can. This is because of the trust and recognition it has built for all these years it has been in existence.

Tushar then spoke on the key parameters to a pricing strategy. Geographic focus and segregation of the offering based upon location always helps. The inclination of the pricing strategy to the company’s overall business strategy is another parameter one should look at. The case of virgin market and mature market were discussed to great detail by all participants. Tushar also shared that apart from his experiences the book written by Nagel on Strategy and Tactics of Pricing has helped him a lot. By this time the crowd appeared to really appreciate the thoughts of Tushar and his experiences. He then concluded with a short brief on the need to do discounting and how discounting eventually becomes a strategic view more than just being operational. He was applauded by all and then Arvind invited Tarun Anand from Semusi to take center-stage and share his thoughts on selling to enterprise customers, in his case, telecommunication service providers or telcos.

Tarun started off with his encounter with an Indian telco. His product offering took off on Nokia’s platform and with Middle-East customers. The product was well received and this is when Tarun decided to launch it in India too. The subsequent agreement with an India telco major pushed the product to India. However, moving forward it became clearer when the telco abruptly changed requirements and priced the product to almost 1/5th of its competition. There were cases of non-payments and violation of contract agreements with the telco as well. The rationale given here was that the product is new and there are not many takers for it. But when Tarun checked, the product had sufficient number of users as well as sufficient number of dropouts. It is here when it becomes important to choose a suitable pricing model, the two he suggested were full user pricing (FUP) and promotion pricing. In this case, eventually he rebranded his product and sold it through the app store which gave him a much better insight to the actual customers of his product.

After Tarun it was Prashant from Signals who was invited to take center stage. Tushar started describing pricing techniques for an app store. The question of whether the product should be transactional priced, free, in-app pricing or ad-based was put forth by him. The even bigger question that needs an answer first is to go free or to go paid for your product. This question really gets answered by a research on ‘when the user is actually ready to be monetised’. Tushar then went to describe the price decision matrix which was split across quadrants of short life span, long life span and instant realisation, realisation after a period of time. Games, Social network apps, Dropbox and VAS were examples spread across these quadrants. So the eventual decision is to place your product in one such category and accordingly accept the price model that comes with it. Another very critical talk by Tushar was on choosing a price point, the baseline (99 cents), the maxima ($1.20) or the median (between 99 cents and $1.20) for your product or app. If one goes by baseline, then the app store owner has no incentive to give your app the preference in his listing even if you have greater number of downloads. So he suggested that it is always good to keep your product priced at maxima and then slowly move towards baseline pricing depending upon the realisation value of the product. Tushar concluded his talk by adding some avoidance measures when choosing an advertisement based model.

It clocked 5:30 PM and refreshments followed in the form of tea and samosas along with flowering of ideas by everyone in regards to the overall feedback on the initiative and the format of the initiative, ways it should be carried out in the future. Finally everyone joined in to celebrate Avinash birthday and cut a cake which was the most pleasant surprise of the day. Sign of great things to come from this emerging community of product leaders.

Post Contributed by Charles Cherian

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Who is your customer?

Get this right and you have taken the first step towards success in your software product venture, whether on the web or on-premise.
As a corollary, if this is not clear, then no matter how sophisticated your product is, it will always be a struggle.

As many entrepreneurs are aware, the success of a product depends on the product itself, the pricing, the promotion and the physical distribution as defined by the 4 P’s.

Even in this era where pricing is irrelevant given the Free or Freemium business models, one needs to spend money to get signups or visitors and that will be wasted if the target customer profile is not defined properly.

In a software product business, getting the customer profile right is the key even to start because the specifications would depend on the type of customer.  The design and the development would follow.

Let me illustrate this with an example.
A friend of mine asked me to help market his POS Retail Software Product that he had already developed.  To better understand his product and strategy, I asked him a single question “Who is your customer?”  He looked at me as if I was an alien and said “Obviously a retail business!!”

Undeterred by his tone, I asked a follow-up question, “What kind of retail?” and by this time he was convinced that talking to me was useless.  Just to humour me, he said “Any kind of retail shop will benefit from my software”. And there started the “Spanish inquisition”.

Me: “So the neighbourhood grocery store as well as big bazaar can use it? A shop selling Bengal sweets as well as Bata? All of them fall under the category of Retail”

And then he saw the point and the implications of lack of clarity on:  

The Product itself:

  • The scope:  The small grocery shop may need at best just the billing and the receivables whereas the chain might want to network it’s branches and would like to know the traffic pattern to have the right number of staff to meet the demand.
  • Hardware requirements: A small shop may do with an assembled PC and a strip printer whereas the big ones may want POS Terminals with scanners.
  • Security: Just a simple login would suffice for a small shop while elaborate security levels need to be defined for a large outfit with clearly defined responsibilities

The Price:

  • The shop owner might be willing to spend a small amount for the PC, printer and the software and he may not give too much credence to the software.  You cannot charge him a few lakhs for the software alone.
  • In the case of a large chain, the price point must be much higher given the need for metrics, security, deployment at different locations, training, hand-holding etc.

The Promotion

  • If it is for the small shops then one case use mailers or approach a set of similar shops in an area to generate interest.  One can also use local newspapers to create some awareness.
  • To catch the eye of the chains, one must advertise in industry journals, magazines and perhaps take stalls at industry events

Physical Distribution

  • For the retail shop, a one-one approach using the salesperson may perhaps work best.
  • For the large chains, one has to go with the hardware vendors or system integrators or retail IT consultants (I hope such a specialty exists given the explosion of retail in our country)

I know that this distinction is very simplistic but I have chosen it to give an idea. Having seen the importance of defining the target customer, we will look at some parameters to do it effectively, in the next post

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How To Do Pricing For Enterprise Sales #PNMeetup

Pricing is a mix of art science. Most product startups have a hard time figuring out their revenue model (freemium or, paid only) and what they should charge. If you chose freemium, you have to be careful that cost of incremental customer is low and it will be great, if this customer also helps spread the word about you. On the other hand, if you choose paid, you run the risk of having minimal traction, especially if your sales cycle is long and complex.
In either of the business models, you need to have clarity on who your customer is, what they are really looking for, does it have a direct impact on creating additional revenue or, eliminate inefficiencies and what your competitors are charging and why. Is your sales cycle long or, short? In a product company, you expect to cover the cost from multiple customers and not just one. However, most businesses falter as they fail to take into account the cost related to acquiring paid customers and customer service.

All being said, do remember that for most companies, pricing is an evolution as your product is.

You will hear from our experts on how they went about pricing their products and what if any adjustments they made along the way based on their learning.

Speakers:
– Tushar Bhatia – (EmpXTrack) Saigun Technologies
– Varun Shoor – Kayako.com
– Prashant Singh – TheSignals

#PNMeetup is an initiative by ProductNation and is meant for Entrepreneurs, Product Startups, Product Managers in the NCR Region. Here you can share, learn and network with fellow Product Managers and also discuss new trends innovations, get feedback on prototypes and insights from experienced people in the industry.

The objective of #PNMeetup is to provide each attendee with practical skills and knowledge that they can put into practice tomorrow to improve the products they bring to market, enhance their companys success and further their own careers. Some of the people supporting this initiative are: Amit Ranjan(Slideshare), Arvind Jha(Movico Technologies), Jainendra Kumar(Pitney Bowes), Pawan Goyal(Adobe), Rajat Garg(SocialAppsHQ), R. P. Singh(Nucleus Software), Vivek Agarwal(Liqvid eLearning).

These meetups will be done on Third Saturdays of the month and will include an opportunity for professional networking. If you would like to volunteer and make a difference to the Product Eco-system in NCR, do send us a mail at volunteerpn.ispirt.in

Supporting Partners:
– Indian Product Management Association, Institue of Product Leadership, Delhi Startups, TLabs, The Hatch, Startup Saturday. Ignita

Registrations:
Limited seating and registrations is strictly for Product Startups and Product Managers. No onsite registrations will be allowed. Register Now to avoid disappointment. This is a closed event and If selected you will get the confirmation for the event.

Venue: 
Kunzum Travel Cafe: Address: T-49, GF, Hauz Khas Village, New Delhi, Delhi 110016

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Get Your Story Straight

What do top technology companies have in common? Think about SalesForce, IBM,VMware, Workday, Apple, Riverbed, Cisco.  What separates market leaders and category creators from the rest of the pack?

They tell powerful stories.

Stories matter. We see it over and over again. Companies that capitalize on an inflection point and grab a leadership position always have a thought-provoking point of view that resonates with buyers. Customers buy into the story before they buy the solution. 

And a story is more than a slogan or a catchy tagline. It’s offering a different perspective, not just pushing a product. It’s a crisp, clear way of communicating how a company or a product will solve a big, hairy problem for customers. It comes from putting the customer’s needs and requirements first, not the technology or the company’s agenda.

Look at Cisco. The company wasn’t founded to sell routers and switches. It started when a husband and wife wanted to email each other from different offices at Stanford and they couldn’t. So they created the multi-protocol router and solved the problem. And they knew others wanted the same problem solved. They didn’t launch a product—they solved a problem and created a powerful story and different point-of-view. And they instilled a customer-first, problem-solving culture at Cisco. You know the rest of that story.

Need other examples? Look at game-changing CEOs Marc Benioff, Larry Ellison, Steve Jobs, and Jeff Bezos. They disrupted markets and catapulted their companies into legendary status with conversations that re-framed the problem for buyers. They articulated their company’s value in simple, concise positioning stories and a narrative that offers a new perspective to buyers.

So if a great story is the key to success, why doesn’t every technology company have one? The reason is simple.

All too often, the responsibility for positioning is taken on by tech CEOs or product managers who are in love with their technology.  And technology moves to the forefront of the story. WRONG. Buyers don’t care what’s cool about your technology or your IP. They care what it does for them.

The most effective storylines carve out a distinct corner of the room—and box competitors in as having a solution for “yesterday’s problem” or “the right idea, but the wrong approach.”

What makes a good storyline? The most effective positioning stories MUST answer three questions for the target buyer:

#1: Why your company or product, NOW?

Tell them in clear, human terms what problem your product solves and why it’s important to solve it TODAY. Is this an old problem that has gotten worse? A new problem caused by fast-changing market dynamics? Will your buyer lose his job if he doesn’t solve this problem? Strong positioning stories empathize with the buyer’s situation and create a sense of urgency about solving a critical problem.

#2: Why is your solution different?

Once the buyer agrees with your point of view, the next question on their mind is “who else can solve this problem?” or “can my existing technology vendor take care of this for me?” Great stories lay down the logic for a new approach to solving the problem. This requires talking about your secret sauce, IP, or game-changing differentiators  in terms of business requirements. You can avoid the tedious “feature-checklist” war by articulating the need for a different approach. Different, not better, always wins.

#3: How will this improve my life six months from now?

Paint your buyer a picture of how much better their life will be with an investment in your solution. Your life is “hell” right now (big problem); here is the unique approach (our secret sauce) for solving this problem; here is what your life will soon look like.

All market leaders and category disruptors have a compelling and distinct point of view. If you want to join them, start by getting your story straight.