Pricing Models (Fri Nov 15, lect 20) | previous | next | slides |

Logistics

What makes a “good” pricing model?

• It has to be simple to understand
• Customers are willing to pay it
• It has a logical or reasonable story attached to it (which may or may not be true)
• It can be contextualized with related products that have established a price
• You can make an argument that your business will grow and profit with that pricing model

How do you “test” a price?

• A price and a pricing model are hypotheses!
• Ultimately, that customers are paying it
• Ask possible customers to react to it
• Find related or competing products that use a similar model
• Develop a rationale that makes sense to the Customers

Pricing Models

• A subset of the business model
• Explanation of who pays and what they pay for

• Ask yourself some questions:

  1. Who is getting value out of this business?
  2. Who is willing to pay for that value?
  3. What exactly are they willing to pay for?
  4. When are they most likely to be willing to pay for it?
  5. How often are they willing to pay for it?
  6. Is your pricing model logical or reasonable?

Real World

• A Real World Lemonade Stand
• A detail from the photo above.

Exercise

• Teams work together; about 10-20 minutes
• You are a 10 year old entrepreneur running a neighborhood lemonade stand.
• Not the one from the pictures above but a very smart kid wanting to make a lot of money
• You want to make some money doing this. What are some models that you could put in place?

Here are some examples

1. Charge 25 cents for a small, and $1.00 for a large lemonade
2. Have a club like Amazon Prime that gives you a discount on each glass
3. Have a subscription like Netflix giving all the lemonade you can handle
4. There are many other possibilities.
5. Think out of the box!!

Work with your team on the following:

1. Come up with many variants of pricing models as you can
2. Try to come up with a classification of those models, in other words look for the patterns
3. for example: what is being charged for?
4. What is free?
5. Who is paying
6. who is getting something for free
7. what costs are fixed and which ones are variable, and so on.

Pricing

How would you test a pricing model?

• “What would you pay for this?”
• “Would you buy this for $20?”
• “How much do you think this is worth?”
• “What’s the most you’d pay?”

Freemium vs. Free Trial

• Play on words with “Premium” and “Free”
• Freemium:
  • Base product is free
  • Has some limitations
  • Pay for “full product”
  • Tiers of “full product”
• Contrast with “free trial”:
  • Full product
  • Can use it only for limited time (e.g. 1 week)

Discussion about “our” products

• Each team come up with at last TWO distinct pricing models for your product.
• Take 15 minutes. Consider:
  1. Will the model “make sense” to the buyer?
  2. Will they be willing to pay it?
  3. Is the pricing anchored with any other prices or expectations?
• Present them to class
• How it fits into the financial model

Thank you. Questions?  (random Image from picsum.photos)