Step 16Pricing

Framework

MIT Global Startup LabsPeru 2018

Step 16: Pricing Framework

Why Now?1. Value Creation → Value Capture

a. Business Model + Pricing

2. Set initial estimate of pricing

a. Used in LTV calculationb. Important to set now, but don’t spend too much time now

3. Test with clients

4. Change as needed, iterate

a. Seasonal/Daily change (gas prices)b. Dynamic pricing - real time (airline tickets based on availability)

5. The 1% Windfall, Dr. Rafi Mohammed, McKinsey Study

a. 1% increase in price → 11% increase in profit

Why Now?1. Value Creation → Value Capture

a. Business Model + Pricing

2. Set initial estimate of pricinga. Used in LTV calculationb. Important to set now, but don’t spend too much time now

3. Test with clients

4. Change as needed, iterate

a. Seasonal/Daily change (gas prices)b. Dynamic pricing - real time (airline tickets based on availability)

5. The 1% Windfall, Dr. Rafi Mohammed, McKinsey Study

a. 1% increase in price → 11% increase in profit

Value Based PricingSetting your price for your products and services based on the perceived value to the customer.

Basic Pricing Concepts● NOT based on costs

○ Should NOT even share cost info with sales team (Freakonomics - Steven Levitt)

● 20% of Quantified Value Prop, but depends on:○ Risks you’re willing to take on - subscription vs. upfront○ “My business is very simple. My customers give me $2, and they get back $10”

~Steve Walske, CEO of Parametric Technologies

● Always easier to drop prices than raise prices○ Price high, offer discounts○ Higher prices for earlier customers

Price Sensitivity● Price elastic vs. inelastic = how sensitive your customers are to price changes

○ Tech Enthusiasts = 1st people to buy, consumers vs. research, buy only 1, highest

WTP, price inelastic

○ Early Adopters = Price inelastic, high WTP, require extra attention, potentially high

cost

○ Early Majority (pragmatists) = THIS IS THE PRICE POINT we should think about for

pricing strategy. This is where you make a scalable company

○ Late Majority (conservatives) = comes later, pricing strategy will be very clear by

then

○ Laggards/skeptics = don’t even worry about them now

Dynamic Pricing● Price Discrimination = charging different prices to different consumers

depending on their WTP

○ Perfect = Charge each consumer max WTP

○ Market Segmentation = Charge higher prices to different (observable) segments

○ Consumer Self Selection = Offer a menu of related products and let consumers decide (early bird discount)

● Using big data ○ Understanding of user characteristics to understand WTP○ Amazon - Cookies Off - First time users get it cheaper○ Target - Credit Card Activity - Target Web Ads & Change Pricing

Other Pricing Concepts

● Tiered: 2 or more product package options● Freemium: a product or service is provided free of charge, but money

(premium) is charged for additional features● Unit Pricing: You pay for exactly how many units you consume● Volume Pricing: The greater quantity, the cheaper the price

A/B Price Testing

Before I explain what this means, let’s do the experiment!

A/B Price TestingYou have the following options to subscribe The Economist magazine. Which plan would you choose?

Scenario #1

❏ Online subscription @ $59/yr❏ Print & Online subscription @ $125/yr❏ Print subscription ONLY @ $125/yr

A/B Price TestingYou have the following options to subscribe The Economist magazine. Which plan would you choose?

Scenario #2

❏ Online subscription @ $59/yr❏ Print & Online subscription @ $125/yr

A/B Price Testing● http://www.quora.com/A-B-Testing/Does-anyone-A-B-test-pricing● Dan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads

Scenario #1

A. Online subscription @ $59/yrB. Print subscription ONLY @ $125/yr C. Print & Online subscription @ $125/yr

How many chose option A?Option A: 16%Option B: 0%Option C: 84%

Revenue: $11,444

Scenario #2

A. Online subscription @ $59/yr

C. Print & Online subscription @ $125/yr

How many chose option A?Option A: 68%

Option C: 32%Revenue: $8,012

Actual results from 100 MIT students:

Source: TED 2008 “Are we in control of our own decisions?”https://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions?language=en#t-809050

A/B Price Testing● http://www.quora.com/A-B-Testing/Does-anyone-A-B-test-pricing● Dan Ariely, author of Predictably Irrational, did a study on The Economist magazine ads

Wrap Up - Key Consideration in Pricing1. Value Creation

2. Customer Acquisition Analysis

3. Nature of the Customer

4. Strength of Your Core

5. Competition

6. Maturity of Your Product

Homework - Present on Wednesday ● Report on two (1 Peruvian & 1 international) companies that are

competing in your field● Prepare slides and add them to your Wednesday presentation ppt

Guidelines:o Company (founders, date founded, size) o Business (products, target customer, value prop, biz model, and core) o Your Response (how you plan to coexist with them)