The 3-letter Labyrinth and Pricing in Practice
I recently participated in a webinar called The Art of Pricing, that (as you may guess) was about pricing. The main speaker was Niko Laine, CEO, and Co-Founder of Calqulate, which is a financial data platform offering different products and services as well as webinars that are also recorded and uploaded on YouTube.
The presentation was interesting but difficult to follow at first, as it was full of 3 letter abbreviations, that were either new to me or not a part of my everyday vocabulary. By re-watching parts of the video for a second and then a third time, I am almost confident that I understand everything that was discussed.
Laine mainly compared self-service and enterprise style businesses. The main difference as he mentioned was that while self service needs cheap ICP (Ideal Customer Profile) and cheap prices, which brings higher volume, thus lower CAC (Customer Acquisition Costs); enterprises need higher prices and good quality ICP, which brings better LTV (Lifetime Value), MRR (Monthly Recurring Customers) and NRR (Net Revenue Retention). The point here was that matching the right prices to the business model is crucial to not end up in the “graveyard” of businesses.
When it comes to pricing products or services Laine recommends having multiple price groups for the MVP (Minimum Viable Product). It is good to start selling at the MVP stage so some feedback can be collected not only about the price but also about the product itself. MVP can be also sold at a realistic price for long-term success. Another tip was that the price needs to be clear and simple. Somewhere written down so that the customer doesn’t have to look for it so hard, thus the company seems more transparent.
Finally, it is important to consider the expected sales volume when setting a price. It is recommended to set up customer volume brackets so if the billing scale rises one bracket the already existing resources can handle it. (Gregory 2019)
If we look at pricing as a practical phenomenon, the base definition would be that it is a decision-making process that endows a product or service with a value that can be translated into money or other exchange currencies of one’s choice. (BYJU’S n.d.)
When setting the prices of certain products or services, one needs to remember that besides the variable costs that come from the volume, there are also fixed costs, such as human resources and other running costs. It is advisable to not think about taxes and other commission fees until the own costs are summed up. On top of the fixed and variable costs; VAT and commission fees, the desired profit margin can be added.
„Pricing isn’t a decision you only get to make once.”
The objectives of pricing or pricing methods may differ depending on the given business or product.
One may say that the reason for pricing is to get money, which is true however when we talk about business operations, the focus is on growth and growth is not the same for everyone.
- Survival: for the company to stay alive and see another day
- Expand profits: for the company to get as much profit from each unit as possible
- Expand sales: for the company to sell as much unit as possible
- Maximize retention rate: for the company keep its customers as long as possible, thus saving money on CAC (Customer Acquisition Costs)
- Increase trial sign-ups: for the company to have as much potential customers as possible
- Rule the market: for the company to be number 1 in the market, and be the “obvious choice”
It is not necessary to pick one method, it can be experimented with and mixed to find the best for a given business. (Campbell 2019, BYJU’S n.d.)
There are two main pricing methods. Cost-oriented and market-oriented.
Cost oriented pricing method is based on the company’s expenses when it comes to producing the goods or providing the service. First, the break-even point needs to be calculated, and then either a fixed percentage or price is added on top to get an optimal selling price. (BYJU’S n.d.)
Market-oriented pricing method is based on the market factors following market research. In this case prices in the market are compared to each other and then the goal is to reduce the expenses to be as low as possible. With market-oriented pricing, the price can be determined by the customers’ perception of the product, the competitors’ prices, or just simply giving the lowest price to it possible, when the quality doesn’t change from competitor to competitor or product to product. Another option is to put similar products into quality/price brackets and create an exclusive brand where everyone is included or at least it is the perception. (Promodo Team 2020)
There are other pricing strategies that cannot be categorized into the above-mentioned groups.
Examples of other pricing strategies:
- Dynamic pricing: Prices might be changing constantly, using algorithms and AI to achieve the maximum profits possible (e.g. airlines, hotels)
- Freemium pricing: A basic version of the product or service is available for free so the customers can get acquainted with it and later more likely purchase the premium pay version. (e.g. Spotify, Canva)
- Premium pricing: A company may price its products or services higher than their values or their competitors to create a luxury perception in the customers. (e.g. Apple products, designer clothes, organic products)
- Geographic pricing: In different parts of the world, one may purchase the same goods cheaper than somewhere else. When fitting the prices to the local economical situation and other factors, the sold value can be maximized thus the profit can be maximized. (e.g. gasoline, agricultural products)
After attending the webinar and researching further on the topic, I can conclude that pricing is an important part of the entrepreneur’s life and that there are a lot of things to consider. Looking back, I see that in previous projects, I’ve taken part in, there wasn’t enough effort in figuring out the right price, which might have affected the outcome. Now I feel more confident that the next time we’ll make a more informed and overall better decision about our prices.
Laine, N. 2022. The Art of Pricing. Key-note presentation. Startup Grind webinar on 31.3.2022. Helsinki
Gregory, A. 2019. High-Volume Billing: Scaling Your Volume without Scaling Your Efforts. Read on 10.4.2022. https://gotransverse.com/blog/high-volume-billing-scaling-your-volume-without-scaling-your-efforts
Odjick, D. 2021. How to Price Your Product and What You Need to Know About Pricing. Read on 10.4.2022. https://www.shopify.com/blog/how-to-price-your-product
BYJU’s n.d. What is Pricing? Read on 7.4.2022. https://byjus.com/commerce/what-is-pricing/
Promodo Team 2020. Pricing Strategies in Marketing: 6 Pricing Methods for your Business. Read on 7.4.2022. https://www.promodo.com/blog/pricing-strategies-in-marketing-6-pricing-methods-for-your-business/
Decker A. 2022. The Ultimate Guide for Pricing Strategies. Read on 7.4.2022. https://blog.hubspot.com/sales/pricing-strategy
Campbell P. 2019. 6 Pricing Objectives & How to Choose the Best to Grow. Read on 7.4.2022.https://www.profitwell.com/recur/all/pricing-objectives#:~:text=Pricing%20objectives%20refer%20to%20the,order%20to%20meet%20your%20objectives.