I was recently talking with a colleague from an extremely large corporation. We were discussing the relative cost of building smart phone applications. He went on to tell me how much they paid for the app after he gave me a demo on his phone. He then asked the price it should have cost to build it. I told him it should only be cost 5-10% of the price they paid.
Flummoxed he asked some advice on how to get things built for this much lower clip. Here is what I told him - Remove your logo from your business card before you get the quote. He laughed and asked if I was serious. I was very serious.
Sometimes the simplest advice is the hardest to take.
When negotiating with a supplier in business, it’s a natural desire to want to get the best deal. And when we think of deals, we think of the value equation: The product or service as a function of price.
If we take this approach and succeed the net result is this: The party we are dealing with gets their margin squeezed and they make less money from dealing with us.
This isn’t the best deal. In fact, it is not a very good deal for both parties. Low margin customers usually get sub optimal service, attention and effort put into their account. In startup land what we usually need is love and attention more than sharp supplier pricing. Which is why best business practice is to leave something significant in it for the other guy.
The web has changed business models so much, it’s hard to know where to start when discussing the implications of revenue streams.
In the past I’ve been very clear on my views about Free – it is not a business model. It’s a sampling campaign, or a related revenue strategy. But in truth, the methods for extracting revenue are being totally reinvented by the web. Given the cost of producing everything from flat screens, the flat pack furniture to microchips is in a state of rapid deflation means we need to reconsider the revenue equation – or more appropriately, the timing of the revenue.
For a business to survive, revenue must be extracted.
But before revenue can be extracted, value must be created.
When creating web based startups it is very hard to create value, until we have large numbers of participants (espoecially if we are not selling physical or virtual goods). The way to get large numbers of participants is the reduce the barriers to usage and entry. And the best way to reduce the barriers to entry, is to reduce the price, or even remove it entirely in the short term.
So when thinking of pricing models we need to forget about the price and start thinking about value. It isn’t until we have created value, that we will be able to extract it. So the real question is not ‘what to charge’, but has value been created yet?
When I buy something via iTunes it doesn’t feel like money. Especially when it is an app that is a few dollars at most. It’s easy to press a button which confirms a purchase at a value which is lower than anything you can buy in the real world. A coffee or coca-cola is $3.50 these days. it doesn’t end there though. When we get the bill on our credit card it’s the smallest number on the page.
Mobile phone plan $59
Restaurant XYZ $179
Again – the comparative spend makes it easy to ignore it as inconsequential expenditure. Yet, for some reasons we’ll switch brands at a supermarket to save 15 cents on the purchase of toothpaste.
There’s an important lesson for entrepreneurs here, and that is the selling environment and immediate comparison.
How can we sell our brand in place where it looks cheaper than everything else on offer, as the biggest barrier isn’t how much money it costs, but how much it costs relative to the things around it? It turns out that what the price is, is not nearly as important as where the price is.
While reading SamsMojo earlier this week I was surprised to learn the prices of the top 10 selling iphone apps for 2009. In fact, the price for the top seller was more than 10 times what I expected at $99 – The TomTom navigator app. Not the $3 we’d get as a response if we asked a random sample of people.
Sure, it’s a high price as far as iphone apps go, but it much cheaper than a $500 TomTom. The point for startup is this. There is no such thing as expensive. There is only expensive in relation to the set of relevant substitutes. And when we are pricing our brand or startup all pricing decision need to be made relative to the alternatives.
Pricing is a difficult thing to get right in the marketing mix. Often we get all other 3 P’s (product, place promotion) right and that wrong…. and instead of revisiting it, we mess with the product.
There is no hard and fast answer on how to price a product in a startup or a web service, especially as it pertains to pricing models. But there are two simple pieces of advice I can give.
1. If there is an established pricing method which is accepted and liked in the market, go with it.
2. If consumers generally despise how things are priced in the category you are entering, change the model, and let everyone know about it.
In the first example the ethos is this: It’s hard enough gaining cut through with our product without adding unnecessary complexity to the decision making process. Especially when you have a new and untested offer.
In the second example the ethos is this: The pricing model becomes the main feature. It’s the reason for the switch to you, other parts of the marketing mix will then require far less innovation to gain the cut through a startup needs.