framework pricing step 16 - gsl-archive.mit.edu
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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)