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How To Improve Your Revenue Streams - Part Two

How To Improve Your Revenue Streams - Part Two

Pricing models

In the recent article How To Improve Your Revenue Streams – Part One, we looked at expanding your customer base (through competition and finding new customer segments) as well as designing new offerings for your current customers.
Now we’re going to look at pricing and rates of consumption; if we can increase these, then our income will go up without us needing to find more customers.

Setting New Price Points
Marc Andreesen’s advice to startups is controversial: raise your prices.
It’s a great point; your genuine fans won’t mind, and you’ll have a stronger business with larger margins.
It might mean dropping your lowest value customers, not necessarily a bad thing.
Tim Ferriss famously dropped his most difficult customers, refocusing his energy on his top clients: sales soared and complaints evaporated.

There’s the nagging force of inflation – keeping prices stagnant is the equivalent of decreasing revenue by 2-3% per year.
Those of you who have seen Pulp Fiction will remember John Travolta in disbelief over “a five-dollar milkshake!”
What was once a steep price is now considered affordable by today’s standards, all thanks to inflation.
It’s the same reason why your grandparents bought their house for $35,000 or why lollies were 3-for-one-cent.
The point is, inflation dictates that your prices should go up anyway, so you may as well think it through.

The idea here is not “be greedy”, but rather “don’t leave money on the table”.
If you’re selling something that’s genuinely useful and makes people happy, don’t tell yourself that you have to compete on price.
As Seth Godin put it:
"If we keep trying to figure out how to be competent for cheaper, we're in a race to the bottom.
And the problem with a race to the bottom is that you might win.
But you probably won't, you'll probably come second, which is even worse.
The alternative is to race to the top, and the way you get there is by becoming meaningful"

Pricing tricks and strategies

To set a price point, you need to have an opinion on the three types of pricing model.
The first is cost-plus pricing.
This is what retailers like supermarkets do, where they take the wholesale cost (or cost of producing the service), add a margin (say 40%), which sets the price for the customer.
If costs go up, so does the price.

The second is market based pricing.
This is where we examine the nearest competitors offering a substitute product/service, and base our pricing on theirs.
We know a rough “acceptable range”, above which we’ll lose customers, and below which we’ll attract customers.
Petrol stations tend to operate in this manner, as do most industries that sell a commodity product.

The third is value based pricing.
This is where you determine how much the item or service is worth to the customer, then set the price accordingly.
This is why drinks at sporting events and music festivals are so expensive, because they’re perceived as being worthwhile at almost any price.

To form a pricing strategy, we need to understand how much it costs to produce each item/service, which gives us a price floor.
We then need to set the price not much higher than direct competitors, and certainly not higher than what customers are happy to pay.

It also might be that different customer pay different amounts.
You can do this by not displaying your pricing formula, especially if you’re a service based business.
You can also raise your sticker price, then offer discounts for those who have smaller budgets.
This allows you to charge full rates to customers who won’t blink, whilst also remaining competitive for customers who like your company but have tighter parameters.

For example, at an NFL game in America, each seat has an individual price.
Fans can choose to pay more/less based on the row and the relative position to the field.
These then go up/down based on popularity and demand as the season goes on.
Airlines have a similar model – thanks to all the 3rd party retailers, promotions and packages, it is possible that every passenger on your flight paid a different amount for their seat.

It’s also worth remembering that price can suggest quality.
Chivas Regal used this approach when they suddenly hiked up their prices.
Since whiskey is hard to evaluate from a bottle and label alone, customers use the cost as a guide, and associated Chivas’ higher price with higher quality – sales went through the roof.

De Beers did this with diamonds – their campaigns were voted the best ads of the 20th century.
Essentially they repositioned diamonds as being rare and romantic, then framed the expectation of men spending two month’s salary on an engagement ring.
Despite being no rarer than any other gemstone, diamonds had the connotation with scarcity, permanence and commitment, as well as a huge price tag.
So much so that men would go to jewellers with “the right price” in mind, before they’d seen a single stone.

There is also such a thing as suspiciously cheap – there’s something intuitively wrong with someone selling you a designer bag for $30, or offering to give you a low cost tattoo.
Customers want to pay the lower end of the right price range, and would rather feel like they’ve earned a discount rather than buy something that is naturally “cheap”.

increasing customers rate of consumption

Increasing Rates Of Consumption
Alka Seltzer had a famously effective marketing campaign, with their jingle “Plop Plop, Fizz Fizz”
Not just because it’s catchy, but because the inference is that customers should be taking two tablets at once, thereby doubling their usage.

Toothpaste companies do the same thing – we’ve all heard dentists say to use the amount “the size of a pea”, but these companies show their product spread across all the bristles.
Small changes, large impacts.

A friend of mine was working at McDonalds in 2009, and mentioned that her store’s revenue had recently doubled.
It was right around the time that they launched their Angus burgers, which were proving popular.
I asked if the new range was drawing in additional customers:
“Yes, but the real difference is that our customers who used to order a $4 Big Mac are now ordering a $9 Angus burger”
They may not be eating more burgers, but McDonalds created a way for them to eat bigger and better burgers.

Not every industry lends itself to this strategy.
You can’t increase the rate at which I use dishwasher tablets, unless you convinced me to put in fewer plates per wash.
But for discretionary purchases, it’s easier to encourage customers.

When I was a Costco member, I bought a huge block of Halloumi for $16.
It was great “value”, being 4x larger for only 2.5x the price.
It also meant I ate a lot more halloumi than usual, since it was there and would have otherwise expired.
A great week for my cooking, but terrible for my health.

Dentists recommend making an appointment every six months.
Mechanics suggest annual services for your car.
Cafes give out loyalty cards to entice you to come back.
RSLs and Clubs hold member raffles, where you only win if you’re there in person.
Software platforms offer discounts to startups, knowing that they’ll add “seats” as their team expands.
Tontine put expiration date stamps on their pillows so that you replace them more frequently.

The key here is identifying whether or not your product/service is “elastic or inelastic”.
Elastic products/services see their demand rise or fall based on price, e.g. cinemas became more expensive, so people went to see fewer movies.
Inelastic products/services have constant demand irrespective of price, e.g. smokers will still buy cigarettes when they are $50 per pack.
Will a price increase or decrease affect your customer’s rate of consumption?

Bundling and unbundling products

Bundling and Unbundling
Sometimes it’s not just the “what” of the product, but the “what else” of everything that surrounds it.
A product or service might not be appealing on its own, but hold great value when part of a broader package.
Vice versa, you might have an enticing component to what you sell, but customers are kept at bay because of all the strings and extras that it comes with.

For example, look at how telecom companies bundle their products and services together.
The only reason anyone has a landline these days is because it’s part of a bundle, nobody is ordering a new landline service.
They also get their “free” new handset as part of a 24-month contract – the format of the deal allows then to justify the purchase that they otherwise wouldn’t have made.

On the other hand, Australia was the number one pirate of Game of Thrones, with viewers refusing to take up Foxtel’s expensive packages with long term commitments.
It took them a while, but eventually HBO Go emerged, allowing fans to just purchase the channel they wanted, for as long as they liked.
While some could argue that they may have sold fewer bundles, they also monetised a large group of people who otherwise would have paid nothing.

Netflix bundle new shows into a single subscription – previously I spent $50 per season on DVDs but was also more risk-averse.
Now I can try as many new shows as I like, without fear of committing dollars to something of unknown value.

iTunes unbundled the album, allowing customers to pay $1.69 for the three songs they liked, rather than $29.95 for a hit-and-miss CD.

It comes down to how customers perceive value.
You can craft packages that have impressive “discounts”, but based on products and services that customers otherwise would have ignored.
In other cases, the allure of “all inclusive” sounds enticing, with customers willing to pay more than usual in order to have that sense of freedom and indulgence.

Framing numbers and prices

Framing Numbers
Daniel Kahneman uses a great example of the power of framing in his book Thinking Fast and Slow.
In an experiment, participants were presented with a scenario in which 600 people were set to die from a new disease.
The first group of participants were offered the choice of two interventions:
A) 200 people will be saved
B) 1/3rd chance all are saved, 2/3rd chance none are saved

75% of participants chose option A.

Then a second group were given the same question, phrased differently:
C) 400 people will definitely die.
D) 1/3rd chance nobody dies, 2/3rd chance everybody dies.

75% of the participants chose option D.
This is the same scenario, framed in different ways, creating completely different results.

What are the ways that framing could change how your value proposition is perceived?
Software as a Service (SaaS) companies do this well.
If they said “You’ll pay $5,000 a year for our platform”, customers would stall on the purchase.
But by saying “It’s $10 per month per seat”, customers view the purchase as a series of cheap purchases, even though a business with 42 staff will end up paying $5,000 per year.

It’s worth considering each of these strategies for your business.
Some will be a bad fit, and some have already intrigued you.
I’d encourage you to spend some time thinking about the ones in the middle – these opportunities aren’t as obvious, but that’s also why they can be the most lucrative.

Next we’ll look at ways of reducing your costs…


How To Reduce or Restructure Your Costs

How To Reduce or Restructure Your Costs

How To Improve Your Revenue Streams - Part One

How To Improve Your Revenue Streams - Part One