"The strategy of pricing involves acknowledging that customers have different pricing needs and then making efforts to profit from these differences. Customer different in three primary ways"
Desire a different pricing plan -> Pick-a Plan
Have unique product needs -> Versioning
Value a product differently -> Differential Pricing"
-The 1% Windfall, p28-29
The bulk of the interview is around those three pricing strategies and how business can expanded their views about how to use pricing to improve profits.
⁂
The 1% Windfall is one of the books I recommend in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download the ebook here.
“So certain is the plummet of prices that economists have mapped the curve of their fall. The cost of making something–whether it is steel, light bulbs, airplanes, flower pots, insurance policies, or bread–will drop over time as a function of the cumulative number of units produced. The more an industry makes, the better it learns how to make them, the more the cost drops. The downward price curve, propelled by organizational learning, is sometimes called the learning curve. Although it varies slightly in each industry, generally doubling the total output of something will reduce the unit cost on average by 20%.
Smart companies will anticipate this learning curve. Very smart companies will accelerate it by increasing volumes, one way or another. Since increasing returns can exponentially expand the demand of items–doubling their totals in months–network effects speed the steep fall of prices.”
“Costs Go Down” is the first section of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
We have been talking about pay-what-you-want as one of the options that gives creates more commercial flexibility. Content producers are understandably nervous about the possibility that customer could choose to pay nothing.
Smashwords, a company based in SiliconValley, creates and distributes ebooks for self-published authors and small publishers. With only a Microsoft Word file, their publishing engine can convert the document into nine different ebook formats and in recent months, they have built distribution relationships with more retail outlets including Barnes and Noble.
Smashwords CEO Mark Coker published some interesting data last week. When an author publishes work on the site, they have the option of choosing a fixed price or pay-what-you-want. Coker pulled a sample of 353 purchases made with pay-what-you-want pricing and here is what he found:
85% of customers choose to download their purchase for free. That is not a huge surprise. The comScore data from Radiohead’s In Rainbows experiment put free downloads at 62% of the total. This data is spread out across multiple titles and authors with, I think safe to say, weaker brands.
I summarized the paid data in the chart below:
The sample set of 54 points is on the smallish size to draw conclusions, but we can say customers favored a price point under $4 with that accounting for two-thirds of the purchases. The sub-$4 price point account for 44% of In Rainbows paid purchases.
The total revenue for 353 purchases was $173. This again shows business models involving free require a high volume of prospects and customers to generate meaningful revenue.
I wonder if the pay-what-you-want model needs an anchor. The In Rainbows experiment was able to generate higher chosen price pointsin response to past Radiohead purchases and the established pricing from the iTunes music store. The publishing industry is still in the process of establishing their ebook pricing and that could have a positive effect on these pricing schemes over the long run.
⁂
You’ll find more detail about Radiohead’s In Rainbows pricing experiment on page 18 of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download ithere.
There has been some good material posted recently on reading.
Gretchen Rubin of The Happiness Project provided Twelve Tips For More Reading. She share my view that you need to quit reading if something is not working and move on. "There are too many wonderful books to read."
Michael Hyatt posted his How To Read a Non-Fiction Book a few weeks ago. He takes notes in the margins, has a set of symbols for note taking, and dog-ears pages he wants to return to.
Brian Oates at daxle.net says you should jog, walk, and then stroll through a book. "Non-fiction is about learning and can be tackled differently. You should read a non-fiction book on purpose. The more clear you are on why you are reading it and what you want to learn the better."
And if you are really serious, pick up a copy of How to Read a Book by Mortimer Adler and Charles Van Doren. Here is what they authors say about reading practical titles like business books:
The most important thing to remember about any practical book is that it can never solve the practical problems with which it is concerned. A theoretical book can solve its own problems. But a practical problem can only be solved by action itself. When your practical problem is how to earn a living, a book on how to make friends and influence people cannot solve it, though it may suggest things to do. Nothing short of the doing solves the problem. It is solved only by earning a living. (p193)
I borrowed the title for my ChangeThis essay from Alder and the opening story has me making fun of a kid who is walking around with a copy of the book. Just for the record: I was wrong and would recommend How to Read a Book to anyone who is serious about getting more out of what they read.
Many media formats have active used markets. Visit any college campus during the first week of classes and you'll find a used textbook swap. Amazon has created an active marketplace for pre-owned hardcovers and paperbacks.
The videogame industry is no different with retail chain GameStop leading the way as market maker. Wall Street analysts estimate the size of the second-hand market to be $2 billion a year and accounting for 1/3 of the games sold in the U.S.
Leading game publisher Electronic Arts (EA) is rolling out a program to try and recapture some of that lost revenue. Included inside new copies of their games is a one-time code which unlocks new characters, weapons, and gaming levels. Anyone who buys the game on the used market will pay money (currently $3-$10) to gain access to this additional downloadable content (DLC). These codes act as both reward to purchases of new product and new revenue source from the secondary market.
DLC is growing source of additional revenue for software companies. EA is going to offer Tiger Woods Golf for free online with club upgrades available at a cost. Hipstamatic, a camera application for the iPhone, allows customers to buy lens, film, and flashes to creates a variety of vintage effects. Social gaming sites for kids like Club Penguin and Moshi Monsters use a philosophy of free membership with additional features added with a paid subscription.
So, the question is: what's your downloadable content that could create another revenue stream and give you more options?
⁂
"You Have Options" is the final section of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
"What looks like resistance is often lack of clarity. What looks like laziness is often exhaustion. What looks like a people problem is often a situation problem." p17-18
The meme you are going to keep hearing with Switch is about the elephant, the rider, and the path. Chip and I talk about each of those concepts and their effect on our ability to change.
Shortly after Radiohead announced announced their pay-what-you-want offer for the digital version of In Rainbow, Paste Magazine made the same offer: choose what you want to pay to receive the publication for one year.
If I had to do it all over again I would do the same thing. It paid for itself because we had enough new subscriptions and advertising. The PR value alone was worth doing it. As a sustainable model, I think there is some valid criticism that you undervalue your product—and it obviously doesn’t work when the ad revenue is not there.
For a young magazine that had not reached market saturation it was a fantastic way to get the word out about Paste. We got 30,000 subscribers out of that and they’re still with us. We would have needed 2 million pieces of direct mail to get that response.
We used it for only that one time as a subscription push, but for all of 2008 we continued to use it as a strategy at live events.
We’ve learned that people won’t subscribe at a festival, but they’ll come over to our table and pay what they want and take their first issue with them. It had a strange mystical power. And the shame factor drives the subscription price higher—the average Internet order was $7, versus $10 face-to-face. For a while it became a core strategy at festivals. We gained a few thousand more subscribers that way.
Pay-what-you-want works like free, creating a way for prospects to try your product or service. This case study also shows the potential for a stronger bond with high renewal rates for people who initially subscribed using the offer.
The final comment by Purdy about higher rates paid for people who paid in person at festival is interesting; does personal contact versus online anonymity increase amounts through some indirect peer pressure?
⁂
You'll find more detail about Radiohead's In Rainbows pricing experiment on page 18 of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download ithere.
Each year I read more business books than most people read in a lifetime. My experience allows me to help readers know what to read, do book scouting for publishers...
Curent Project
Fixed to Flexiblee-book. Four Simple Lessons About Cost, Price, Margin and The Options Available to the 21st Century Business
I co-wrote