How to choose price metrics for your business? | Business strategies #7

One of the factors that helps not only to attract better customers but also to retain them for a longer period, is the price metric. What does it consist of and how to choose it? You’ll find out in the following article!

Price metrics – table of contents:

What is a price metric?

There are two definitions. One more formal and the other less formal. The more formal one goes: “A price metric is a unit of consumption for which the customer pays.” The less formal one, on the other hand, is contained in a simple question: “What do we charge customers for?” And as we’ll see in a moment, you can “cash in” for almost anything.

This was perfectly illustrated by Steven Forth, managing partner at Ibbaka, who used the example of chocolate (you can find his text here). The easiest way to buy chocolate is to buy a whole bar. But you can just as well buy chocolate by weight or by the piece (pralines). Here “bar, weight and pieces” are price metrics.

With that said, these metrics will vary by industry, product, customer segment and, most importantly, by the value offered.

Cab vs. car-sharing

For example, when taking a cab or renting a car through a car-sharing platform, we want to achieve the same goal – to get from point A to point B. Nevertheless, the two services are different, and the difference between one and the other is, among other things, the customer segment (without a driver’s license you won’t rent a car), the value (convenience vs. freedom) and just the price metrics.

In the case of a cab, you pay a certain rate per door slam and kilometer traveled. In the case of car sharing, on the other hand, you pay for kilometers and minutes. But more than that, pricing metrics very often differ between service providers operating in the same industry. For example, one car-sharing provider may charge its customers for kilometers and minutes driven, while another may charge for a full day of driving.

Well, now the question is, how can you know what YOU should be cashing customers for?

Look for the answer in the value.

Value vs. price metrics

In a previous article (this one here) we described three methods of pricing – based on costs, prices offered by competitors and value (understood as the set of benefits a customer derives from using your product or service). This third method of pricing is the best because it allows you to find arguments to justify the price. If you don’t have them, the price in the eyes of customers will always be too high. So how do you set prices based on values?

Price vs. value. Three steps

Value-based pricing consists of three steps.

Understand the value you offer the customer.

The easiest way to start is by brainstorming. You look at your offering, make a list of the features, functions and parameters of your product or service, and then ask yourself “What’s in it for the customer.” In this way, you determine the benefits, and therefore the values.

Then you do the same with your most important competitors – perhaps something from their offerings will be worth including in yours? At the same time, you can also talk to your customers and ask them what they value you most for. And if you are just entering the market, nothing prevents you from talking back to your competitors’ customers.

You should finish this step with a list of values in hand.

Measure and select the value.

What factors do customers consider when considering a purchase? Price? Quality? Availability? Yes. They also take many other factors into account. Think about what these attributes are – write them down.

Then determine whether these parameters are equally important. They won’t. Some will be more and some will be less critical. Then determine how good you are at a particular attribute relative to your competitors and plot the data on a competitive advantage matrix.

This matrix consists of two axes. The vertical Y axis represents the relevance of a particular attribute – the higher you place it, the more influential the attribute is. The horizontal X axis, on the other hand, represents the attribute’s rating relative to the competition – the further to the right you are, the better you are at executing that particular parameter.

This means that your most essential values will be in the upper right corner. These values will be the most expensive. Of course, not all customers will need these values, and therefore will not pay for such a product or service. What then?

In such a situation, it makes sense to segment customers and prepare specific solution packages for them. In this process, you should divide customers into those who want the following kind of solutions:

the best,
for now,
easy to get started,
cheap.

Communicate your values.

The third step is to communicate values. It’s not worth doing it through the lens of features and functions – don’t talk about them. It’s better to do it the way Steve Jobs did. When he presented the iPod, he didn’t say it was a music player for 1GB MP3 files. He was talking about 1,000 songs in your pocket.

Selection of price metrics

Once you know the values that, on the one hand, are important to your customers and, on the other hand, that you can simply “prove”, ideas for pricing metrics will naturally begin to emerge. Perhaps there will be so many of them that you won’t quite know which ones to choose and how many there should be. With help comes the criteria described by Thomas Nagle in his book The Strategy and Tactics of Pricing.

Thomas Nagle and his criteria

In the aforementioned book, its author listed five criteria. These are:

Criterion #1. different values for different customer segments

Different customer segments have different needs, and therefore different values go to them. You know this because you have gone through the competitive advantage matrix already described. Here a clear conclusion emerges: pricing metrics should not only match values but also be tailored to specific types of customers.

Criterion #2 – Track differences in cost of service

It costs money to produce and deliver value to the market. Moreover, this cost varies depending on how and how much value is delivered, among other things. So a pricing metric should take into account these costs for each customer segment to be cost-effective.

Criterion #3 Ease of administration and measurement

Pricing should be simple – both for customers and for you. Otherwise, customers won’t understand charging (what they’re paying for), and you’ll have a problem selling and administering your solution. Here it is worth looking at how the Western giants in the movie and series streaming market do it.

For example, you can buy access to Netflix with three price options, and in each, you’ll find videos of different quality and with more or fewer screens on which to watch productions at the same time. A Disney Plus subscription, on the other hand, works on a simpler basis – you can buy either monthly or annual access.

Criterion #4 Differentiator and competitive advantage

Price metrics are also used to build competitive advantages. So, one of the criteria you should consider is the question: will this price metric allow me to stand out from the competition? If so, great.

Criterion #5 Compatibility with value and user experience

Does this particular price metric go hand in hand with the value offered and reflect the expected customer experience? If not, it’s not a metric worth betting on. How do you find out? By presenting your price list to customers. You can do this, for example, in direct conversations or by doing A/B testing.

A/B testing is generally helpful for price verification, only that it has to be done cleverly. For example, the way the founders of startup Wufoo did it.

During the test, they sold access to their tool in two variants – for $7 and $9. However, when customers in the “$9” group made a purchase, Wufoo charged them the lower price anyway. In this way, the company avoided disappointment (it could have happened that customers saw a lower price somewhere) and, in the process, made itself known as a consumer-friendly company.

Finally

What do you checkout customers for? In the digital world, you can cash them in for literally anything. The best example that perfectly illustrates this approach is YouTube. Its free version allows users to watch videos posted on the platform free of charge, only with ads appearing from time to time. YouTube knows that for some users this can be a nuisance.

That’s why it also offers a premium version. Then users of the platform can watch the same videos, only without commercial breaks. On top of that, they can listen to the audio with the screen off. So YouTube is cashing in customers for the ability to turn off the screen – an interesting value and price metric.

It is worth looking for similar examples, peeping at the competition and being inspired by other companies’ price lists. They will be a breeding ground for your own ideas and creative solutions.

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Author: Adam Sawicki
Owner and Editor-in-Chief of Rebiznes.pl, a website with news, interviews, and guides for solo entrepreneurs and online creators. In media since 2014.
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