The Mystery of Pricing [And Successful Business]

The more experience I gain running businesses, the more fascinated and puzzled I become with the mystery called PRICE.

What is Price? How is it determined?

Solve the mystery if you can, with the following clues:

P = Perception

When the ‘Zodiac Grill’ – a very sophisticated restaurant launched at the Taj Mahal Hotel in Mumbai, the menu did not have prices. Guests were free to order what they wanted, and then leave behind a price for the meal as they deemed fit. There were no eyebrows raised if guests left behind $1 as long as they thought that was the value of the meal they had enjoyed.

As it turned out, The Zodiac Grill received more revenue for meals served than they had estimated. Guests had enjoyed the ambience, the food and the service and had rewarded the restaurant with a price based on their ‘perception’ rather than what would have been printed on the menu.

The Zodiac Grill today has a fully priced menu and the launch experiment helped the hotel management tremendously to ‘price’ the service appropriately.

I see an interesting pricing model being followed by the digital enthusiasts who make free ‘plug-ins’ for large publishing platforms like WordPress.org. Subscribers of the wordpress.org platform are free to download all these fantastic plug-ins and then are prompted to ‘donate’ a few dollars to the developers if they feel like it. I am sure that the sum of donations received, generates more money for the developers than they would have earned if they were to price each plug in.

If you are a new start up or a business entrepreneur, try and gauge the prices of your product and services based on what your customers perceive it to be worth. It may be the best way to discover your true value.

R – Revenue Build

Many businesses I know have certain revenue targets in their business plans. They aspire to be say a $10 million Topline Company by the 3rd year of starting up. Pricing then begins to work backwards and they price their products and services accordingly.

Is this the way to build and price your services? I have a contrarian point of view. This approach may damage the value creation.

For the sake of giving an example, let’s assume that you have a Magical Goose that will start  laying eggs very soon.

  • If you decide to sell the eggs even before they are laid to discover later that your Goose is slower than normal in laying eggs, you may land up killing the Goose while trying to force it to lay eggs. To illustrate, MySpace was spoilt early on by Google when they received guaranteed revenue commitments from Google who exclusively took over selling ads on MySpace. Past the first year, Google figured that this was a loss making deal for them (they made less revenue from MySpace ads than what they had guaranteed to pay MySpace) and did not renew their agreement. But by then, MySpace had got addicted to ‘revenue’ toplines and went ahead and ruined their site by spraying ugly ads all over the site and aggressively selling them. MySpace, as I remember looked like a website that had only ugly ad hoardings all over and this quickly drove away lots of their users. The lure of only generating revenue ruined MySpace forever.
  • On the other hand, if you determine the price of eggs before they are laid, you may land up selling ‘golden’ eggs at the price of ‘normal’ eggs. Facebook managed this beautifully – they took their own sweet time to just to understand their ‘Magical Goose’ and what it was really going to be valuable for. It’s amazing to see how slowly and elegantly they have sold ads (so they priced their golden eggs appropriately) and more so, introduced non obtrusive revenue streams like ‘facebook credits’ – a la creating value from the feathers of the Magical goose in addition to the eggs it lays!

Revenues are important but should not become the death noose of your business as it begins to rev up.

I – Insights

What do people pay for? If you can really examine the finer detail of what consumers really want to reward you for, then pricing can really be made to work for you in a far more profitable way than you could imagine.

Examples are aplenty. It’s well known that kids buy McDonalds ‘happy’ meals for the toys, and more often then not, their parents then eat the ‘happy’ meals. In India, brands splurge on MTV just for the association with an iconic youth channel more than the actual media reach it delivers. Chinese customers are happy to pay much more for a Gucci bag made in Italy than an identical Gucci bag made in Korea. So, in the case of McDonalds, MTV & Gucci, beyond their core offering, it’s intangible value drivers based on their consumer insights that is also being aggressively priced.

When we sell ‘Advergames’ (branded games), we calculate the time spent by consumers playing the game and hence interacting with the brand. So assume that 200,000 unique players play a brand game for 3 minutes, we have delivered 600,000 minutes of engagement to the brand. Next, we compare how expensive buying 600,000 advertising minutes would be on television and then price our offering very competitively. In this case we have an insight about how our customers (brand owners) VALUE media – not by impressions but by engagement.

 

Advergames deliver engagement not impressions

Insight – ‘Advergames’ deliver engagement not impressions

When I made socks in my father’s Company, I began walking around in European Clothing stores to discover what kind of socks I should be selling to them. During this process, I stumbled upon an amazing insight – the price of Baby Socks for new borns (as young as 3 months) were the same as the price of Men’s socks as large as shoe size 12! When I dived deeper, I realized that it was mothers who buy socks and they were equally attached emotionally to their newborn child as they were to their husbands and hence didn’t differentiate the price of baby socks vs. men’s socks.  Now, baby socks weigh 10% of Men’s socks and hence are 90% more profitable to make. We started our export business making Baby Socks!

Try and go beyond the obvious reasons why consumers are buying your products and services. The real price you can charge them may be hidden in that insight.

C – Costs

You cannot escape measuring costs and then making sure that it’s more than covered for when you start pricing your goods and services. But wouldn’t that make a business just another usual small time business?

If Zynga – the Company behind Cityville and Farmville would have added its costs of servers and salaries and then divided it by the number of players it served, it would have logically priced the game service as a monthly subscription. Instead, they offered all their games as free to play and sold only in-game virtual items. In the a few months, millions of gamers bought virtual gifts for their friends (beer on Poker tables) and pink tractors for their farms! They compensated Zynga multiple times over to what they could have otherwise paid for as a monthly service.

To drive home this point – when you buy seeds in Farmville, you pay for a virtual item that is nothing but an image on your screen. You pay for the electricity to fire up that image on your screen and even for your Internet broadband connection to play Farmville. For Zynga, the money of the Pink Tractor has almost no cost and is an almost hundred percent profit!

So understand costs, but don’t adopt ‘only’ the costs plus formulae to make money. You may well be missing the Pink Tractor hidden in the mud.

E – Endearment

I think this is the most amazing dimension of Pricing. Apple for instance has mastered ‘endearment’ pricing.  Consumers like me just have to buy Apple products the moment they become available because I simply LOVE Apple. When my Macbook costs 100% more than a similar laptop, I don’t even think twice before buying it.  If an iPad costs $499, it costs $499. I don’t go out and look for comparisons and then decide to buy it or not. The same applies to Fashion brands and the likes. For example, why do you pay $1499 for a black Armani Jacket when you could buy a very similar looking Jacket from Gap at $199?

I don’t think consumers compare prices of brands they are attached to and just pay what they are asked to. As we all know, when you are in love, ‘price’ comes second.

If you can make your consumers fall head over heels and blindly in love with you then you can charge them anything. That’s the ultimate nirvana of Pricing.

[Guest article by Alok Kejriwal, Founder of Games2Win. Reproduced from Alok’s blog]