A simple argument for investing in your pricing

A simple argument for investing in your pricing(cranberryblog.substack.com)

61 points by boraginaceae 4 years ago | 21 comments

When thinking about the concept of increasing prices, the company that comes to mind for me is Teenage Engineering, the Stockholm based design company most famous for their OP-1 synth/sampler. For example, both OP-1 and OD-11 (wireless speakers) have more or less been doubled in price over the years, and when they release new products such as their computer case Computer-1 and their portable speaker OB-4, there’s an endless outcry on different social media platforms and forums that the prices are ridiculous. That might be true for many people, but in the end, new products often are sold-out pretty much immediately, so there’s obviously enough people willing to pay these prices at the rate they’re able to produce them.

For me, this is a sign of a healthy price setting culture within a company. If there are people who are willing to pay much more than me, I wouldn’t want the products priced at my level. Let these people part with their money first, making me relatively richer than them and enriching the company who can put the money towards creating even better products that I eventually can scoop up on the second hand market for the same price I’ll be able to resell it for. The alternative is to keep the prices down, effectively creating some kind of lottery with regard to who happen to check their e-mail when a new batch is released.

This might have been a bit of a rambling, but in the end, I just want to say that I, as a consumer, wish that more companies would try to maximize their profits when it comes to pricing and that they should go against the sentiment that it’s somehow greedy to do so.

RicoElectrico 4 years ago | |

At this point I think there is simply too much money floating around. People (as a collective mass, not criticizing any single person) spend it on stuff like LEGO, retro consoles and such, priced well over what it takes to produce/sell/develop it.

Buying behavior seems to be so emotional and impulse-driven these days.

onion2k 4 years ago |

Customers’ willingness to pay signals how much they value a product or feature.

I'd change that very slightly. It's not their willingness to pay, but their cold, hard cash that signals how much they value the product. Many, many people will say they're willing to pay for a product before you build it, and they really are, but won't actually pay for it when it comes time to sign up because they either no longer have the need, or the product isn't actually a good fit, or they can't afford it, etc. You can't really believe any signal except the money going into your bank.

marcosdumay 4 years ago | |

"Willingness to pay" is a very specific term on economics and it doesn't mean "oh, sure I'd like that, I'll call you".

It means exactly that those people will pay, with nobody forcing them, if you offer the product without further constraints.

It's also an abstract value that can only be measured once the item is sold.

tpetry 4 years ago | |

The book „The Mom Test“ describes the behaviour very good. Most often these people are not totally honest in evaluating your idea because multiple reasons e.g. you asking the wrong way (happened to me too!) or they are not really thinking about it buying it but only about commenting your idea. Should be read by everyone!

mehphp 4 years ago | | |

The Mom Test is such a great (and quick) read!

cercatrova 4 years ago | |

https://en.wikipedia.org/wiki/Willingness_to_pay

Willingness to pay is an economics term which means basically what you stated in your comment.

bryanrasmussen 4 years ago | |

unfortunately you only have the willingness to pay before the product or feature is delivered.

onion2k 4 years ago | | |

That's not true at all. You can charge customers before you build anything - it's just the 'pre-order model'. Lots of businesses do that, including some high-profile startups. Check out the sites like Seedrs and Kickstarter for examples.

WA 4 years ago |

> Price increases on existing customers are pure margin.

Don't do this. Grandfather your old customers. Of course, it depends on the kind of business. But in B2C, customers can be price-sensitize and they don't (rightly so) understand why they should pay more for the same value they receive from a product.

> Now let’s assume we increase average prices by just 10% without losing any customers.

I chuckled.

tpetry 4 years ago | |

A nice way i have seen is grandfather your old users to the old price. But only users paying the new price are getting the new and shiny features. The product is not worsened for the old users. If they are really interested in the new features let them upgrade to the new pricing model with more features.

lbriner 4 years ago | |

Strongly disagree. Grand-facthering pricing sounds reasonable but is a nightmare for us.

As well as the technical issues with having to build in a load of complexity to maintain various features on different customer accounts, at some point there will be things that will change but customers will not accept that.

Most of our customer completely understand that they are paying for a service, not a product. Just because their features don't change doesn't mean it is costing us nothing to run the service.

Price gouging is morally dubious just because they are sticky but when you are selling a value-add (we could be saving you X employees per year) then it is reasonable to charge an amount of money as the OP says that customers are not as price-sensitive as you think.

baxtr 4 years ago | |

Re Grandfathering: That's really difficult to do in iOS Apps for example.

It also introduces a new level of complexity on many levels, e.g. rights and access management, product versioning and maintenance, customer support etc.

garrickvanburen 4 years ago | |

Losing customers is fine. I subscribe to Alan Weiss's perspective that purposely losing the bottom 10% of your customers is how you grow.

blauditore 4 years ago | |

Increasing price without any new features can be seen as greedy cash-grab and do damage to your brand which is hard to measure. Also, if you _do_ lose customers, will they come back if you backpedal and reset prices to the previous state?

huitzitziltzin 4 years ago |

In economics, this is called demand estimation. There is a gigantic empirical literature on how to do it right under a wide variety of assumptions.

It is practiced in industry at Amazon and Microsoft among other places.

Price discrimination comes in three forms and is discussed in any textbook on industrial organization.

There is a lot of good theory AND empirical work for anyone interested in applying these techniques.

ignoramous 4 years ago | |

> There is a lot of good theory AND empirical work for anyone interested in applying these techniques.

In relation to tech (and software in particular), can you point to some resources that would be useful to explore some of these concepts?

huitzitziltzin 4 years ago | | |

I don't know of published applications of demand estimation in software in particular. I know that Microsoft and Amazon do this to estimate demand for cloud services, but I don't think any of that is publicly available.

In principle, _any_ time that Amazon wants to make a decision about offering an in-house version of some product that is already sold in their stores this is the kind of thing they will do first (again, none of these estimates are public to my knowledge).

There are prominent applications in:

- automobiles (Berry, Levinsohn and Pakes (1995) - the originators of the technique),

- alcohol (Miravete, Seim and Thurk, (2018) - relevant especially to the case of a high-dimensional product space),

- the minivan (Petrin (2003) - relevant to studying a new product),

- breakfast cereal (Nevo (2003) - this is a surprisingly innovative and competitive market category!)

- radio stations (Sweeting (2013) - probably the current state of the art econometrically)

- studying vertically organized markets with unobserved prices (Villas-Boas (2007))

- (There are other applications beyond those listed here - demand estimation is a foundational issue for answering many, many, many economic questions.)

Depending on the specific features of the software demand estimation problem you are thinking about, you may find any of those references helpful.

Two very recent surveys have been published by four of the top people in this area:

1. Gandhi and Nevo: https://www.nber.org/papers/w29257

2. Berry and Haile: http://www.econ.yale.edu/~pah29/Foundations.pdf

Plus there is a now-standard Python implementation of the estimator:

https://pyblp.readthedocs.io/en/stable/

nicbou 4 years ago |

When new freelancers ask how much they should charge, the answer is always "as much as you can get away with". In my experience, competing on price gets you the stingiest penny pinchers.

However, if your customers are the product (advertising, affiliate marketing), then you should squeeze your advertisers more, not your customers. So many content creators ruin their hard work by going too hard with monetising their users.

mchusma 4 years ago |

I having full-time dedicated pricing experts on payroll makes sense as a rare thing.

(1) When pricing is hidden, this means in practice you have every sales rep trying to maximize pricing for the individual person. Meaning there are in fact millions of "pricing people" in companies around the world.

(2) When pricing is NOT hidden, pricing is rarely updated, which is a good thing. Ads, comparisons, press releases, etc all may reference pricing. Changing pricing on your existing customers really can cause churn (which for SAAS outweighs the typical margin gain).

(3) The author doesn't mention discounting, which is in fact playing with pricing, and something companies do a lot of.

(4) For transparent pricing, finding the right price doesn't really change that much. So if you only have a few products, investing in a full time person seems like maybe they would be really busy for the first 1-12 months then...do nothing? You really probably need new products coming out regularly to justify someone dedicated to the role.