The curious case of pricing technology based products and services

Many technology #start-ups I have seen have failed to grasp the essence of a proper #pricing strategy for their products and services.? This is because traditional cost-plus pricing models do not hold water in their market.? This is particularly the case for those involved in the provision of information-based products such as #Apps, #Software and #Data Services.? Most of these services are characterised by a significant one-time development cost but distribution costs which are close to zero.?

Focus on utility not cost

The best strategy that technology #start ups can deploy to maximise their revenue streams is through “utility-based pricing.” I know what you are thinking. This is hardly groundbreaking as it has been advocated by economists globally for decades. I agree. However, the real challenge lies in its application namely because not only is the measurement of customer utility hard but is distinctly different for each individual customer. ?I typically advocate four ways in which technology start-ups could seek to maximise the revenue generating potential of their products and services:

Create scarcity to increase customer utility & privilege

The first two methods are suitable for information technology products and/or services which are launched as premium/limited editions and provide exclusivity or privilege to a highly discerning customer base.? These are: ?

#Skim the Market

A limited number of #technology products and/or services are released for sale targeting premium customers over a fixed period.? Such releases would typically include some special features that would not be available through the mainstream product and/or service. The objective would be to sell all such services within the identified timeframe.? Sales performances are monitored in real-time and analysed against probability distribution curves to determine the likelihood of success by the end of the period. Underperformance against the distribution curve would require a price reduction to increase sales volume.? In contrast overperformance would require an increase in price to maximise the revenue generated from the perceived #utility by customers from the technology product and/or service provided.? This strategy is very similar to that used by Airlines when selling tickets for a flight.

#Auction - sell to the highest bidder

Once again, a limited number of technology products and/or services are released for sale over a defined period.? In this case, prospective customers are requested to make an offer for purchasing the technology product and/or service. This may be subject to a minimum bid price.? At the end of the bidding period, the products are released to the highest bidders.? To succeed, the product releases will need to afford a restricted privilege to its customers which would not otherwise be available for the mainstream market.? Such a #strategy seeks to maximise utility derived typically from early adopters of #technology products.

These strategies are not suitable for platform or #network based technology products and services. This is because the #consumerutility of such products and services is itself influence by the level of adoption by a large critical mass of consumers. I shall be addressing this point in a subsequent article.

Use variability and variety as instruments for optimising customer utility

Although #skimming and #auctioning pricing strategies are intended for restricted markets, they have the potential to build an enviable brand position that could be leveraged to reach out to mass markets by using alternative pricing strategies.?

Create Multiple #Versions of your technology products or services

The Technology #start-up creates different variations of its information-based product that would be offered to its customers at different price tags.? Variations could take the form of functionalities, service, useability, and level of access criteria amongst others.? #Versioning seeks to maximise #customerutility by creating alternative choices to customers who would otherwise not consider acquiring such technology products and/or services.? A single version of the products inevitable detracts customers who perceive a lower utility and misses out on additional revenue that could be generated from customers perceiving a higher utility.? I typically advocate the development of three versions with the middle version being the core product to be promoted.

#Bundle Technology Products and Services Together

Whilst versioning focuses on managing variations in customer utility of one product across different customers, bundling seeks to manage variations in customer utility of multiple products across different customers. The concept of bundling is to package several #information-based products and offer them at a single price which is considerably lower than the price at which they are offered individually.? ?Through bundling variations in customer utility are levelled out across several information products such that revenue generation potential is optimised.

Are you a technology start-up looking for advice at how to price your products or services correctly in the market-place? Contact me for support and assistance.