In a world of competitive products and services, competing directly or as substitutes to solve a customers problem, the ones which become clear winners have differentiated how they price and not their price point. These clear winners gain rapid commercial success especially in saturated markets with limited product differentiation e.g. basecamp, slack, iTunes, Dropbox, Amazon Web Services, Netflix, Discovery, Outsurance are all examples of success stories that leveraged a different pricing model to stand out in the market and deal with a key pricing factor — FEAR.
“Slack’s genius was getting around the long buying cycles of enterprise software, which made it the fastest growing enterprise software business in history.”
We all make the same mistake. Your amazing product seems unique to you with blindingly obvious benefits in the marketplace over its competitors. Customers should be flocking, elated, and paying you a premium … or even a discount to competitors. However, to your customers, it is just another substitute to a problem they are currently solving or a scary new thing to try. Both have an emotional risk associated with making a bad decision that can feel much higher than the sales price.
The launching a new service/product it is often tempting to use the competitor price as an anchor and price around that i.e. higher or lower based on perceived quality. The truly disruptive businesses change the pricing paradigm to make comparison difficult. They obfuscate the price by either breaking it down into non-comparative components (e.g. AWS) by focusing not only on benefits but also on fears and purchase hurdles. This is more significant than providing a discount or low-cost trial as it sets up the company to earn larger profits over time.
Take slack for example. Is it cheap compared to other products? — not really. Slack’s genius was getting around the long buying cycles of enterprise software which made it the fastest growing enterprise software business in history.
Slack knew that their product would have traction with small dev teams. Once it caught on in a team the trick was to move from a free to use model to a paid for use model. The biggest hurdle is to combat complex purchasing processes within enterprises. So slack adopted a simple pay as you use model versus an upfront licensing model or tiered licensing model. Furthermore, because you pay based on the previous months users, if the users were inactive during the month you get a credit against your next bill. This level of transparency circumvents the complex negotiations with corporate. Furthermore, it encourages corporates to use the product more because it eliminates the complexity of licensing tiers.
Why is this disruptive? It took into consideration not only the physical cost of the product but also the emotional/political cost of the product, making it easy to buy (i.e. no business case or change management program or integration plan or political capital needed) and reducing the fear of unused licenses based on purchasing in tiers of licenses in advance.
Another method (now considered a norm) of dealing with user fear was to zero price limited functionality i.e. freemium and it was a breakthrough model when introduced by basecamp in the early 2000s and still highly successful today. This pricing model unlocked a massive amount of both latent demand that then current pricing models of software providers couldn’t accommodate (ie low monthly cost) AND shifted spend away from small custom built software solutions that companies had previously used. While it is cheap on a monthly basis, over the long term — you may spend more money on a cloud-based solution than the one you would have purchased and sweated for 3–5 years.
Dropbox gave you a free storage the more you shared their product and massively increased their user base which they converted into sales. Hotmail gave you a free email in return for advertising (vs the one you got with your ISP subscription or at work). Netflix, gives you a free month to try it out with no upfront cost or installation and no long-term contract (unlike cable or satellite TV). Amazon Web Services charged for computing power and features based on usage (which was a massive shift from building a server room). Discovery (medical aid company) reduces the cost of your insurance depending on your health level by keeping track of your exercise routines and promoting a healthy lifestyle. Outsurance rewards you for not claiming on your insurance by giving you back your premiums after 5 years.
All of these companies priced completely differently from their competitors and not only switched but retained their customer base and recreated the industries in which they compete.