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How to come up with a pricing model for an online service?

10

Nov

2009

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How do you come up with the best pric­ing model for an IT ser­vice. It’s online, doesn’t have direct com­peti­tors, so there is noth­ing to com­pare it to.

This is one in Minutecoach’s LinkedIn Q&A Best Answers series, widened out and rewrit­ten for those not on LinkedIn. If you’d like to read the orig­i­nal, you can use the link at the end of the article.

One way of find­ing a price when you have a new ser­vice with­out any easy com­par­isons is to abstract until you iden­tify the real value in the service.

Or said another way, don’t price the ser­vice, price what it is accomplishing.

Imme­di­ately now you have con­text, which is the value of the accom­plish­ment to a par­tic­u­lar mar­ket sec­tor. If you nail this value, you can price the ser­vice that sup­plies it advan­ta­geously for your cus­tomer and your­self. If the value comes out low, you know you’ve work to do, how­ever ele­gant the service.

Price points and pack­ag­ing an online service

A ser­vice may allow dif­fer­ent lev­els of accom­plish­ment, and it may be your role to iden­tify suf­fi­cient dif­fer­en­ti­a­tion to appeal squarely to dif­fer­ent sec­tors and widen your prospec­tive client base, to offer var­i­ous price points.

If so, I’d sug­gest you do not start at the top and work around fea­ture reduc­tion as a dif­fer­en­tia­tor, but rather approach price points from a refine­ment vec­tor, assum­ing you are want­ing to upsell services.

For instance, many ven­dors release lite ver­sions, to try and hook smaller busi­nesses, to intro­duce them to the fam­ily. They reduce fea­ture count of their flag­ship prod­uct, try­ing to repur­pose the asset yet main­tain the price dif­fer­en­tial between levels.

First to go are options for import/export, API access and cus­tomi­sa­tion. This is nuts, because small busi­nesses need these options more than big busi­nesses, can’t afford to cus­tom them up, and can live with reduced func­tion­al­ity else­where. Most of the prod­uct inno­va­tion comes from mul­ti­ple small busi­nesses and devel­op­ers stretch­ing the prod­uct to make it do what they need, so it doesn’t make sense to deny them the tools to do it.

Bet­ter to have your prod­uct cen­tre stage of the small busi­ness ecosys­tem because you have designed it to con­nect to any­thing, to lever­age the small busi­nesses assets they cur­rently hold in other com­pa­nies’ soft­ware into your higher level soft­ware or ser­vice at a later date.

Focus groups will be to O.K. to check assump­tions, but rough out accom­plish­ment lev­els and value first. Build, don’t reduce, and don’t assume fea­tures have value per se, you need context.

The pric­ing itself won’t be that tough.

Orig­i­nal LinkedIn Question

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