Sunday, March 13, 2011

convince or confuse pricing

If your pricing model cannot convince prospective customers, do you go ahead and confuse them? It is odd that payment products, of all products, do this.

The back-story to this post is that my television refused to power on and I called in a local mechanic to take a look. While paying him in cash, I started chatting with him about his business, payments in particular. It turns out that most of his revenue is from house visits, and he only accepts cash. No customer has problem paying in cash. And he doesn't use any of the new technology to swipe credit cards on a phone to accept payments because they are very expensive.

So I went and checked out some payment products for credit cards, and their pricing:

1. Intuit's Payment Terminal

2. Intuit's Go Payment for Mobiles

3. Square for iPhone* (they recently eliminated all fees)

Now, I'm sure these companies have some really smart people to include all their intrinsic and extrinsic costs and model fraud risk into their pricing. But this is overly complex for a small business owner trying to figure out if he/she should pay for the product. At the very least you need to give your customers a pricing calculator and some example scenarios to get them started.

The best thing is to eliminate multiple layers in this pricing structure.

If your customer is another business, you want their costs to be variable. Charge them a flat rate (a percentage is best, but a fixed amount might suffice) per transaction, for all transactions. Get your smart pricing team to figure out the optimum rate to charge based on your costs and to maximize your revenue, but DO NOT offload the calculation to the customers.

If your customer is an end consumer, a fee per transaction leads to a decision point at every such transaction: "Do I want to conduct this transaction using Intuit Go Payment and thus pay an additional fee again?" kind of questions. An up-front charge might be too large an investment. In this case, a periodic fee would work best. The consumer's total cost is spread across time, and yet, not too frequent or dependent on any other event (the transaction, in this case). Every time a customer has to take out his wallet and pay, is a hurdle that the Product Marketer needs to cross.

It may not be easy to come up with a single fee structure for all customers, so product marketers often sell "bundles" where different amounts of the same thing are priced differently. This is a slippery slope and it is best to avoid differential pricing unless there is a difference in the value-add provided by different bundles. A completely variable price model (e.g. fee per transaction) would be more preferable in that case.

A last thing to keep in mind while pricing - what other comparative models exist? Customers are sure to compare your prices with someone else's, and that should be easy to do. If your pricing model is radically different, give your customers tools to easily work out a comparison.

* Since my chat with the TV repair man and drafting up this post, Square has removed all fees for transactions. This is the most customer friendly, but may not always be viable. In this case, they are definitely changing the game, and I hope their model wins.

I'd love to hear your thoughts. If you have anything to say, please leave a comment.


avendesora said...

UJ, what you are referring to is actually a bigger phenomenon vs. just on topics you touched.. try checking out the sizing/grammage of most branded products and comparing them with the competitive brands... it certainly is not an easy thing to do.. and most times its not chance driven.. confusing customers is an oft used tool by companies to move the equation away from pricing..

Umang said...

Absolutely. And I can see why products in a very crowded market would want to "confuse" vis-a-vis pricing. But for new products that are trying to create a market, that is poor strategy.